New research: Retirement with dignity or poverty?
June 1, 2020
Here’s a thought experiment: What would happen if Social Security were suddenly entirely eliminated? The most immediate consequence would be that six million households across the United States would be plunged into poverty or near-poverty, i.e. below 200% of the federal poverty level (FPL). A recent study found that 37 percent of households with older persons already survive on 200% or less of the FPL.
The study is entitled, “Examining the Nest Egg -- The Sources of Retirement Income for Older Americans.” The report primarily limits itself to households across the nation where the head of the household is age 60 or older and no one in the household works 30 or more hours per week – representing approximately 43 million people. The research was conducted by the nonprofit National Institute on Retirement Security (www.nirsonline.org) earlier this year.
Perhaps the most important conclusions of the nationwide study are that “Social Security has a very important and powerful role to play in preventing elder poverty .... Protecting, strengthening and expanding Social Security should be a top policy priority for those who are interested in retirement security.”
The traditional wisdom for decades has been to pursue the so-called ‘three-legged stool’ of retirement savings: Social Security; a defined benefit such as a ‘traditional’ pension; and individual savings, typically through a defined contribution plan, such as a 401k. In theory, this was a good idea.
The researchers found that households that did indeed have retirements funded by all three sources suffered a fraction of the poverty and near-poverty of households that had only one or two sources of income. However -- and this is critical -- only 7% of all households in the study actually relied on the security of a “three-legged stool.” Moreover, the percentage of such households has been plummeting for decades. On the other hand, the study reports that a plurality of older Americans, over 40 percent, receive income only from Social Security in retirement -- hence the critical role of Social Security.
In the early 1980s about 60% of the workers in the private sector had a traditional “defined benefit” pension plan, but that has fallen to a meager 4% in recent years. In the public sector, however, traditional pensions are still offered by about 84% of state and local governments, primarily due to the greater rate of unionization in the public sector. Unions in the private sector have been under attack for decades, and the destruction of traditional pensions has mirrored the destruction of labor unions in the private sector.
Additional key research findings are:
Older men consistently have higher incomes than the older women. Both unmarried men and women have lower retirement incomes than married older men and women.
Whites have consistently higher retirement incomes than blacks or Hispanics, and those with a college degree have significantly higher retirement incomes than those with only a high school education.
And most importantly, defined benefit pensions [i.e. a “traditional” pension] have a much greater poverty-reducing effect than defined contribution plans such as a 401k. Note that Social Security is similar to a “traditional” pension.
It is clear that Social Security in recent decades has played an increasingly important role in achieving retirement security. The question arises, “Whither Social Security”? And here the news is mostly good despite decades of attempts to weaken and/or privatize Social Security. Recently (April 2020) the Annual Report of the Board of Trustees of Social Security was released. In summary, as reported by Social Security Works (socialsecurityworks.org), a nonprofit research and educational organization,
“This year’s report announces that Social Security has an accumulated surplus of approximately $2.9 trillion. It projects that, even if Congress took no action whatsoever, Social Security not only can pay all benefits and associated administrative costs until 2035, it is 91 percent funded for the next quarter century, 85 percent for the next half century, and 82 percent for the next three quarters of a century. At the end of the century, in 2095, Social Security is projected to cost just 5.86 percent of gross domestic product.”
What can be done to make Social Security even more stable? In accordance with current law, payroll taxes are not collected on wages over $132,900. One equitable and commonsense fix is the Social Security 2100 Act, which has 208 co-sponsors in the House and has had numerous hearings. This legislation would add a payroll tax to wages above $400,000. This provision would only affect the top 0.4% of wage earners so that millionaires and billionaires would pay the same rate as everyone else. The Act has a number of other features designed to both sustain Social Security into the next century, and to provide better benefits to the people that need it. After all, everyone deserves a retirement with dignity.