Raising the Bar: Three Steps to Improving Retirement Security
May 3, 2010
The more things change, the more they remain the same. In the early 1980s, the nation faced a serious retirement challenge, with Social Security estimated to have unfunded liabilities of about $6 trillion and worries about whether the Greatest Generation would be able to afford its retirement.
Flash-forward almost 30 years. Today's headlines talk about a $5 trillion shortfall in Social Security and concerns about how the Baby Boomers will be able to pay for their retirement.
The Boomers, unlike their parents, are not followed by a large cohort of workers whose contributions can pay for retirement benefits. Generous defined-benefit pension plans and other guaranteed income sources are largely a thing of the past. Extended lifespans and high healthcare costs threaten retirement security.
In fact, today's retirement savings status quo threatens to inflict even more severe financial stress on future retirees, who may be hard-pressed even to pay for such necessities as food, housing and medicine.
The severity of this challenge means we need to strengthen all of America's retirement savings systems, public and private, and build a truly robust, resilient and secure system that can reliably replace pre-retirement income-and we need to begin now.
There are three major steps we can take: Make Social Security solvent; expand and strengthen workplace savings plans; and promote lifetime income options.
Step #1: Social Security Solvency. Tackling Social Security should be the first step in this effort, for two reasons.
First, it is an immediate problem. In March, we learned that the nation was paying out more in Social Security benefits than it was taking in from Social Security tax. This was something that had not been expected to happen until at least 2016, but occurred sooner because of the slow recovery from the recession-tax collections were down, and discouraged older workers were retiring early.
Yet, while the system may temporarily swing back into balance for a few years, the unexpectedly early swing into negative cash flow is an alarm bell in the night, reminding us that the solvency of our retirement system is not theoretical.
Second, the projected Social Security shortfall is more easily addressed than that of other entitlements. At $5.3 trillion, it is a little more than one-tenth of the total federal entitlement deficit, currently estimated at $46 trillion over the next 75 years. In current dollars, it also is only about half of the $6 trillion Social Security deficit we faced back in the early 1980s. While fixing Social Security would not be painless, it would be much more manageable than dealing with Medicaid, Medicare or other big federal programs.
Earlier this year, President Obama recognized the severity of the deficit challenge by forming a bipartisan National Commission on Fiscal Responsibility and Reform to offer recommendations on closing the federal budget deficit.
Now the President should charge his deficit reduction commission with focusing first on fixing Social Security by designing a package of revenue increases, benefit cuts and other changes needed to make the program solvent.
The commission should have only three constraints on its recommendations. First, there should be no impact on the benefits of current retirees or those within 10 years of full retirement age, since they have no time to adjust to changes. Second, the commission should not raise the Social Security payroll tax, since that would discourage job creation. Third, the commission should keep future retirement benefits intact for below-median income Americans, such as the one-third of retirees who receive 90% of their retirement income from Social Security alone.
The President should ask the commission to deliver a Social Security solvency action plan on the day after the 2010 mid-term elections, and then ask Congress to give the plan a straight up-or-down vote. I believe the President and Congress would find the nation behind them on any reasonable proposal. A recent national retirement income survey conducted by Putnam Investments showed that most Americans support Social Security reform; in fact, nearly 70% of those surveyed believe that it is vital for elected officials to close the Social Security gap.
Step #2: Strengthen Workplace Savings Plans. While Social Security currently replaces a significant, if declining, share of pre-retirement income for many retirees, even full solvency would not completely make up the difference between what Americans expect to have and what they will need in retirement. Personal savings and investments have to play a major part in a well-balanced retirement policy.
For a generation, one of the most effective ways of promoting such savings has been through workplace-based plans, such as the 401(k), 403(b) and 457 defined contribution plans. These plans now have more than 80 million participants who hold more than $4 trillion in assets.