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The Real Retirement Security Crisis

July 6, 2000 |
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Among the many realities obscured during the 2000 presidential campaign is the fact that reforming Social Security is only one part of a much larger and more serious challenge. However we make the 65-year-old Social Security program solvent for the 21st century, the nation's real retirement security crisis is that during the best of times a majority of American workers have no retirement savings other than Social Security.

Any good financial planner tells their affluent clients real security relies on a three-legged "retirement income stool" that includes Social Security, private pension benefits and personal savings. Sadly, too many middle- and low-income people are heading into retirement wobbling on a one- or two-legged income stool. A shrinking minority of workers can count on earning pension benefits at work -- and even fewer are saving on their own.

Like their retired parents or grandparents, today's middle- and low-income adults are likely to end up overly dependent on Social Security's poverty-level benefit when they retire (the average benefit was $804 in 2000). Among current retirees, about two-thirds rely on Social Security for more than half of their income; while nearly half would live in poverty without it.

America's borrowing binge

Individually, a majority of us are not saving nearly enough to maintain living standards in retirement. Over the past five years, according to Federal Reserve data, personal debt has risen almost 60%, to $6.5 trillion. A majority of American households have more debt than financial assets.

Collectively, we are saving too little to build and sustain the sort of economic growth we will need as the ratio of workers to retirees dwindles over the next 30 years. We cannot bury cars and canned goods to ease the burden of the baby boom's retirement; nor do we have any idea what today's pricey stock certificates will be worth in 20 years.

As Federal Reserve Chairman Alan Greenspan testified last year, the only way our nation can achieve higher living standards with fewer workers and more retirees is to build a high-capacity, high-productivity economy. And that requires a higher saving rate than the country has mustered this past decade. The presumptive major party presidential nominees, Al Gore and George W. Bush, have staked out radically different plans for bolstering the nation's retirement income security. Each candidate's plan claims to "save" Social Security and to help individual workers build up savings in universal personal accounts. In reality, neither candidate confronts the costly budgetary choices that will be the first step in finding bipartisan common ground for a meaningful, long-term solution.

Bush's plan would give workers the option to invest 2 percentage points of their Social Security payroll tax in diversified stock and bond funds. Unfortunately, since the entire 12.4% payroll tax will soon be needed to pay benefits to current retirees, dependent survivors and the disabled, it's unclear how Bush would finance the multi-trillion dollar transition to a partially-privatized system over the next 50 years.

Unless Bush is willing to give up on big income-tax cuts, or to cut other federal spending to the bone, his plan requires reducing the level of guaranteed benefits for workers now under 55 by 40% or more. This may not be politically feasible; a nationwide poll last week by Newsweek found that when likely voters were told Bush's plan would mean a reduction in guaranteed benefits, support plunged from a majority to just 17%.

Gore, in turn, would maintain current benefits by first paying off the national debt, by 2013, and then transferring trillions of dollars from the general "on-budget" surplus into Social Security over the subsequent several decades. Gore also proposes income-tax credits to subsidize new personal saving accounts tilted toward less affluent families.

While siphoning general revenues would allow Social Security to pay promised benefits until 2057, Gore does not confront the issue of what benefit cuts or revenue increases might be needed to keep the system solvent in the longer term, or if the economy turns south and projected surpluses dry up.

A basis for compromise

For all their differences, Bush and Gore do agree on several points that suggest a possible path around the current ideological gridlock regardless of which one of them wins in November. Both candidates agree that the short-term surplus in Social Security taxes must be placed in a "lock box" dedicated to increasing net national saving. Both profess a concern that workers not end up with lower benefits, especially those now approaching retirement. They both also embrace the notion of universal wealth building through government-sponsored saving accounts -- a position that, until this year, was anathema in any form to liberal defenders of Social Security.

One possible basis for bipartisan compromise would be a reform package that combines the two types of personal accounts proposed by Bush and Gore. Since Democrats adamantly oppose putting middle- and low-income retirees at the mercy of the stock market, maintaining the current guarantee of a livable, inflation-protected benefit for middle- and low-income workers would be a necessary starting point. Rep. Bill Archer (R-TX), Republican chairman of the House Ways & Means Committee, has sponsored a partial-privatization approach along these lines.

Of course, guaranteeing that workers below a certain income level will end up no worse off is potentially a expensive proposition. This means that any "deal" must also confront the issue originally at the core of the debate over Social Security -- how to restore the system's solvency over the long-term.

Ken Apfel, the commissioner of Social Security, has shared with many policymakers a long menu of "little fixes," combinations of which could close the solvency gap for an estimated 75 years. For example, restoring the payroll-tax base back to 90% of U.S. earnings by raising the maximum earnings subject to the tax closes nearly a third of the solvency gap, while including newly hired state and local government workers takes care of another 10%.

Adding on Gore's refundable tax credits to subsidize private saving by low- and middle-income workers could put a deal within reach. Of course, even then, transfers of general revenue would be needed over a several-decade transition period, until today's workers over age 30 have built up large enough account balances.

Incentive to save

While a compromise along these lines would be resisted from both the political left and right, as a package there are some additional advantages. The combination of a refundable tax-credit incentive and automatic payroll deduction at work could encourage millions of younger and lower-wage workers to start saving. This should add directly to national saving, because these groups do not save much now.

The federal government already spends more than $90 billion a year on tax deductions for private pension saving, but two-thirds goes to the wealthiest 10% of households, most of whom would save with or without a generous tax break. Workers earning less than the median wage typically lack the strong tax break and matching-payment incentives that higher-wage workers access through employer-sponsored 401(k) plans. Since only 45% of U.S. workers are covered by a tax-subsidized pension plan at work, a tax-match for voluntary saving by lower-income households could help close the private saving gap.

Hopefully this year's campaign debates will reveal that a narrow focus on shoring up Social Security is both bad policy and bad politics. The real retirement security challenge is to encourage new savings and investment on top of Social Security's safety net.

Michael Calabrese directs the Public Asset Program at the New America Foundation, a non-partisan policy institute in Washington, D.C. His e-mail address is calabrese@newamerica.net.

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