Saving Ourselves

Richard Quinn

FRANKLIN ROOSEVELT said on Aug. 14, 1935, that the new Social Security program would provide “some measure of protection to the average citizen… against poverty-ridden old age.”

Nancy Altman, president of Social Security Works and chair of the Strengthen Social Security coalition, opined this year that “after a lifetime of work Americans should have enough guaranteed Social Security to maintain their standard of living.”

Make no mistake: There’s a vast gap between Roosevelt’s notion of protecting against poverty and Altman’s goal of guaranteeing one’s standard of living. The latter implies 100% income replacement. How did we end up here?

Today, Social Security is designed to pay the average person about 40% of preretirement income and, for many people, it’s far less. At current benefit levels, the program won’t be able to pay 100% of promised benefits in 18 years or so. Yet some want Social Security expanded, so it pays even higher benefits, while others argue we should trim the program’s generosity to ensure its solvency.

There was a time when many Americans had a pension to rely on in old age. But it was never the majority and that number has fallen for a host of reasons, including the decline of unions, complexities added by government regulations, funding problems, and fears among employers about the impact of this uncertain liability on their finances.

It’s hard to determine exactly how many of today’s workers have a traditional defined benefit pension, because the term “retirement plan” is used so loosely. But we do know there are great difference between public and private sector workers.

In the public sector, the traditional pension is the norm. Among state and local government workers, 85% of all workers and 93% of fulltime workers have access to a defined benefit pension. But in the private sector, pension coverage is put at just 15%.

Meanwhile, Social Security benefits represent about 33% of retirees’ income. Among Social Security beneficiaries, 48% of married couples and 69% of single individuals receive 50% or more of their income from Social Security. Even more alarming, 21% of married couples and about 44% of singles rely on Social Security for 90% or more of their income. That should not be the case. Few people can live on Social Security alone without significant belt-tightening.

Enough of the depressing statistics. What are we to do about it? We might assume that Americans would realize that a substantial part of retirement income depends on their own actions and do something about it. We might also assume employers would see the value in bolstering employee morale and loyalty by helping them to retire in comfort at a reasonable age, and want those retirees to have enough money to continue buying their goods and services. It seems neither assumption is valid.

Employers embraced 401(k) and similar plans largely for two reasons. First, costs were easy to predict and control for employers. Second, these plans seemed to make sense for a workforce that was more mobile, with few people staying with one employer long enough to qualify for a substantial defined benefit pension.

But the 401(k) experiment has proven to be a failure. Perhaps it isn’t the plans themselves that failed. Rather, the failure lies with workers’ unwillingness to accept long-term responsibility for their own retirement.

We can—and, I believe, likely will—eventually raise the basic Social Security benefit. But even a jump of 10% to 15% in benefits won’t solve the problem, and it will require significant additional taxes that’ll hamper the ability of many individuals to save.

According to the calculator from the Committee for a Responsible Federal Budget, to increase benefits by 15% for new beneficiaries only would require increasing the payroll tax by six percentage points, bringing the total payroll tax to 18.2%. That’s still a far cry from ensuring all beneficiaries maintain their standard of living in retirement. But given employers’ unwillingness to provide significant retirement benefits and employees’ unwillingness to save out of their own pocket, increasing Social Security benefits—and hence the payroll tax—is arguably the least bad option.

Richard Quinn blogs at Before retiring in 2010, Dick was a compensation and benefits executive. His previous articles include Required IrritationWe’re Stuffed and Clueless. Follow Dick on Twitter @QuinnsComments.

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4 years ago

Thank you for the even-handed, albeit sobering, assessment of an upcoming crisis. I have difficulty thinking this won’t be more consequential for many Americans than the much more public discussion over health care financing. But even with an increase in Social Security benefits, it’s difficult for me to foresee that making a quantifiable difference in the life of most retirees. As you write, it is an unwillingness to accept (or understand, to be charitable) long-term responsibility for their own retirement. I think, to the detriment of the country at large, the corrosive effect we’ll all experience (savers or not) is that indeed, aging Americans, in aggregate, will be forced into a lower standard of living in retirement. This may have significant downstream impact of the economy, both domestic and in turn global. “Maintaining their standard of living” will simply not be an option. Perhaps even more accurate, their CURRENT standard of living is exactly what’s dooming their standard of living in retirement. Simply living beyond their means, hoping to either win the lottery, marry well later in life, or die young. In any case, a poor bet.

4 years ago

I throughly reject this idea that we should increase Social Security benefits. I do not want to get rid of the program, but I’d say that it’s existence has left many people with a false impression that “Social Security will be there for them” to the point where they don’t do their own planning. This is the moral hazard that SS creates. Instead, leave the benefits the same, tweak the COLA adjustment, increase the payroll tax and cut benefits gradually so the system is 100% intact for anyone 47 years and older. Over time, parents and grandparents and people will instill a new ethic of the need to save and live within one’s means without depending on the government. As it is, Medicare, which is $37 TRILLION of unfunded liabilities, is on a path towards imploding. Let’s make SS rock solid and sustainable.

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