December 28, 2010: Washington is panicking over the national debt. Powerful members of Congress, spurred on by recommendations made by some members of President Obama’s recently concluded fiscal commission, are planning an aggressive legislative agenda to balance the books. Part of this strategy is attacking Social Security.
Workers and retirees alike should be alarmed.
Correcting the myths
Focusing on Social Security cuts is misguided on two counts. First, it wrongly assumes that Social Security is going broke and causing a long-term fiscal crisis. Second, it ignores a much more urgent financial crisis in our midst: the retirement income deficit – representing the gap between what people have saved for retirement today and what they would need to have saved by today to meet a basic threshold of adequacy in retirement.
If the new Congress is serious about both protecting economic security for older Americans and getting the economy back on track, the last thing we should do is cut Social Security. We should strengthen it, and work to create a new reliable private retirement income system on top of it.
Contrary to the widespread myth further forwarded by the commission, Social Security is neither going broke nor causing our federal deficits. It never contributed and, unless the law is changed, never will contribute a penny to the debt. It is self-financing, has no borrowing authority, and cannot pay benefits unless it has the income on hand to cover the entire cost.
Today, Social Security is running surpluses and will be in sound financial shape for nearly three decades. Even after that, its long-term shortfall can be addressed easily without cuts. If a corporation could make such claims to its shareholders, it would be cause for champagne, not gloom and doom.
The retirement income deficit
What is a source for gloom is the massive retirement income deficit already facing millions of Americans. Calculated by the Center on Retirement Research at Boston College, the Retirement Income Deficit is already $6.6 trillion – five times the size of the federal deficit.
The retirement income deficit covers households in their peak earning and saving years — those in the 32-64 age range. It assumes that people will continue to work, save, and accumulate additional pension, retirement savings, and Social Security benefits until they retire at age 65, later than most people currently retire. It also assumes that retirees will spend down all their wealth in retirement, including home equity. The $6.6 trillion is thus in many respects a conservative number.
Cuts to Social Security will only make the retirement income deficit worse. Social Security was intended to provide only a minimal foundation of retirement income, with private sources making up the rest. Our current problem is that in practice, Social Security is the lion’s share of retirement for most Americans: it’s half the income for two out of three retirees and virtually all the income for one out of five.
And these benefits amount to subsistence payments: $14,000 for the typical retiree. That’s less than a full-time minimum wage worker earns flipping hamburgers.
Deficit commission lives on
These figures didn’t seem to have much sway over the president’s deficit commission. Even though the commission proposal failed to attain the supermajority support needed to go to Congress for an immediate vote, key members of both houses are already promising to advance its agenda next year.
This commission proposal recommends a range of substantial cuts to Social Security. These include reductions in cost-of-living adjustments, increases in both the normal and early retirement ages to 69 and 64 respectively, and draconian changes in the benefit formula. Today’s retirees will see their benefits reduced just as cuts in Medicare take effect. And, as for tomorrow’s retirees – who are just toddlers today – they will be living on Social Security benefits that will be cut by as much as 41 percent. So much for the contention by the commission’s co-chairs that they are doing this for their grandchildren.
These commissioners and legislators may think that phasing in Social Security cuts will somehow result in young people saving more for retirement on their own, but that is unrealistically optimistic given the facts we know today. Half of today’s private-sector workers have no retirement plan at work. That means they will be left to live on only the minimal payments of Social Security. Those with true pensions – ones that are employer-paid and that promise a stream of guaranteed benefits – are a dwindling breed. In 1980, two out of three American workers participated in traditional pension plans with guaranteed, lifetime benefits. Now, it’s one out of five and falling as employers cancel these plans, rescinding long-standing promises to workers and increasingly turn to do-it-yourself 401(k) plans.
But 401(k) plans are failing to close the Retirement Income Deficit. Even before the stock market drop, half of all households with 401(k) and other retirement savings plans had less than $45,000 in their accounts. For those approaching retirement, the median account balance was just $98,000 – not much to retire on.
A new approach
It is hard to believe that things will get better for future generations when employers have made it clear that they don’t want the responsibility of contributing to retirement plans and do-it-yourself savings approaches have not worked.
Instead of building on the flawed commission recommendations, Congress should take a fresh, hard look at these issues with public input and open debate.
What we need is comprehensive retirement policy that protects future generations of retirees. In addition to doing everything possible to protect and strengthen Social Security, policymakers should create a 21st-century pension system on top of Social Security – one that has shared responsibility of employers, employees, and the government.
Karen Friedman is the Executive Vice President of the Pension Rights Center, a consumer rights organization that is coordinating Retirement USA, a new campaign to promote the creation of a new universal, secure, and adequate pension system on top of Social Security.