GRAY MATTERS: New Ideas For Social Security

SaulFriedman75x75 Pulitzer Prize-winning journalist Saul Friedman (bio) writes the weekly Gray Matters column which appears here each Saturday. Links to past Gray Matters columns can be found here. Saul's Reflections column, in which he comments on news, politics and social issues from his perspective as one of the younger members of the greatest generation, also appears at Time Goes By twice each month.

Here’s a novel idea. Instead of worrying that Social Security will go bust in 30 years (it won’t) and considering absurd and unnecessary cuts in benefits for millions of Americans, why not expand this, the most popular social insurance program in the country, to provide for a universal defined benefit pension for every worker and his/her family?

It’s really not such a unique idea; most modern and civilized industrial nations have in place such pension systems, although some are not as generous as Social Security. But while Social Security was designed to replace about 40 percent of a person’s final wages, and does a good job keeping most of us out of the poor house, it has some glaring weaknesses that could be addressed by expanding the program.

Social Security (average benefit, $15,588 for men; $12,012 for women) alone is not enough to provide a stable, poverty-free retirement for many Americans – the very old, especially widows who have not worked, workers who are too young to retire but have been unable to find steady jobs with decent salaries, students whose families have lost their breadwinners, Hispanics and blacks who have made little money during their life times.

Time was that a factory or white collar worker could count on a defined benefit company pension. But they have disappeared in favor on individual retirement savings plans like 401(k)s which shifted most of the responsibility for savings and investment from the company to the worker.

And, as we shall see, those plans have proven to be a mirage; even before the market bust, their value was not nearly enough for even a couple of years of retirement.

A favorite of mine, economist Teresa Ghilarducci of the New School for Social Research, was the first to call the 401(k) a failure for retirees and she shocked lawmakers when she suggested they be ended in favor of what she calls a Guaranteed Retirement Account that would be as safe and secure as defined benefit pension plans. Today, two-thirds of the few unionized workers have such defined pensions compared to only 15 percent of non-union workers.

Even Time magazine joined her criticism of 401(k)s and their like, pointing out in October of last year “the ugly truth is that the 401(k) is a lousy idea, a financial flop, a rotten depository for our retirement reserves.”

About half of American workers have such plans and their average value is just $45,519 and, of course, dependent on the roller coaster of the market and subject to the fees charged by fund managers.

Journalist James Ridgeway summed up the retirement dilemma for millions of American families in a recent issue of Mother Jones:

“I contemplate my future at a time of deep recession with no pension and a depleted 401(k). And it occurs to me that the very notion of a comfortable, paid retirement may turn out to have been a temporary phenomenon, with a life span almost precisely as my own...

"And I have to wonder if someday the tale of a foolish generation of Americans, who imagined that a lifetime of work would be rewarded with a comfortable and secure old age, will become just another footnote in the annals of the market.”

If I may digress, there is (and was) a difference between what Ridgeway called his “foolish generation” and mine, which weathered a depression and a really big war and learned a few things. We were unionized, we fought and bargained for company pensions (and health care) and we were not so trusting of the free and unregulated market to see us through our old age.

Sure, we saved, but our savings were to be one of three tiers for retirement, along with the guaranteed company pension and Social Security. It’s also been likened to a three-legged stool.

Now, according to Richard Trumka, president of the AFL-CIO,

“[O]nly 13 percent of workers say they are very confident about having enough money for a comfortable retirement – that’s the lowest level in 16 years...With the enactment of Social Security and the growth of union-negotiated pensions, elderly Americans became [and are still] the least impoverished age group.”

But for a younger generation, Trumka said, two of the three tiers (legs) are disappearing and “Social Security is the ONLY reliable guaranteed benefit for the growing number of people without pensions.”

Just as my generation fought for Medicare and universal health care, Trumka concluded, “Universal retirement security is our next hurdle.” He could have added that it’s an idea whose time is coming.

In the meantime, the National Academy of Social Insurance has some ideas to close some holes in Social Security – increase benefits for persons 85 and over; pay a widowed spouse 75 percent of the couple’s prior benefits instead of 50 percent; provide child care as a benefit; update the special minimum benefit to 125 percent of poverty; pay benefits to students who have lost a breadwinner up to age 22 instead of 18-19; increase benefits across the board for all individuals in the next year or so, to make up for losses in savings.

Stephen Hill, reported on a study by the New America Foundation [pdf], which outlined how Social Security could double its revenue and spread its enhanced benefits further, freeing employers from providing retirement, which would eliminate the employer tax deductions, which cost the treasury billions.

Hill called it “Social Security Plus,” and suggested that greater benefits could not only help the economy but could eliminate the individual tax deductions which only benefit people who can afford 401(k)s and IRAs.

Ghilarducci makes the same point, that 401(k)s and IRAs, in which taxes on earnings are deferred, reduce tax receipts by $193 billion a year. But, she says, 80 percent of these tax breaks go to the top 20 percent of taxpayers.

Her solution: “Guaranteed Retirement Accounts” to which employers and employees would each be required to contribute 2.5 percent of salaries, with a $600 refundable tax credit for the employee’s contribution.

The accounts, which could not be touched until retirement, would be pooled and managed by professionals as private defined pensions are now managed, with a target of a three percent return above the rate of inflation.

“National savings would get a boost,” she wrote in Bloomberg Business Week last July. “All Americans, including the 64 million who have no pension plan, would get one at no extra cost.”

Hers was one of a number of proposals for guaranteed, government-sponsored annuities or pension plans offered in September at a conference on retirement security, sponsored in part by Retirement USA, a new coalition of unions, senior groups, the liberal Economic Policy Institute and the non-profit Pension Rights Center.

This month it is in the midst of a campaign called Wake Up Washington, opposing cuts in Social Security while seeking a universal retirement system for America to replace what it calls “the patchwork of private plans.”

Why do we need it? On September 16, the non-partisan Center for Retirement Research at Boston College told Retirement USA that the gap between all the assets American households have, including homes, IRAs, 401(k)s and other savings, and the amount they will need for a decent retirement is $6.6 trillion. The calculation was based on the Federal Reserve’s Survey of Consumer Finance.

I can’t begin to fathom such a number. But even this “foolish generation” must know that unless things change, their lifetime of work may not be rewarded with a comfortable and secure old age.

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Does anyone in our government ever ask you for advice on any matter?

I often wonder why the President relies mostly on politicians for their ideas on how best to run the country. I read quite a few newspapers and magazines and think that the ideas and suggestions I read from various business people or journalists make a lot more sense to me than what the politicians are suggesting the President do.

I am old enough to remember FDR and his Dollar a Year men.
I wonder why President Obama doesn't ask Warren Buffett or Bill Gates or journalists like yourself who come in contact with, and speak to, many men and women from various fields of endeavor to meet with him and brainstorm their ideas for success.

If he had called on the business leaders of this country instead of the politicians to help with Health Care Ideas I think it would have been suggested that he simply propose Medicare for all. Instead they had to make it so complicated with their "Public Option" that no one really understood, they soured even people like me on the whole idea.

How I wish the President would form a committee of people like yourself and other journalists and business people and listen to them because you listen to the people.

Guess I should point out here that the situation Saul describes points to one of the reasons why gay people are fighting to make marriage legal for ourselves at the federal level. Two gay people can share their lives and their finances for 30 or 40 years, but in the eyes of the government, when one dies, there is no "widowed spouse" and the deceased partner's Social Security just stops. It's an extra and very harmful penalty for being different.

Nancy: The president does appoint commissions -- see also the catfood commission. What I find hard to understand is why the upper business class thinks it can continue to enjoy its grip on most of the wealth of the country while it continues to squeeze everyone else. Wall Street loves 401k plans. More money to gamble with.

I have visions of old and young people with pitchforks.

Splendid idea! Perhaps we could be the proverbial "squeaky wheel" & storm President Obama with emails & such to promote this idea. Even tho' I don't care for the phrase "thinking outside the box", this is probably the best example of that notion. Oh Saul, you nailed it again. Have a great w/end. Dee

Janinsanfran - "The upper business class thinks it can continue to enjoy its grip on most of the wealth of the country..." because events since 1980 have proven that it can! The workers Saul's so fond of are cheering on Tea Party candidates all over the country--candidates who want to lower taxes for the wealthy, abolish regulations, and destroy SS, Medicare, and Medicaid.

Whoever is behind Rush Limbaugh, FOX, and the Tea Party is running the most successful PR campaign since Joseph Goebbels. Hitler wrote, in Mein Kampf, "All propaganda must be popular and its intellectual level must be adjusted to the most limited intelligence among those it is addressed to."

If you think the battle to get universal health care was difficult just imagine the hurdles there would be to get a universal retirement plan enacted.

Common sense has very little to do with the way we are governed. You can prove to the naysayers that a sensible retirement plan would save the government money and be fair and it would fall on deaf ears just as the single payer medical system did. Money speaks so much louder than the good of the people.

I hate to be cynical, but watching the Washington politicians for too many years has made me so.

They won't do it on the left out of fear of being called a socialist and on the right because they already have it. It is a very frustrating time to be an American and see how much of it is about taking care of number one first and not caring about anybody else.

Saul, I completely agree with expanding Social Security to be a retirement program for all. I also support the concept of a council of well-informed, intelligent leaders from the public and private sectors that would address the growing gap between future retirement needs and resources. Unfortunately, it appears that President Obama is unlikely to call for the formation of such a group. A torrent of emails and phone calls from voters might, indeed, change his mind.

However, discouraging though it may be to contemplate, I feel it's a myth that we the people actually govern our country. It's largely controlled by a relatively small segment of the population that has money--e.g., the wealthy and ultra-wealthy. (I believe that this group could legitimately be termed an oligarchy.) If in doubt, consider the Republican candidate for governor of a large state. So far, this candidate has spent well over $1 million of personal wealth campaigning. Legally, this person has a perfect right to do so, but what will a victory signify other than tons of money wins elections?!

If there's not some restoration of balance between the haves and the have-nots (a group that now includes many more of the middle class than it once did), I fear for the future of our democracy.

Mary Here is another pertinent quote:

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it"

Joseph Goebbels.

The rank and file people who need to know these facts to create a ground swell of support don't really seem to pay attention. People on both sides seem only to perk up to ranting and raving, throwing in a few name-calling words, that support their personal point of view, thus thwarting any sort of civil discourse. Each sides supporters think their ranter is great but -- so what -- nobody else pays attention. Total supporters are not who needs to hear or read what's said.

Thank you for sane rational presentation of facts and solutions. Now, how do we get others to pay attention? That's the job of your readers methinks, including yours truly.

Saul, you make sense in a worls that doesn't make sense. Too bad our alleged leaders don't pay attention.

In order to do this, we must have a larger revenue stream. Two ways to do this.

1. Remove completely the cap on income subject to SS tax. People who earn millions will not miss it.

2. Subject all income from whatever source to the SS tax. When SS was enacted, 401k's did not exist. Passive income from dividends, capital gains, etc was rare. Now it is a significant source of income.

There is no philosophical reason that income from earned income should be subject to this tax, and income from other sources should not.

It is only fair that all income be subject to this tax. Someone who gets the majority of their income from investments is eligible for SS and Medicare when they qualify, but the revenue for that was largely contributed by low and middle working class people.

This would accomplish two things. 1. It would enable a significant lowing of the rate of the tax, benefiting low and middle income earners, putting more money in circulation. 2. It would enable more money to also be diverted over to the Medicare side, where the real problem is.

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