Calling it an “important first step” on the long road to addressing this country’s retirement crisis, the U.S. Senate Finance Committee recently held a special hearing on needed reforms for Social Security, defined benefits and private retirement accounts.
The December hearing was called by the Subcommittee on Social Security, Pensions and Family Policy, which includes member Senator Patrick J. Toomey (R-PA) and Chairman Senator Sherrod Brown (D-OH). Featured speakers at the hearing included Robert G. Romasco, president of AARP, in Washington DC; Andrew G. Biggs, resident scholar at the American Enterprise Institute in Washington DC; Dean Baker, co-director for the Center for Economic and Policy Research in Washington DC; and John F. Sweeney, executive vice president at Fidelity Investments in Boston.
“Today, middle class and low-income seniors rely on Social Security for the majority of their retirement income, while workers 50 to 64 are increasingly unprepared for retirement,” Senator Sherrod Brown warned participants at the hearing. “The challenges facing workers are dire. The vast majority of economic gains in the last 25 to 30 years have gone to those at the very top of the income distribution in this country.”
Senator Brown offered a series of statistics that paint a bleak picture of the ability of today’s senior to face a comfortable and secure retirement.
- One-third of Americans aged 45 to 65 have no retirement savings at all;
- Even among workers with a retirement plan, 75% of Americans nearing retirement age have less than $30,000 in their retirement accounts; and
- Among minority workers the picture is especially dire, with 80 percent of Latino workers having less than $10,000 in retirement savings.
“The picture gets bleaker when considering racial disparities in wealth,” Senator Brown said. “Today, the median wealth of white households is 20 times that of black households and 18 times that of Hispanic households.” These numbers represent the largest ratios since the government began publishing this data about 25 years ago, he said.
The unfortunate reality of all of this is that for too many Americans, Social Security is the only leg left of what had been a three-legged stool. The other two legs are personal savings and pension plans.
According to data provided by Senator Brown, the percentage of workers covered by traditional defined benefit plans has declined steadily for 35 years. While there had been 112,000 plans available in the mid-1980s, that number is down to 30,000. Likewise, the proportion of private workers with retirement plans covered by defined benefit pension plans had dropped from 62% to 7% during that period. They have been largely replaced by higher risk defined contribution plans.
With so many Americans now dependent solely on Social Security, the result is that we are stuck in a downward cycle of retirement preparedness.
“Without retirement savings, aging parents become dependent on their working-age children, preventing those children from saving for their own retirement, and perpetuating the cycle of economic distress in the retirement years,” Brown said.
Social Security Solvency
While speakers at the Senate subcommittee agreed that retirement for many Americans is at a crisis point, Social Security is not yet there, noted Robert G. Romasco, president of AARP.
“According to the Social Security Trustees, even with no changes at all, Social Security has sufficient income from payroll contributions and assets in Treasury notes to pay 100% of promised benefits for the next 20 years, and can continue to pay approximately 75% of promised benefits thereafter,” Romasco said. “Social Security is therefore not in an immediate crisis, but the projected funding gap should be closed.”
Romasco said AARP is especially concerned with suggestions that Social Security benefits be reduced in order to help reduce the federal deficit.
“Social Security is a separate, off-budget and self-financed program with its own dedicated funding source and it is not the cause of our federal deficits,” Romasco said. “There, AAPR strongly opposes cuts to Social Security in order to reduce the federal deficit.”
What the AARP does support is the Auto IRA proposal. Several state legislatures are currently considering Auto IRA programs, which enable workers that don’t have access to an employer plan to fund their own retirement plan account through voluntary payroll deductions, Romasco said.
“Harnassing the power of regular, automatic payroll deductions at work can encourage and simplify saving and significantly improve the retirement security of millions of Americans,” Romasco told the subcommittee.
The debate over income levels
Another proposal being considered by Congress for Social Security would be to raise the income level at which Social Security taxes are withheld. Such a more would be irresponsible until the financing of Social Security is more solvent, Andrew Biggs told committee members.
“Social Security is significantly underfunded,” Biggs said. “While not a threat for current retirees, insolvency is a major risk for people who are middle aged or younger.”
“Speaking personally nothing poses a greater threat to my own retirement security than the chance of a 25% legally-imposed benefit cut at the very time I plan on retiring,” he said.
The best way to keep Social Security solvent would be an immediate and permanent revenue increase of around 29%, according to Biggs. He noted that the most prominent progressive Social Security reform plan, introduced by Senator Harkin in March 2013, would raise taxes by approximately this amount – by 27%. Harkin’s proposal would see the ceiling on taxable earnings repealed in 2014, which would be $117,000.
But Senator Harkin’s proposal only goes half way to solving the problem, Biggs said. He also urged Congress to support a defined contribution pension system.
“It is tempting to conclude that the systems we have don’t work and cannot work,” Biggs said. “In reality, though, simple steps could go most of the way toward fixing the shortcomings of the U.S. retirement saving system.”
Biggs asked that the subcommittee consider a defined contribution pension plan that had automatic enrollment at a healthy saving rate, invested in a life-cycle portfolio, composed of low-cost index funds, and at least partially converted to an annuity.
“Such a plan would address most of the concerns raised over retirement security today, with very limited downsides for individuals and no risk to the taxpayer,” Biggs said.
Finally, Biggs addressed the steps that Congress should take.
First, he urged Congressmen to take advantage of the burgeoning field of research now available on retirement practices, plans, and trends.
Second, he urged Congress to support this research with funding.
Third, he asked individual Congressmen to raise awareness of retirement issues with their colleagues and constituents, including employers.
Fourth, he asked that Congress tackle the business already at hand.
“Fix the problems you have before thinking about enhancing them or starting new programs,” Biggs said.