Social Security as solution, not problem
Social Security is not the problem – it is the solution.
Washington is filled with talk of a looming “retirement crisis.” The discussion focuses on funding Social Security and usually includes calls to cut benefits – either by changing payout formulas or raising the retirement age.
But the real problem is not the long-term solvency of Social Security. Rather, it is the fact that millions of Americans are facing an insecure and underfunded retirement.
The best way to address this retirement issue would not be to cut Social Security but to expand it, as Michael Lind, Steven Hill, Robert Hiltonsmith and I argue in a new paper released Wednesday. By increasing the public portion of the American retirement system, we can spend the same or less on retirement as a share of the economy while making the system as a whole much more progressive and stable.
We propose a two-part, or “double-decker,” plan to expand Social Security. In addition to maintaining the current Social Security program, we would add a universal flat benefit for all older Americans. This benefit could be set at a level to meet the goal of replacing 60 percent of income for a middle-income earner in combination with the existing Social Security program.
Social Security is already far more important to retirees than many understand. The poorest 40 percent of elderly earners get about 84 percent of their income from Social Security. Those in the middle-income quintile (40th to 60th percentile) rely on Social Security for almost two-thirds of their income.
Under the current system, Social Security will likely replace about 40 percent of an average worker’s lifetime income during retirement. Experts often estimate individuals will need at least 70 percent of their earnings to maintain a similar standard of living in retirement. So Social Security alone is too low. But if Social Security is expanded to replace 60 percent of an average worker’s income, as we propose, it would provide a sturdier foundation for retirement – especially for middle- and lower-income Americans.
Designed as a supplement t0 other retirement income, Social Security has become the primary retirement security program for the majority of workers. We need to expand it to make up for where other retirement supports have fallen short.
For much of the last generation, employer defined-benefit pensions guaranteed a stable source of elderly income. Workers, who often spent entire careers at the same firm, could rely on the employer defined-benefit pension. In 1980, about 40 percent of private-sector workers had a defined-benefit pension from their employer, including 84 percent for workers in large companies.
Since the mid-1980s, however, defined-benefit pensions have steeply declined. Fewer than 15 percent of all private-sector workers, and 32 percent of those in large companies, have these pensions today – a 62 percent drop.
Defined-benefit pensions were far from perfect. They were not portable between jobs, and they place excessive retirement risks on businesses trying to remain competitive. But their replacements, the 401(k) and other tax-favored private accounts, have been far worse.
The 401(k)’s rise tracks the decline of the defined-benefit pension. From 1980 to today, the 401(k) grew from covering only 17 percent of the private workforce to 42 percent. Though more portable, the 401(k) has shifted risks onto individuals and failed to provide retirement security for anyone except the affluent.
Workers are not saving enough in 401(k)s, and what little they do save is subject to market volatility. The 2008 financial crash illustrated the problems: Individuals lost $2.8 trillion in value of their 401(k)s or individual retirement accounts.
Without sufficient additional liquid savings, many workers have been forced to draw from their 401(k)s to pay for contingencies during their working years. Almost 40 percent of employee contributions to 401(k)s were withdrawn in 2010, moves that came with significant early withdrawal penalties. Even worse, high account fees, along with management companies that do not act in individuals’ best interest, have imposed additional costs on individuals’ retirement security.
What is left in the wake of vanishing defined-benefit pensions, costly and risky 401(k)s, and insufficient additional private savings? Social Security. To adequately meet the needs of retirees, we need to expand Social Security.
Expanding Social Security may seem like an expensive proposition – but only if we ignore the costs of the private programs we currently have. Social Security is one of the most efficient programs, with low administrative costs. Tax-favored private savings programs also chiefly benefit the affluent few who can afford to accumulate large amounts of money in tax-deferred savings accounts.
We estimate that the expansion of Social Security that we propose could result in spending that is similar to – and possibly less than – that of the current system as a share of the economy.
All attempts to fix retirement security through private means have failed spectacularly and have only made the problems worse. Social Security, however, has remained popular and successful, keeping millions of elderly Americans out of poverty and ensuring a decent retirement for all workers.
We should expand on this success, not cut it.
The full paper, “Expanded Social Security: A Plan to Increase Retirement Security for All Americans,” can be found here.
PHOTO (Top): Undated handout photo show counterfeit Social Security cards that were confiscated by Immigration and Customs Enforcement (ICE) agents during worksite investigations in San Diego, California. REUTERS/ICE/Handout
PHOTO (Insert): President Franklin D. Roosevelt signs Social Security Act, on 14 August 1935. Standing with Roosevelt are Rep. Robert Doughton (D-N.C.); unknown person in shadow; Sen. Robert Wagner (D-N.Y.); Rep. John Dingell (D-Mich.); Rep. Joshua Twing Brooks (D-Pa.); Labor Secretary Frances Perkins; Sen. Pat Harrison (D-Miss.); and Rep. David Lewis (D-Md.). CREDIT: Social Security Administration/history