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Retirement Planning > Social Security

Senators agree Social Security is sacrosanct

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Not a drop of blood was drawn. In fact, a hint of bipartisanship made its appearance last month at a Senate subcommittee hearing on how the U.S. should tackle its retirement crisis.

Democratic and Republican senators alike agreed that the traditional three-legged stool of retirement security Social Security, pensions and personal savings is critical to a successful retirement strategy.

The tone of the conversation was set by Sen. Sherrod Brown, D-Ohio, and Sen. Patrick Toomey, R-Pa., who agreed that Social Security, in some form, needs to remain in place to protect the elderly, disabled, extended families and children.

Brown noted that “the budget debate creates a vacuum that does not take into account the economic impact of Social Security programs. Yes, Social Security benefit cuts will decrease our 10-year deficit, but such cuts do not consider the impact on seniors, their families, which then must support them, and current middle- and low-income workers.”

He added that “shifting the costs from the federal ledger does not resolve our retirement and savings problems.”

Toomey agreed that “government policy should protect all three pillars of retirement security, recognize the strengths of the retirement system and preserve what works.”

He added that it is necessary to “protect programs that seniors rely on.”

On the other hand, Toomey said, something does need to be done about Social Security because it is “insolvent in its current form.”

Robert Romasco, president of AARP in Washington, D.C., said at the hearing that his organization has done a study on the impact of Social Security benefits on the economy. It found that for each dollar paid to beneficiaries, there was $2 in spending, adding $1.4 trillion to economic output in 2012.

When talking about the three-legged stool of retirement, Romasco said that unfortunately, “Social Security is the sole dependable leg.” He pointed out that traditional pensions have gone away, retirement income has shrunk, wages are down, health care costs are soaring and 50 percent of the workforce have no employer-provided retirement plan.

“Financial security is in jeopardy. Unless we reverse the trends of stagnant wages, Social Security may be the only source of retirement income for our families,” he said.

Ed Ferrigno, vice president of Washington affairs for the Plan Sponsor Council of America, also attended the hearing. He felt it was “fairly well balanced” – and was surprised at the amount of time spent talking about how to save Social Security.

“I’m not aware of any efforts anywhere to take down Social Security,” he said. “To the degree they were defending Social Security. I wonder who they were defending it from?”

Ferrigno added that the biggest perceived threat to Social Security has been the move to a chained consumer price index, which he believed would lower benefits over time by reducing the cost of living adjustments beneficiaries receive each year.

Along with AARP’s Romasco, others to testify at the hearing were Andrew Biggs, a resident scholar at American Enterprise Institute; Dean Baker, co-director for the Center for Economic and Policy Research; and John Sweeney, executive vice president of Fidelity Investments in Boston, Mass.

Most did defend Social Security, although it was suggested that benefits be reduced for higher earners and increased for low- and middle-income households.

The Plan Sponsor Council of America thinks “shoring up the bottom end of Social Security makes a heck of a lot more sense than an employer-linked program because if you are chronically low income, you probably don’t have a strong year-round relationship with the workforce and employer plans are not going to work for that segment,” Ferrigno said.

Baker pointed out that Social Security will only increase in importance in the future because of the collapse of traditional defined-benefit pensions. Workers can make up some of what was lost through saving in a defined contribution plan, like a 401(k), but “this will not come close to making up for the loss of traditional pensions,” he said.

He supports a proposal that would increase the basic Social Security benefit by 5 percent, or about $55 a month. Such a move would not increase costs by much, less than 0.3 percent of payroll. Increasing the benefit for surviving spouses to 75 percent of the joint benefit, which could be capped at the average wage, is another low cost way to improve Social Security, Baker said.

In his testimony, Biggs said that the best thing the country could do to preserve retirement security is to automatically enroll workers into lifecycle funds, or target-date funds that manage participants’ investment risk for them as they age. He also was a big promoter of annuities.

PSCA’s Ferrigno said just because most Americans have not made the leap into annuities doesn’t mean it is a plan sponsor’s job to push them at 401(k) plan participants.

“Biggs was very interesting. He was all hopped up on annuitization but the bottom line is anyone who wants to annuitize their retirement savings is free to do so today and that the number one problem with annuitization is the lack of demand,” Ferrigno said. “I don’t think too many plan sponsors believe it is their job to create demand.”

Chad Parks, founder and CEO of The Online 401(k), said that his problem with annuities is that individuals end up shifting their risk and responsibility to private companies “who are in it for short-term gain, not the long-term.”

He pointed out that many thought AIG was too big to fail, but it did. It would be too risky for people to put their retirement money into companies that may or may not be around in 20 years when they need their retirement income.

Parks said that saving Social Security would be fairly easy, but without the political will to do it, Congress will continue to kick the can down the road until it is too late to fix it. He disagrees with the characterization that the Social Security trust fund is bankrupt, calling it a scare tactic term. Changes do need to be made to it or benefits payments will be reduced over the next 20 years.

There are several ways to shore up Social Security, including the chained CPI, raising the cap on income limitations above its current $113,000 or raising the Social Security tax across the board, Parks said.

Raising the Social Security tax for both employers and employees by 1.3 percent would solve Social Security’s problems for the next 75 years, he said.

“Most people I mention that to, they say, ‘That’s it? If that’s all it would take, I’d be willing to do it,’” Parks said. Unfortunately, anytime you talk about raising taxes for everyone it gets political, he said.

Sweeney, whose employer, Fidelity, manages the retirement savings of more than 23 million people through 401(k) and IRAs, urged quick action.

“The success of the American retirement system is a critical component of a healthy economy. So the earlier we begin to implement positive changes in the system, the more impactful they will be for future generations of retirees,” he said.

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