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.
“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.
“[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.