Social Security: Good, But Could Be Better
By Chris Farrell on March 25, 2013 - Businessweek
Is the dream of a comfortable retirement dashed for aging baby boomers and
younger generations? It sure seems that way after looking at the study released
by the Employee Benefits Research Institute on March 19. The Washington (D.C.)
think tankfs 23rd Retirement Confidence Survey reports nearly half of workers
surveyed have little to no confidence theyfve saved enough for a decent
retirement. Among those surveyed who provided financial data, 57 percent say the
value of their household savings is less than $25,000 (excluding the value of
their home and any traditional defined benefit pension plan). gRetirement worry
is highest in 23 years,h said USA Today; gWorkers Saving Too Little to
Retire,h the Wall Street Journal; gAmericans more downbeat than ever
about retirement, study says,h the Los Angeles Times; and gMost Workers
Have Less Than $25,000 For Retirement,h Financial Advisors
Magazine.
Really? Is this where the average American worker finds himself—busted,
broke, financially ill-prepared for old age? Itfs a depressing thought for a
number of reasons, considering all the media devoted to retirement planning,
strategies for managing 401(k)s and IRAs, and planning tips for old age. Sure,
the information is often overwhelming. Still, the message from the boom in
retirement stories is unmistakable: Save for old age. Is the American employee
that myopic?
Simply put, no. There are many things to worry about in the American economy,
but the gloom runs far too deep when it comes to aging and retirement. For one
thing, the U.S. economy is only now leaving behind the worst downturn since the
1930s. The EBRI survey captures the mood following the financial trauma of the
Great Recession and Anemic Recovery. The finances of an aging population should
improve in coming years with the revival of the stock market, housing market,
and labor market. For another, for workers in their 50s, now that the kids are
out of the house (hopefully) and retirement is less distant (where did the time
go?), more will focus on saving for retirement.
Many scholarly studies that take a comprehensive look at the finances of an
aging population are less pessimistic. These studies view household finances as
a pyramid (to borrow a metaphor from an Investment Company Institute study, gThe
Success of the U.S. Retirement Systemh). The components of the pyramid are
Social Security, homeownership, employer-sponsored retirement plans
(private-sector and government employer plans), as well as traditional defined
benefit plans and defined contribution plans, such as a 401(k); IRAs and other
savings, from bank deposits to cars. The kicker to gAre All Americas Saving
eOptimallyf for Retirement?h a 2009 study by John Karl Scholz and Anath
Seshadri, economists at the University of Wisconsin-Madison and William Gale,
economist at the Brookings Institution, nicely captures the overall sentiment:
gBut we see little in the descriptive data or our model-based analyses that
leads us to think that households are making large, systematic errors in their
financial preparation for retirement.h
I would add that most of those with a shortfall will work a few years more,
probably part time, perhaps as a contract worker. Putting in additional time
earning an income is hardly an unrealistic expectation for many aging boomers,
considering todayfs 65-year-old is comparable in health and mortality to a
54-year-old in 1947, according to John Shoven, economist at Stanford University.
The catchphrase, g65 is the new 55,h isnft just a hopeful baby boomer bumper
sticker.
The bigger takeaway from more comprehensive studies into retirement adequacy
is how the discussion about Social Security has gone way off track in
Washington. For the past three decades, Washington has been obsessed with the
so-called Social Security crisis and the need to cut back on benefits.
Policymakers should reverse course, fast.
The flaws in the private pension system are worrisome. A mere 42 percent of
private-sector workers ages 25 to 64 have a pension on the job. The result is
that more than one-third of U.S. households end up with no pension coverage
during their entire work lives, according to calculations by the Center for
Retirement Research at Boston College. During bad economic times, such as the
recent recession, many companies reduce their pension benefits by, say, cutting
back or even eliminating the employee match. State and local government pensions
cover more workers, but in recent years states and localities have learned the
hard way that theyfve overpromised and underfunded retirement plans. The next
decade or so will be dominated by governments scaling back on pensions.
Social Security is the cornerstone of Americafs retirement system. The system
covers most workers, itfs administratively cheap, and itfs designed for a mobile
labor force. gFor most households, one of the most valuable resources is their
Social Security retirement benefits,h write the co-authors of gThe Success of
the U.S. Retirement System.h Since its creation in 1935, gSocial Security has
[been] transformed into a comprehensive government-provided pension for workers
with lower lifetime earnings and a strong foundation for retirement security
with higher lifetime earnings,h they add.
Instead of chiseling away at the Social Security cornerstone, letfs bolster
it into an improved national retirement system. There are a number of ways to
shore up the programfs underlying finances without cutting into benefits. For
example, raising the cap on wages subject to payroll taxes from its current
$113,700 for 2013 to around $250,000 extends the projected date of 2033 for
exhausting the systemfs reserves for another four decades or so. Eliminating the
cap altogether essentially gets rid of any funding shortfall for the next 75
years.
The more intriguing ideas are ways to improve Social Security as a national
retirement system. For example, policymakers could tweak it in ways that
encourage people to work longer. Participants who have paid into Social Security
for 35 or 40 years could be considered done. The worker and his or her employer
would no longer fork out Social Security taxes, a boost to the bottom line of
both. To reach out to workers without access to a retirement savings at work, a
program of voluntary additional contributions could be built on top of the
Social Security system.
Building on Social Securityfs existing strengths, rather than weakening them,
is a sound way of strengthening the retirement pyramid. It would also offer some
relief from the stress many aging workers feel about their living standards in
old age.