On Wednesday, the Senate Finance Committee’s subcommittee on Social Security, Pensions and Family held a hearing at which the political differences, and the possible solutions, around Social Security were highlighted. Four experts testified, and three senators made statements, at the hearing, titled “Strengthening Social Security to Meet the Needs of Tomorrow’s Retirees.”
In his trademark gravelly voice, the chairman of the subcommittee, Sen. Sherrod Brown, D-Ohio, kicked off the hearing by recalling the beginnings of Social Security — “it was an untested idea in 1936” — before arriving at the current day, stating that “not only are cuts to Social Security deeply unpopular," but “we’ve fallen into the bad habit of discussing Social Security in the context of the federal budget,” which “misleads the public” because Social Security has its own source of funding.
Instead, he said, “Social Security is about family budgets,” and Social Security “is social insurance. Let me repeat that — Social Security is social insurance,” which offers “working families a modest bundle of insurance products: retirement, life and disability insurance at reasonable rates.” The average benefit, he said, is also “modest,” at about $300 a month.
Moreover, Social Security constitutes a “moral and economic issue” which mandates that a “bipartisanship approach should be continued.” Congress must “have the courage to act,” but the solutions of raising the retirement age, raising taxes and putting off cost-of-living adjustments [COLAs] are “blunt instruments that will only harm workers.”
Instead, Brown called for expanding Social Security benefits, including survivors' benefits, which constitute “the only life insurance” for many low-income Americans; updating the SSI program; providing caregivers credits; paid family leave, and helping the children of deceased beneficiaries pay for college.
He also called on Congress to take bipartisan action to "reallocate the disability trust fund," which he said would keep it solvent for "another 20 years." Reallocation is, he said, "a simple process that Congress has done in a bipartisan manner 11 times since 1957."
The ranking Republican on the subcommittee, Sen. Patrick Toomey of Pennsylvania, agreed in his statement that the issue of preserving Social Security is “important, but the trust fund is insolvent. It’s running a cash flow deficit now, and has been since 2010.” With nominal GDP growing at 4% at best while Social Security payouts are growing at 6%, fixing Social Security, Toomey said, is “not a partisan issue, it’s an arithmetic issue.”
Another Republican senator on the subcommittee, Johnny Isakson of Georgia, called on Congress to use the Ronald Reagan-Tip O’Neill 1983 Social Security agreement as a “template” to come to bipartisan agreement on Social Security. However, he also called for moves to “take pressure off the system to encourage more saving” by workers in 401(k)s, IRAs and Roth IRAs. Those workers, Isakson said, “deserve a benefit, and we need to protect it,” so as to “empower retirees to save for themselves.”
Then the experts presented their testimony. Stephen Goss, the chief actuary at the Social Security Administration, noted the “global challenge of aging, especially in OECD nations.” The problem is not falling death rates, he said, but falling birth rates. “We’ll have a big increase in the number of people aged 65 or over relative to those under 65,” in what is known as the “aged dependency ratio.” And, he said, “be glad we’re not Japan or South Korea,” where birth rates are far lower than in the U.S.
Referring to Toomey’s statement about the relationship between GDP and Social Security, Goss admitted that “over the next 20 years, Social Security will take up a larger amount of GDP,” to about 6% over the next 20 years, when it will “stabilize” at that level. Responding to Brown’s point about the “modest” level of benefits, Goss said that the average benefit was $1,270 a month in 2013, or about 35% of “average covered earnings,” which he characterized as a “good foundation; a solid leg of the stool” for retirement income.
What must be done to "solve" the Social Security "problem?" Goss said that “between now and 2033, some combination” of actions that would “reduce benefits by 25% or increase revenue by 33%.”
Teresa Ghilarducci, chair of the economics department at the New School for Social Research in New York, painted a grim picture of retirement readiness for Americans. “For the first time in our history, working Americans will be worse off in retirement than were their parents or grandparents,” she said. “Boomers expect to do worse, because of congressional action, much of it unintended,” but said that the base retirement income provided by Social Security and employer-provided retirement plans is “eroding precipitously.” Older workers are entering retirement with “much more debt; 65% have some kind of mortgage,” she said.
One of the unintended consequences of congressional actions has been that the asset levels in 401(k)s and other retirement plans are “increasingly skewed to the highest earners” and those with existing wealth, while middle-income workers are more likely to take out loans from their 401(k)s. In addition, those less-than-wealthy workers tend to “pay higher fees because of commercial account management” of their retirement plans, and because “ they’re advised to be conservative [in their investments], they get a lower return” on those invested retirement assets.
Her solution? “Restore some of the cuts in Social Security benefits; the minimum benefit should be increased to prevent poverty among older people” and provide access to “appropriately safe and secure savings vehicles” at their places of employment. “It’s not that people aren’t saving; they don’t have a good place to save.”
So she proposes “universal savings retirement accounts for all Americans” that would use the SSA’s infrastructure to “collect money from all workers to add on top of Social Security,” making the money a refundable tax credit. Such plans, already put into place by six states, she said, would "allow no withdrawals before retirement, with the money pooled with other workers'" contributions, managed by “institutional investment managers” who would do so at low fees and would in retirement “pay out mostly in annuities.”
Check out The Retirement Apocalypse That Isn’t Coming on ThinkAdvisor.