There is broad consensus across the political spectrum that Social Security benefits -- averaging around $16,000 per year -- are low, and that most Americans are not able to accumulate sufficient savings to adequately supplement them. Data from the Federal Reserve reveal that households' accumulated wealth at various ages are at roughly the same levels (relative to income) today as they were in 1983. But whereas then over 40 percent of workers could expect an employer pension upon retirement, today such pensions are disappearing. Moreover, since 1983 Social Security benefits have been cut by 15 percent (plus another 10 percent from increasing taxation of benefits by 2050), and seniors' Medicare premiums and other out-of-pocket costs have risen by more than a third since 1992. Hence workers today need to be saving much more for retirement than their predecessors. That they have not signals an impending retirement income crisis. The Center for Retirement Research projects that 52 percent of today's working households will not have adequate income in retirement -- around two thirds when one takes health and long-term care costs into account.
Workers' inability to replace disappearing pensions and lower net Social Security benefits with private savings is attributable primarily to the fact that median household income has been largely stagnant over the past four decades, while many core expenses such as housing, health care, day care and education have grown.
Policymakers have not yet been forced to address this crisis because the first generation of workers affected by these converging trends -- the decline of employer pensions, phased-in cuts to net Social Security benefits, and decades of slow and unequal wage growth -- is only now entering retirement. A decade from now, the full force of this looming storm will begin to be felt.
For policymakers, this raises the question: What can be done to avert retirement insecurity for the millions of low- and middle-income workers who will retire in the coming decades? Or, as Mark Miller posed the question in a column last week, how can we prevent income inequality from becoming retirement inequality?
One option would be to expand the private account system. Private retirement savings incentives have been in place for over three decades, however, and their record is disappointing, even to their staunchest advocates. High earners have been able to use the 401(k)/IRA system to accumulate considerable savings for retirement. But there is good reason to believe that most of this money would have been saved anyway, even without tax subsidies, given the natural incentive for high-earning households to save considerable sums for retirement in order to smooth consumption over their lifetimes. Poor and lower-middle-class households, conversely, have been as ill-served by the private account system as high earners have been well-served by it. As a new GAO analysis of the 2013 Survey of Consumer Finances reported this week, 41 percent of households approaching retirement today have no retirement savings whatsoever, and half have less than $14,500. In short, there is good reason to question whether our tax-favored private savings system -- which gives the highest subsidies to the highest earners -- is the best use of limited tax dollars.
Expanding Social Security is the most promising way to avert the retirement income crisis looming for low- and middle-income workers. Social Security is far more efficient than private savings in several important ways. Its administrative costs are around 1 percent, a fraction of those of private accounts. By pooling risk, Social Security reduces income inequality in retirement. By providing an annuity, it eliminates everyone's greatest fear, outliving one's savings. Because it is universal and mandatory, it protects workers with low income or at small employers who are left out of the current private account system (and out of any reform plans that do not mandate participation). Because Social Security is portable and public, households can't be hoodwinked by the maze of investment firms controlling their many different 401(k) and IRA accounts.
Social Security expansion can be funded by scrapping the income cap on contributions and by subjecting high-earners' investment income to contributions, as has been done with Medicare. These reforms would simply mean that all workers contribute to Social Security on all their income at the same rate -- a sensible response to rising inequality. Indeed, recent studies by the OECD and IMF recommend raising taxes on high earners and closing loopholes in taxation of capital income as critical not only to reducing inequality but to restoring economic growth.
A storm of retirement insecurity is gathering -- it's one of the most predictable crises we face as a nation. Congress should leverage the power of Social Security to efficiently and equitably address it.