Can those aged 45 to 64 be saved from misery in retirement? How?
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).
Nothing we should do?
Some believe little in the way of public policy should be done to help future retirees. Andrew Biggs of the American Enterprise Institute, though he agrees part of the problem is systemic, also feels a significant share of the blame falls on individuals who inadequately save for retirement: “People are adults. We’re not dummies here. If somebody over the course of their lifetime consciously makes dumb decisions, it’s a little hard to stop that so long as we’re living in a free society.”
Is there really nothing we can do to help those who will have inadequate resources in retirement? “Work an extra year or two,” Biggs said. “Working longer is a really effective way of raising replacement rates.” What about those who are unable to keep working? He said the majority of jobs today are less physically demanding than they were in the past, when the average retirement age was higher. “Are there people with physically demanding jobs? Sure there are. Are they the majority of people? Should we base our whole national policy on that? Probably not.”
And what about those who were unable to save for retirement or lost their savings? “Undeniably there are going to be some people who are in a bad situation. We’ve got a crappy economy…Would I prefer that we didn’t have a crushing recession and these guys didn’t have to work longer? Sure. But that’s the price we pay for making [poor] policy, which we did,” said Biggs.
To some, such as Dean Baker, co-director of the Center for Economic and Policy Research, Americans should not be forced to “pay the price” for poor policy made in Washington. “We ended up in this situation because we had an economic collapse. These people [future retirees] didn’t collapse the economy…And then you turn around to these people and go, ‘Well, you’re just going to have to live within your means?’” Baker said.
We asked Biggs about this point, and he replied, “Well sure, but we live in a world where, when Washington makes bad policy, we all bear the cost of it. That’s just how it is. I don’t want to sound heartless on this stuff, but there’s just no way around that.”
Baker disagreed with that view. “Well, I for one am certainly not resigned to that. Certainly you could talk about increasing benefits for the low and middle end, and that’s not terribly expensive…You’re talking about money, but this isn’t some impossible burden,” he said.
Biggs supported the idea of automatic enrollment in 401(k) retirement savings plans for employees, but aside from that, argued that most forms of government intervention would likely be bad policy: “If you could readily identify the people who are not well-prepared for retirement through no fault of their own, and figure out the degree to which they need assistance, then we can talk and see how big a policy change we’re looking at. But I just don’t see [that] people can do that very well at this point…I just don’t trust the political process to really get these things right.”