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The Gerontologist, 2015, Vol. 55, No. 4
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Making Retirement Viable Again
Charles D. Ellis, Alicia H. Munnell, & Andrew D. Eschtruth (2014). Falling Short: The Coming Retirement
Crisis. Oxford University Press, New York, NY, 159 pp., no price listed (cloth).
Nancy J. Altman & Eric R. Kingson. (2014). Social Security Works! The New Press, New York, NY, 288 pp.,
$16.95 (paper).
After the 2014 off-year elections catapulted the
Republican Party into majority status in both Houses of
the 114th Congress, House Republicans unexpectedly
adopted a rule which would bar the House from shifting
payroll taxes from the Old Age and Survivors’ Insurance
(OASI; Social Security retirement) program to the (Social
Security) Disability Insurance (DI) program, which is in
danger of running out of funds to pay disability benefits
by 2016. Altman and Kingson (A&K) anticipated this
action by House Republicans in their new book, Social
Security Works! As the authors speculate, the new rule
was undoubtedly intended to facilitate the consideration
of so-called entitlement reform by those determined to
cut entitlement programs, including DI and Medicare.
It is instructive that this very same type of reallocation action had been taken on 11 previous occasions by
Congress, with no apparent ill effects (all benefits were
paid, no funds were taken from other programs, taxes
were not increased, and the nation survived). Equally
important to note is the fact that the shifting of funds via
tax rates has not gone exclusively from OASI to DI trust
funds; it sometimes went from DI to OASI as well. One
of these reallocations from DI to OASI occurred in 1983
and was substantial. It was only partially rectified in a
1994 shift from OASI to DI. If that 1983 reallocation had
not occurred, DI would not be in need of bolstering today
(Ruffing, 2015).
A&K elaborate on how the term entitlement has
become a lightning rod for so-called reformers, who are
actually interested in cutting entitlement spending. An
irony of this development is that entitlement authority,
as defined in the 1974 Congressional Budget Reform and
Impoundment Control Act, was nothing more than a term
intended to classify a certain kind of spending authority. However, opponents of Social Security and Medicare
have, over time, by deliberately and consistently conflating entitlements with anti-poverty or welfare programs
(which are intended to be seen as wasteful gifts), intentionally given the term entitlement an entirely different
and somewhat odious meaning, a process that A&K discuss at some length in their book. To be fair, the conflation
of Social Security with poverty policy may also be due in
part to the widely cited conclusion that Social Security is
the most effective program in the U.S. policy arsenal at
reducing poverty.
The lineage and history of Social Security is of wage
insurance, not poverty alleviation. Its legislative progeny, Medicare, is of a similar origin. Nevertheless, as
A&K emphasize repeatedly throughout their book,
the combined size of these two programs (which now
account for roughly 40% of federal outlays, and perhaps
more importantly, their automatic funding) has made
them the primary objects of the rhetoric of entitlement
reform, which is transparent code for cutting entitlement
spending.
As A&K note, it is regrettable that the relentless equating of entitlements with benefits to the poor has occurred
over time not only as a result of assaults by well-known
entitlement foes [such as mega-millionaire entitlement
opponent and crusader Peter Peterson and his allies, such
as David Walker (the former Comptroller General) and
former Senator Alan Simpson (R-WY)], but also as the
perhaps unintended side effect of actions by more liberal
friends, such as President Bill Clinton (whose creation
of a so-called entitlements commission gave an opportunity to entitlement opponents to propose cuts to these
programs) and President Barack Obama (whose eagerness to achieve a so-called grand bargain on the budget,
including changes to Social Security and Medicare, lent
legitimacy to the arguments of the opponents of Social
Security and Medicare, equating them with need-based
programs).
As noted by Gist in Hudson (2009, p. 174), “In budgetary terms, entitlements are programs that generally
carry permanent authorizations and are not subject to
annual appropriations, thereby insulating them from
congressional appropriations scrutiny.” Rhetorically,
however, the term entitlements has become a code
word to conjure up images of wasteful and extravagant
uncontrollable spending on older citizens, rather than
earned benefits based on contributions such as Social
Security, Medicare, unemployment insurance, and federal worker pensions. As much as anything, it is the
independence of spending for entitlements from annual
congressional control which seems to invigorate opponents, and has even led some more thoughtful analysts
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to blame our budgetary woes on the historical decisions
of “dead men ruling” (Steuerle, 2014), suggesting that
our so-called fiscal freedom is jeopardized by letting
decisions made as long ago as the 1930s govern today’s
budget allocations.
I would suggest we should be grateful for the wisdom
of past Congresses for enacting legislation that not only
provided adequate funding for a multi-generational program, but also made it possible to structure benefits in a
way that allows beneficiaries to know in advance what
they can count on receiving in retirement. Imagine 41 million old-age retirees waiting for today’s Congress (which
has demonstrated a willingness to consider not paying federal workers) to appropriate sufficient funds to pay retirement benefits, and to allocate those funds in a rational
way across individuals. The prospect is disquieting, to say
the least. However, thanks to the foresight of those dead
men, we need not be concerned about a dysfunctional
Congress doing the right thing, and the Congress does not
need to decide on the proper amount of funds to appropriate. Nevertheless, we still have a Congress (or at least
one party) determined to undermine programs that have
functioned successfully (although not necessarily to their
liking) for decades.
Regrettably and ironically, entitlement reformers
have no doubt been inadvertently aided in their effort
to cut entitlements by the outstanding work of the
Congressional Budget Office in analyzing and presenting budget options, and by its use of ostensibly neutral
budget terminology such as entitlements and transfers,
which has lent legitimacy to efforts to equate Social
Security and Medicare with need-based welfare programs
such as Temporary Assistance to Needy Families (TANF),
Supplemental Nutritional Assistance Program (SNAP),
Earned Income Tax Credit (EITC), Medicaid, and other
programs dedicated to the amelioration of the condition
of the poor.
A&K’s investigation underscores the centrality of Social
Security to a financially successful retirement. In this
respect, at least, their treatment is similar to that of Ellis,
Munnell, and Eschtruth (EME), who place Social Security
at the heart of any retirement plan. A&K emphasize several
aspects of Social Security:
(1)It is wage insurance, to which workers contribute, and
it is therefore earned, not a gift, the way many think of
poverty programs;
(2)Because workers make contributions to purchase the
insurance, Social Security cannot go bankrupt, as some
critics claim, as long as there are workers paying into
the fund;
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(3)Worker and employer contributions provide the basic
funding for the program;
(4)Program spending is based not on need, but rather is
directly related to workers’ contributions;
(5)Program funding does not depend on general income
tax revenue.
A&K’s most notable contribution is the plan they call the
Social Security Works for All Generations Plan, which is
a “comprehensive package of benefit and revenue changes
that expands Social Security’s protections in important
ways.”
This plan consists of several changes to both benefits
and revenues. On the benefit side:
(1)Increasing benefits to everyone who receives Social
Security now, or will in the future, by 10% across the
board up to $150/month;
(2)Adoption of a cost of living adjustment based on
spending by the elderly—the so-called CPI-E—which
they deem to be more accurate (although it is not
based on a full sample of older consumers) than
either the CPI-U (the one used today), or the so-called
chained CPI, which is thought by many to be more
accurate than either of the other inflation adjustment
measures;
(3)Update the special minimum benefit to 125% of the
poverty line for those who work at least 30 years and
retire at their full retirement age;
(4)Payment of full benefits for wealthy people whose contributions increase;
(5)Improvement in SSI benefits;
(6)Restoring student benefits for children of deceased or
disabled workers;
(7)Enhancing protections for disabled adult children.
If these seem like costly revisions, they are. A&K propose
financing these enhancements through a variety of means,
as follows:
(1)A two-decade-long increase of 1% each (on workers
and employers) in the rate of contributions to Social
Security (payroll tax), which means contributions
would rise in 20 years from 6.2% on each to 7.2%,
or an overall rate of contribution of 14.4 compared to
today’s 12.4%;
(2)Uncapping the payroll tax, which is currently capped
at just below $120,000. The cap now causes some 6%
of earners and 7.5% of earnings at the very top of the
earnings distribution to escape payroll taxation. The
increase in taxes would be coupled with an increase in
benefits for contributions above the cap;
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(3)A new, higher marginal personal income tax rate of
49.6% (10% age points above today’s maximum) on
incomes in excess of $1 million, with the new revenue
dedicated to Social Security;
(4)Diversification of the assets of the Social Security trust
funds to include investment in equities rather than just
federal bonds. This is unlike the proposal of the George
W. Bush Administration in early 2005 to have each
individual worker carry a portfolio of assets, including equities, in their private Social Security account.
The A&K proposal would not give each worker the
responsibility for managing his or her own asset portfolio. Rather, it would provide for the investment of the
total asset portfolio of the Social Security trust funds, in
much the same way that defined benefit plan portfolios
are managed by the employer, unlike defined contribution plans in which the investment burden lies with the
worker.
EM&E’s book Falling Short also emphasizes the primacy
of Social Security to retirement security, but in so doing
expresses a rather different view of Social Security’s evolution. Rather than the stable, unchanging program described
by A&K, EME describe how changes to Social Security in
the last 20 years have taken us from the so-called golden
age of retirement (1980–2000) to a situation where retirement is precarious, and many are falling short because
they simply do not have adequate retirement income,
which EME define as a replacement rate equal to at least
75% of their pre-retirement income. In the golden age of
retirement, Social Security alone provided about 60% of
the pre-retirement income for the average couple (including spousal benefits), fairly close to the 75% replacement
rate required by their assumption. Consequently, less additional saving was needed in that era. In the golden age,
the defined benefit pension was more likely to be available
than it is today. Not that pension coverage was so much
more widespread in those days—it wasn’t; only about half
of workers received DB pensions, but those that did were
guaranteed a lifetime income stream that required little or
no decision making on the part of the retiree, as distinct
from today’s predominant defined contribution plan. The
DB pension investment decisions were the responsibility of
the employer. Also, those that received a DB pension from
their employer were also likely to receive retiree health
insurance coverage.
However, as distinct from A&K’s argument, EME argue
that changes to Social Security over time have altered the
nature of the program. EME describe how the program
was expanded between 1949 and 1979. The year 1950
Amendments expanded coverage to include farm and
domestic workers and the self-employed. As Social Security
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was expanded, it also began to allow more flexibility in the
age at which people could claim benefits. Social Security
was transformed by these changes:
“from an insurance plan for individual workers into
a family-based economic security program and significantly weakened the link between lifetime contributions
and benefits. Moreover, the legislation accelerated the
payment of benefits so individuals who had worked
only a few years under the system were entitled to full
benefits. The decision shifted the financing model from
a funded system to pay-as-you-go, with big implications
for the cost of Social Security benefits today. If earlier
cohorts had received only the benefits that could have
been financed by their contributions plus interest, trust
fund assets and interest earnings would be much larger
today and the required tax on our current earnings
much lower.”
As EME explain, the situation for the worker is far riskier
today than it was two decades or more ago. First, people
are living longer, so the length of the retirement period is
longer. Social Security’s funding is more precarious, and
although 401(k)s are perhaps capable of providing adequate funding, along with Social Security, for retirement,
there are many more opportunities for workers to make
mistakes with 401(k)s than with DB plans (they may not
contribute enough; their investment choices may not be as
good, such as investing too much in company stock; they
may withdraw money too early; and they may fail to manage their income flow in retirement, e.g., not annuitizing
assets).
Although both books strongly advocate improvements to Social Security as the bedrock of retirement
security, some of their suggestions for fixes to Social
Security are similar and somewhat surprising. For example, both recommend diversifying Social Security’s assets
into equities, although both oppose the creation of individual investment accounts in the Social Security program, as the Bush Administration proposed in 2005.
However, more generally, it seems to me a fair characterization to say that the A&K solution to the retirement
problem is to change programs, whereas the EME solution is to change behavior (although not without public
policy assistance).
The EME answer to what people can do individually to
cope with the retirement problem, distilled to its basic elements, is that individuals should:
(1)Work longer;
(2)Save more;
(3)Invest more wisely;
(4)Think about the home as a source of retirement saving.
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Although this seems more like a so-called yoyo (i.e., you’re
on your own) prescription than that of A&K, EME also
propose several actions (some of which are controversial)
that we can take as a nation that would facilitate the individual behavioral changes:
(1)Improve incentives to work longer. Current law signals
that age 62 is the earliest age of eligibility for Social
Security, but that age is too early for most people to
reach the desired 75% replacement rate. The key to
the EME recommendation is that “monthly benefits
increase by about 7 to 8 percent for each year we delay
claiming” (because benefits are actuarially reduced for
those who retire before the full retirement age and they
are actuarially increased for those who retire later than
the full retirement age). The meaning of actuarial in this
context is that benefits are held constant, on average, by
those adjustments to individual benefits. However, for
those who live longer, higher benefits will be an important benefit. EME conclude that the Boston College
Center for Retirement Research’s National Retirement
Risk Index, which indicates that about 53% of retirees
will fail to reach the 75% threshold of retirement saving
adequacy under current law, would increase to 85% if
people work to age 70. They find that the so-called net
Social Security replacement rate at age 70 for those who
retire then will be 43% in 2030, but only 24% if they
retire at age 62.
(2)Maintain Social Security. Among the options suggested
here are to raise the combined payroll tax rate by
2.88% of earnings, not to increase the full retirement
age (which is tantamount to reducing benefits), fixing
the system permanently rather than for the 75-year
projection window, consider investing part of the trust
funds in equities, and possibly subjecting part of Social
Security financing to the income tax.
(3)Fixing the 401(k) system. Here they suggest improving
participation and contribution levels by making the adoption of automatic participation provisions (with an optout) universal, making it harder to take money out of the
plan, increase use of target-date funds (which combine
an age-appropriate mix of risky and safer investments),
make the use of index funds (which mimic the overall
stock market) more widespread (as opposed to actively
managed funds), and make the drawdown of funds more
rational by making annuities cheaper and safer;
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(4)Expanding savings plan coverage through plans such as
the Obama MyRA plan;
(5)Restructuring tax incentives for saving by converting
tax deductions to credits;
(6)Making the use of home equity savings more widespread by educating the public about the merits and
mechanics of using home equity for retirement income
purposes.
These two books together provide an important antidote to those Paul Krugman calls the fiscal scolds who
tell us that catastrophe awaits if we don’t fix our entitlement problem. They remind us why Social Security is
such a popular and successful program, and that it is not
in the dire straits that are often described by its critics.
They are instructive in setting forth an agenda of action
that will make retirement more feasible for today’s older
workers.
John R. Gist, PhD
Institute of Public Policy
Research Professor
George Washington University
Washington, DC 20052
E-mail: [email protected]
doi:10.1093/geront/gnv084
John R. Gist: Before rejoining the academy at George
Washington University, John Gist worked for two decades
in AARP’s Public Policy Institute as Associate Director for
economic policy research, and later as Senior Advisor for
fiscal and economic policy. He recently completed a study
for the Pew Charitable Trusts and the Mott Foundation on
retirement security across generations, from which he published (with Megan E. Hatch) “Retirement Replacement
Rates and Retirement Wealth Inequality Among Baby
Boomer and Other Birth Cohorts,” Journal of Retirement,
July 2014
References
Hudson, R. (Ed.). (2009). Boomer bust: Economic and political
issues of the graying society. Westport, CT: Praeger.
Ruffing, K. (2015). “Getting it wrong on disability insurance,”
Off the Charts Blog, Center on Budget and Policy Priorities,
February 13, 2015.
Steuerle, C. E. (2014). Dead men ruling: How to restore fiscal freedom and rescue our future. Century Foundation.