May 8, 2013 — “Up until very recently, each generation of retirees did better than the last, not just because incomes were rising in general, but also because they were closing the gap between their pre-retirement and their retirement incomes,” said Monique Morrissey, an economist at the Economic Policy Institute. “Now,” she continued, “we’re at the first time in modern U.S. history where that gap is growing and it’s growing dramatically.”
Morrissey’s assessment that American workers are facing a retirement security crisis has been echoed in recent articles in The Wall Street Journal, Newsday, and Forbes. Strikingly, however, Remapping Debate found that researchers and policy advocates have generally spent little time trying to solve the problem for those already aged 45 to 64.
The evidence we have pieced together through additional probing suggests that for those aged 45 to 54, there is a range of policy options — beyond the fatalistic prescription to “just work longer” — that has the potential to materially enhance retirement security, if adopted quickly. For those aged 55 to 64 the outlook is bleaker, though temporary increases in Social Security payments targeted to that group (or its poorest members), or an expansion of anti-poverty programs such as Supplemental Security Income (SSI), could, if enacted, ameliorate the worst of the anticipated impacts on the poorest retirees.
Despite the availability of a potential solution for the 45- to 54-year-old group and of an improved safety net for the 55- to 64-year-old group, no one we spoke with suggested that the political will to effect such changes exists today.
The numbers and their consequences
According to an analysis by the economist Teresa Ghilarducci and her team at the Schwartz Center for Economic Policy Analysis at the New School, 34.6 percent of workers currently aged 45 to 54, and 31.2 percent of workers aged 55 to 64, are projected to live at or below 200 percent of the poverty level when they retire, if nothing is done to change the picture. Why would it be cause for concern if these workers (about 27 million Americans) were going to live with retirement income up to twice the poverty line? For one thing, Ghilarducci said, such people remain in “a chronic state of want.”
Eric Kingson, a professor of social work and public administration at Syracuse University and founding co-director of Social Security Works, a group that advocates for the protection of the Social Security system, said a retiree with income below 200 percent of the poverty line who faces significant health care costs is often forced to compromise between her health care and other necessities, such as clothing. For some, he said, health care loses out and “people cut their medicine.”
Ghilarducci added, “If we don’t do something, 49 percent of middle-class retirees will be poor or near poor when they reach retirement age.” This would be, by a wide margin, the highest elderly poverty rate since the U.S. Census Bureau began compiling poverty statistics in 1959. The previous high was 35 percent in 1960, and the most recent data reports it as 15.1 percent (according to the newer, and, most believe, more accurate, Supplemental Poverty Measure).
Another snapshot of the problem facing 45- to 64-year-olds as they reach retirement age comes from the Employee Benefit Research Institute (EBRI). Last month, EBRI reported that 57 percent of workers have less than $25,000 in total savings (excluding home value and defined benefit pensions, the latter of which are enjoyed by only 15 percent of private-sector workers). 28 percent of workers report less than $1,000 in savings.
For workers who might expect to live 20 years after retirement, $25,000 in savings would leave them with less than $105 to live on each month beyond their Social Security payments. According to Eric Kingson, this amount of money is insufficient to protect against “just about any unexpected problem.” He cited medical emergencies, car problems, and home repair as events that can deeply cut into such savings.
Eric Kingson said the impending retirement security crisis ought to be a public concern not only because “people should be able to maintain a reasonable standard of living” in retirement, but also because it will create “all sorts of consequences: consequences for [retirees]; but also consequences for their younger family members.” More and more retirees could be forced to depend on their children, he said, which would significantly cut into those children’s own income and savings during their peak earning years, exacerbating the retirement security crisis for younger generations.
Kingson believes this crisis is an opportunity to “start imagining what kind of a world we want…Human dignity is important,” he said. “These programs [those that help prevent elderly poverty] give expression to core values in our society. If you want to be cynical, they’re quaint or they’re old-fashioned, but…fundamentally there’s something decent about providing protection for ourselves and our neighbors. That’s something we need to get back to in this country.”
Fatalism, especially with regard to 55- to 64-year-olds
A common view is that because of political resistance, the type of legislation necessary to make a marked difference in retirement security for future retirees is impossible; for workers aged 55 to 64, most say, it is too late for most options anyway. Anthony Webb, a senior research economist at the Center for Retirement Research at Boston College, told Remapping Debate retirees face three options: they can work longer, attempt to save enough to guarantee retirement security (which he described as “implausible”), or face dramatically reduced levels of consumption in retirement. “Now, given those choices, what would you choose?” We asked whether public policy changes, such as boosting Social Security or some other form of government spending, could create a fourth choice. He replied, “Given the current political climate, I think that the discussion is about how we keep what we’ve already got rather than further expanding benefits.”
This attitude of fatalism, we found, is common. Barbara Butrica, a senior research associate at the Urban Institute, for example, said, “I think most people recognize Social Security is not going to get better; in fact, it’s going to get worse for certain groups.”
Even those who support expansive public policy to counteract the downward trend in retirement security expressed the belief that little will be done for the 55- to 64-year-old cohort. Teresa Ghilarducci said that, aside from forcing themselves to work longer, there are two scenarios in which these citizens could have relatively more secure retirements: “If you’re in your fifties, your only solution is to reduce your living standards by 20 percent and [increase] your savings by 20 percent. You have to start your deprivation early so it doesn’t seem so bad when you get older. Or, the government could decide to boost Social Security benefits.” Ghilarducci never indicated such a boost is likely, however.
Joshua Freedman, a policy analyst in the Economic Growth Program at the New America Foundation, agreed that the current public debate, particularly in the wake of President Obama’s budget proposal, is focused on cutting Social Security. As a result, he believes major legislation that could markedly boost retirement security is unlikely to pass in the near future. However, he thinks it is important that more people begin to identify and talk about the broader issue that “people [won’t] have adequate standards of living in retirement no matter what they do.” If that happens, in the long-term, Freedman said, addressing that broader question would yield “a much more rational and sane look at how we can solve the underlying human problem.”
More room to maneuver for 45 to 54 year olds
For younger workers — those currently 45 to 54 — the future is, potentially, brighter. When asked for ideas on how to help this cohort, experts produced a range of policies that could help them to save enough for retirement to maintain their pre-retirement living standards.
These 45- to 54-year-olds are among a broader group of middle-aged workers who, many believe, have fallen victim to what Eric Kingson described as a “failed private pension system.” Monique Morrissey said that 401(k) plans and other private savings arrangements have failed to adequately prepare workers for retirement: “For many workers, if they’re not getting a tax break and an employer match, a 401(k) might actually be a really bad way to save money…The fees are high. They can easily erode a third of what you accumulate in them.” In addition, she said, private savings plans in general lead people to underestimate how much they will need in retirement. People see a seemingly large lump-sum value in their 401(k) and “think they are rich,” but when spread over decades of retirement, such sums become insubstantial.
According to Dean Baker, co-director of the Center for Economic and Policy Research, the creation of new and better types of retirement savings plans that fix such deficiencies could help 45- to 54-year-olds become more secure in retirement. “They can accumulate something that can provide a boost to their living standards in retirement, so [new forms of retirement savings] would help them,” he said.
What would such plans look like? Monique Morrissey said the hallmark of good retirement savings reform would be the creation of “hybrid multi-employer plans that are easier for employers to fund in advance and that provide steady, decent, and adequate incomes that don’t get capped during downturns, [plans] that people can’t take money out and borrow against.” Two high-profile proposals for a major revamping of the U.S. retirement savings system have been put out in the past year, both of which seem to meet Morrissey’s requirements.
The first of these, proposed by Senator Tom Harkin, is called the “Universal, Secure, and Adaptable” (USA) retirement fund. These funds would be universally available to all who do not already have access to a retirement plan with an automatic payroll deduction and “a minimum level of employer contributions” — though the proposal does not specify that minimum level. Those eligible would take advantage of the existing payroll-withholding system to deduct a specified amount of an employee’s paycheck and place it into the account. This would likely be 3 percent by default, though the employee could increase, decrease, or opt out of the contribution. Employers would be required to “make modest contributions,” but, again, the contribution level is not currently specified in the plan. The plans would be pooled, privately run, and professionally managed by “a board of trustees consisting of qualified employee, retiree, and employer representatives.” They would follow employees throughout their lives, and upon retirement, would pay a monthly annuity (with survivor benefits) just like a traditional pension.
The second proposal, formulated by Teresa Ghilarducci, Robert Hiltonsmith, and Lauren Schmitz, is called the State Guaranteed Retirement Account (State GRA). This plan would require mandatory employee contributions and, according to a working paper authored by the plan’s architects, would “guarantee a return of at least 3 percent, or about 1 percent above inflation.” The plan’s developers assert this rate of return would be naturally achievable, and that projections show “there is very little risk of the rate dropping below 4.9 percent over the long term.” However, they suggest funds should nevertheless take out insurance policies “with either the state or private insurers” to safeguard against shortfalls. Employers could contribute to the State GRA, but would not be required to do so.
Ghilarducci’s plan would have lower investment management costs and marketing costs than current 401(k)s, but “their administrative costs would likely be similar.” Average net returns under a State GRA are estimated to be 7.28 percent — well above the average return for defined contribution plans (6.31 percent) and close to the average return for traditional defined benefit pensions (7.43 percent).
An earlier iteration of the plan, from 2007, was estimated to provide a retiree with pre-retirement income of $20,000 with a $5,183 guaranteed annuity in retirement (assuming the retiree worked 40 years and retired at age 65). This would improve that worker’s “replacement rate” by 26 percent, for a total rate of 89 percent when combined with Social Security payments. (Note: that figure would likely be less for a worker just entering the plan at age 45 to 55, though still considerably higher than the replacement rate for Social Security alone).
According to Ghilarducci, if either her proposal or Harkin’s were made law tomorrow, anybody in their 40s or younger who entered the program “would have adequate retirement; it would solve this problem.”
Automatic enrollment and soft mandate
Though a major retirement savings overhaul would have the most dramatic impact, there are also smaller reform possibilities that would alter the current system of 401(k)s and IRAs to allow workers to save more money.
The first idea is a policy of “automatic enrollment.” This would take the current 401(k) plans and require employers who offer them to automatically enroll employees in such plans. Dean Baker said this plan could help enroll more people in retirement plans: “As it is now, not always, but generally, when you’re an employer that offers a 401(k) you [the employee] have to opt into it. You have to fill out the forms and say you want to be in it, and people for a variety of reasons…they don’t end up doing it, even though they may actually want it. If you flip that over and you make the default that you’re going to be in the program, and you have, say, 3 percent of your wages taken out, you’re likely to get a much, much higher enrollment rate and you’re not forcing people into it” because employees can opt out.
Monique Morrissey suggested what she called a “soft mandate”: the federal government could require employers who receive tax benefits for offering retirement plans to employees to offer plans that meet certain requirements, including steady employer contributions at a minimum rate. As it stands now, employers can stop matching employee contributions into 401(k) plans at will, as many did during the fallout of the 2009 recession. A “soft mandate” would create tax incentives for employers to match employee contributions and continue matching, regardless of the economic climate. Such a policy could also encourage employers to offer plans with low administrative costs; many current plans charge significant fees for administration that erode employee savings.
The limits of retirement savings proposals
According to the most recent data from EBRI, 48.9 percent of all workers have access to an employer-sponsored retirement plan, and 39.7 percent of all workers participate in such a plan. The Plan Sponsor Council of America’s most recent survey of 401(k) plans reports that 81.6 percent of plans have an employer match provision, and 95.5 percent of plans that have a match provision made a match in 2011. In summary, then, only about 39.7 percent of workers have a retirement plan with an employer match. So, while automatic enrollment and improvements to 401(k) plans would likely improve the retirement prospects of many, they would not help the majority of Americans without access to such a plan in the first place. To do that in the framework of retirement savings reform, a plan that mandated employee contributions would be a necessary.
Some economists, however, have questioned the merit of retirement savings in general when compared to more direct forms of government spending. According to Eric Kingson of Syracuse University, “We already have a universal pension system. It’s called Social Security…It travels with you from job to job. I say build up the system.”
Virginia Reno, the vice president for income security at the National Academy of Social Insurance, added, “By the time you finish describing [such proposals], you’ve described the Social Security program…Why don’t we just do it with the system that’s already in place and works? Social Security is so much more efficient. Of the money that comes out, 1 percent is for administration, the rest is for benefits, which is not true of most anything you try to do through the private sector.”
How could Social Security be enhanced to meet the needs of those nearing retirement?
If, as Morrissey says, “Social Security is the cheapest and most efficient retirement program there is,” how could it be improved to provide real security to future retirees?
According to Eric Kingson, “There are some very simple things that could be done that are not outrageously expensive. One, the CPI could be adjusted” in a manner to help, not hurt, beneficiaries. He suggested starting with a measure called CPI-E, an index that aims to more accurately assess the cost of living for the elderly by more heavily weighting health care and housing costs. “If they had that going back to 1982, benefit adjustments would have been about one-fifth of 1 percent higher each year than they have been.”
The effect of adopting the CPI-E measure, according to a document produced by the U.S. Senate Committee on Health, Education, Labor, and Pensions, would be to “ensure that Social Security benefits keep pace with the rising costs of essential items for seniors, including health care.” Such an approach would therefore help prevent the retirement security crisis from being exacerbated, but would not alone generate the increased benefits necessary to solve it.
To do that with Social Security would require a broader expansion. There are three general ways in which Social Security could be expanded: there could be a targeted or means-tested benefit increase, benefits could be increased across-the-board, or the benefit formula could be adjusted in such a way as to increase benefits for all, while providing low-income households with a greater proportional share of the boost.
Targeted increase
A targeted increase in Social Security would likely take the form of an increase in SSI, the means-tested anti-poverty program for the elderly that falls under the umbrella of the Social Security Administration. The program guarantees income for those over 65 (as well as the blind and disabled) up to a maximum threshold, currently $8,529.32 for an individual and $12,792.55 for an eligible couple. (For example, if a retiree has an income of $7,529.32 this year, SSI will pay that individual $1,000.)
Ghilarducci, Morrissey, Kingson, and Virginia Reno all supported this idea as a way to directly boost the poorest retirees out of poverty. According to Reno, “The maximum benefit right now, at least the maximum federal benefit before you get any state supplements…is three quarters of the poverty line, and the poverty line itself is something that hardly anybody could live on. So the benefits are too low, even as a safety net program.” Boosting the SSI limit to the federal poverty line would currently provide eligible two-person households with an additional $2,717.45 in annual income. Boosting it to 200 percent of the poverty line would provide them an additional $7,835.45.
Alternatively, one could increase benefits for those who met a means test. Dean Baker suggested that those with income below the national median could have benefits increased by “10 or 15 percent.” A 15 percent increase would boost the average annual Social Security benefit for a low-income individual from $10,648 to $12,245. In so doing, Congress would effect an approximately 16 percent increase in the replacement rate of a median, two-person, low-income household (a household in the bottom two income quintiles, which have median annual earnings of $20,262). This would add approximately $32 billion to the annual cost of Social Security.
Monique Morrissey said the benefit of such a directly targeted approach is that “you get more bang for your buck. You can target it to people who would be just below poverty or very close to the poverty line, so therefore it’s inherently less costly.” However, she cautioned that such programs tend to be politically weak.
“There’s a cliché, but it’s true, that programs for the poor become poor programs,” she said. By repositioning Social Security as “something that’s for the poor,” she fears the program could lose its political strength, which she believes stems from the fact that earnings are linked to contributions. Eric Kingson echoed this concern, saying that bringing means testing into Social Security could “create schisms between people” and “undermine the political strength of the program.”
An across the board increase?
Alternatively, the government could increase Social Security benefits across the board. In April, the New America Foundation proposed one model for doing this. Its plan would create two tiers of Social Security: the current contribution-based program would be retained and renamed “Social Security A.” A new program, called “Social Security B,” would be a universal flat benefit for all retirees, to be funded by general revenues rather than the payroll tax. This program, the authors of the model wrote, could replace SSI.
Implementing the plan would be expensive. It is estimated to cost approximately 3.7 percent of GDP annually on top of current Social Security expenditures; this year, that would put its price tag at $558.3 billion, which is considerably greater than the cost of a more targeted program. Eric Kingson said this cost makes the idea highly unlikely to pass through Congress anytime soon, and added, “There might be better ways to use those resources.” Nevertheless, he commended the plan’s authors for attempting to start a national conversation.
“We’re not being particularly subtle about what the goal is. We’re not going to turn this into an immediate legislative proposal. That’s not where any legislator is right now,” said Joshua Freedman of the New America Foundation, one of the model’s authors. “We’re looking much longer term about changing the conversation about retirement security in general,” from its current narrow focus on cutting Social Security to a broader assessment of how “people are not able to have adequate standards of living in retirement,” which he credits in large part to the failure of the 401(k) system, and what can be done about it.
Andrew Biggs of the American Enterprise Institute argued that the New America Foundation plan, along with any general increase in Social Security, would “crush private savings,” because those who could save would have a reduced incentive to do so, “and that can’t be good for the economy.” Monique Morrissey disagreed; favoring Social Security over retirement savings, she said, would actually provide “macroeconomic advantages,” particularly during a period of economic recovery. “Right now we have a global savings glut. We don’t really need more money holed up in pension funds or savings accounts. What we need is more money being spent.” The question of whether spending or investment is better for the economy is one of the oldest disputes in macroeconomics.
A more modest approach would be one suggested by Dean Baker: boosting Social Security benefits for a limited amount of time — perhaps for 10 or 15 years — in conjunction with implementing retirement savings reform. This hybrid approach would provide extra income to the 55- to 64-year-old cohort (those who would not benefit from new forms of retirement savings), could be phased out as younger generations take advantage of newly-enacted forms of retirement savings, and could potentially gain more political traction given its temporary nature.
Partial targeting
Currently, Social Security replaces 90 percent of the first $791 of a person’s pre-retirement AIME (average indexed monthly earnings). It then replaces 32 percent of a person’s AIME between that first “bend point” and $4,768, and 15 percent of eligible AIME above $4,768. If Social Security were to replace 100 percent of that first $791 of AIME, Monique Morrissey said, that would put approximately $900 more per year into the pockets of most recipients. As a percentage of overall benefits received per person, the increase would be greater for those who had lower earnings while working than for higher-earning individuals.
Partial targeting would provide less help than full targeting for those who need assistance most, but Morrisey argued that partial targeting would risk less of Social Security’s “political strength.”
Paying for the future
Despite the common refrain that “we just don’t have the money,” there are many options for how to finance such expansions or restructurings. The New America Foundation suggested funding its plan with a Value-Added Tax (VAT) of the type seen in much of Europe, China, and elsewhere. Eric Kingson suggested a dedicated financial transaction tax that would flow into social security, much like the so-called “Robin Hood Tax” that has recently been approved by the European Union. (Remapping Debate previously wrote about the financial transaction tax.)
Some economists are also in favor of lifting or modifying the payroll tax cap, which currently exempts earnings above $113,700 from Social Security taxation. (This idea, though nationally popular, seems to frighten many Senate Democrats.) Ghilarducci would like to see the cap immediately and completely lifted for employers (not employees).
This alone, she said, would “solve elderly poverty,” as long as benefits don’t also increase for higher-income workers. “It would keep the system going, and it could bring up everybody’s income who’s on Social Security up to the poverty level.” She added the caveat, however, that “the reason why that can work is because the poverty level is really low,” and people with incomes between the poverty level and 200 percent would remain in a state of want. Getting all retirees up to 200 percent of the poverty line, she said, would require raising the tax rate as well as broadening the base.
Other models of modifying the payroll tax cap include lifting it for both employers and employees, but increasing benefits for those who will be paying more. Monique Morrissey endorsed this idea, and added, “You can have a lower multiplier” for those new benefits, but the link between contributions and benefits should be preserved, because “that’s what makes people believe in [Social Security].” This approach would, however, produce less revenue.
Choices to be made
Though future retirees appear to be ill-prepared for their post-employment years, the United States has a number of ways to mitigate this problem — if it is willing to pay for them. “We have a choice,” said Virginia Reno. “We have a choice in all of our public policy issues, whether to pay for what we want or to declare we can’t afford what we want.”
While some say seniors will simply have to work longer into their old age, and some even blame those seniors for failing to appropriately save during their working years, Monique Morrissey believes there is a broader philosophical issue at stake: “There’s absolutely no reason for a wealthy country like the United States not to have adequate retirement policies that allow people to retire before they’re sick and worn out.”
Teresa Ghilarducci added that for many, even if more jobs were available, working longer simply isn’t an option. “We already have a situation where most people want to work longer but can’t,” she said. Some of this is due to loss of work, some due to physical or mental limitations resulting from ill health, and some because of the need to provide care for a spouse. For such people, even increased work opportunities will not help.
To Eric Kingson, “It’s really a fully disrespectful notion: that somehow these folks are going to just have to suck it up. Well, they have sucked it up. They’ve already experienced recession, loss of pension protections, less security.”
Refusing to engage in a discussion about the public policies that could help future retirees, Kingson said, is itself making a choice. “It’s bounding the policy discussion, and framing it, and feeding into fatalism…There are lots of things we could do. We just need to have the political will to do it.”
Additional reporting by Heather Rogers.
Note: this article has been modified on May 8, 2013, to more precisely reflect a statement from Anthony Webb of the Center for Retirement Research (Page 2 of article).