By Mark Miller
October 31, 2013
I asked a financial services executive recently how our retirement saving system can be considered a success, considering that all but the highest-income households are approaching retirement with next to nothing saved.
His reply: "They don't have any money while they're working, so why would they have any money in retirement?"
I'll do this executive a favor and let him remain nameless - but it was a moment of revealing truth-telling from an industry insider. Individual retirement accounts and 401(k)s work just fine for people with money, not so much for everyone else. "Them that's got shall get, them that's not shall lose," as Billie Holiday sang.
Income inequality breeds retirement inequality - a situation that Social Security was devised to address. Before Franklin D. Roosevelt created the system in 1935, seniors without money went to the poor farm, literally. Social Security has nearly eliminated that sort of abject poverty by providing a nearly universal modest pension. Last year the average monthly benefit for a retired worker was $1,260.
Yet there's a huge gap in retirement nest eggs. Data from the Investment Company Institute shows that near-retirement households with annual incomes over $200,000 had saved an average of $885,000 in 2010, compared with just $49,600 for households with incomes ranging from $30,000 to $45,000. And 45 percent of working-age households own no retirement account assets whatever, according to the National Institute on Retirement Security (NIRS).
So, while conservatives worried about deficits argue for Social Security cuts, a group of progressive economists, policy experts, labor leaders and politicians is seeking the opposite outcome. On Wednesday they met in Washington to argue not only that Social Security can address retirement inequality - but that it is by far the most logical available platform for addressing the problem, due to its risk pooling and progressive approach to income distribution. Social Security replaces the highest percentage of pre-retirement income for workers at the low end of the wealth scale.
In short, these experts made the case that Social Security should be expanded - not cut.
Sponsored by an advocates' coalition called Strengthen Social Security, the conference on "Social Security's Role in Solving the Retirement Income Crisis" marks the start of a new strategy for progressives, who have mainly been playing defense. Over the past decade they've fended off assaults ranging from a new inflation formula, called the chained CPI, that would cut cost-of-living adjustments (COLAs) to reduced benefits for affluent seniors (means testing) and even the plan to transform the program into a system of private savings accounts floated during the George W. Bush years. This year the Obama administration has openly signaled its desire to throw Social Security benefit cuts into a "grand bargain" budget agreement this fall.
Now, progressives hope to go on the offense. Tom Harkin, the longtime Democratic senator for Iowa, summed it up Wednesday at the conference: "We need a completely new narrative on Social Security."
Here are some of the key points in favor of expanding Social Security:
- The value of Social Security benefits has shrunk by roughly 25 percent, owing to benefit cuts put in place when the program was last reformed in 1983. Those reforms included a gradual increase in the full retirement age from 65 to 67, the introduction of taxation of benefits for higher-income seniors and changes in cost-of-living adjustments. The National Academy of Social Insurance projects that in 2015 Social Security will replace 35 percent of the median worker's pre-retirement income at age 65 - down from 39 percent in 2002. And the replacement rate will fall further, to 31 percent, by 2030.
- The share of households participating in defined-benefit pensions is plunging, and the problem is most acute for younger workers. Less than one-third of households headed by a worker younger than 44 had access to a traditional pension in 2010, according to NIRS.
An expanded Social Security retirement program would have to inject new revenue into the system to close the program's current projected long-range shortfall and set the stage for a benefit increase. Most proposals begin by gradually phasing out the cap on wages subject to the payroll tax ($117,000 in 2014), and raising payroll tax rates over a 20-year period. Some advocates also would like to see a surtax on annual incomes over $1 million. They would also give Social Security permission to invest part of its trust fund in equities to produce higher long-range returns.
On the benefits side, progressives want to increase benefits for everyone by 10 percent, recognize the value of family caregivers by awarding work credits toward Social Security benefits and adopt a COLA formula tied to the Consumer Price Index for the Elderly (CPI-E), which aims to measure higher-than-average price increases faced by seniors, especially for healthcare. (The Social Security Administration yesterday announced a 1.5 percent COLA for 2014; that has been the average for the past four years but is far less than the COLAs over the past three decades, which averaged 3 percent, according to an analysis by the Senior Citizens League.)
It's not clear whether Congress will take up, let alone pass, such reforms. In Washington, Republicans will oppose these ideas, and Democrats are split. "We've been in a rearguard action, with a Democratic administration promoting one of the worst policy ideas for Social Security (the chained CPI)," said Representative Dan Maffei, a Democrat from upstate New York.
But an offensive strategy has one thing going for it: public opinion. A poll conducted for NASI earlier this year found that 70 percent of Americans support a reform package that raises benefits, eliminates the cap on payroll taxes and gradually boosts payroll tax rates. Support was strong among Democrats, Republicans and independents.
That sounds like a strong platform for a new narrative on Social Security.