House, Senate Action Needed On Social Security

We are already making substantial progress in the employer-sponsored retirement savings marketplace. 

The Government Accountability Office recently issued a report which cites Plan Sponsor Council of America survey results - GAO-18-111SP, “The Nation’s Retirement System:  A Comprehensive Re-evaluation Is Needed to Better Promote Future Retirement Security” (https://www.gao.gov/assets/690/687797.pdf).

The report asserts: “The U.S. retirement system, and the workers and retirees it was designed to help, face major challenges. …Fundamental changes have occurred over the past 40 years to the nation’s current retirement system, made up of three main pillars: Social Security, employer-sponsored pensions or retirement savings plans, and individual savings.  …there has been a marked shift away from employers offering traditional defined benefit (DB) pension plans to defined contribution (DC) plans, such as 401(k)s.” Importantly, they note:  “The three pillars of the current retirement system in the United States are anticipated to be unable to ensure adequate benefits for a growing number of Americans due, in part, to the financial risks associated with certain federal programs. Social Security’s retirement program (Old-Age and Survivors Insurance): Beginning in 2035, this program is projected to be unable to pay full benefits.“

They recommend, in part “Congress should consider establishing an independent commission to comprehensively examine the U.S. retirement system and make recommendations to clarify key policy goals for the system and improve how the nation promotes retirement security.”

If there is a “retirement crisis” in America, it isn’t the result of less access to DB plans or the dominance of 401(k) plans.  While it would be nice to see Congress create a national retirement policy, that isn’t it either.  If we have a “retirement crisis,” it is the result of Americans’ failure to save and a government promise of Social Security benefits that are much greater than projected tax revenues.

Failure to Save: Without exception, for the past 35 years, every American wage earner has had access to a tax preferred savings vehicle – the Individual Retirement Account.   A worker age 25 in 1982, who contributed the maximum each year and earned 5 percent on his or her investments could retire at the Social Security Normal Retirement Age of 66 and use the combination of savings and Social Security to maintain his or her pre-retirement standard of living (author’s calculations). Most wage earners have also had periods of employment where their employer sponsored a plan.

Social Security Funding:  In June 2017, the average Social Security benefit was $1,369.  About 61 percent of retired workers count on Social Security to provide at least half of their monthly income. So, in 2035, when the Trust funds are exhausted, without action, benefits will be reduced to match what can be financed by payroll taxes. This is nothing new – it’s been known since 1983, which was the last time Social Security was reformed.  See:  https://www.ssa.gov/OACT/TR/2017/tr2017.pdf  

Social Security Reform Over the Last 25 Years:

• November 5th, 1993: President Bill Clinton, by Executive Order #12878, created the Bipartisan Commission on Entitlement Reform (the Danforth Commission) to evaluate entitlement programs - specifically Social Security and Medicare.  The Commission never reached consensus and couldn’t get all members to agree on even an Interim Report.  Subsets of the commission members made their own proposals.  None gained any traction, nor action. See:  http://www.presidency.ucsb.edu/ws/index.php?pid=61571  
• February 5, 2005: President George W. Bush made a reform recommendation to add personal accounts and change the COLA.  These proposals triggered great criticism, and no action was taken. See:  https://georgewbush-whitehouse.archives.gov/infocus/social-security/    See also:  https://georgewbush-whitehouse.archives.gov/news/releases/2005/04/200504...
• April 27, 2010: The bipartisan National Commission on Fiscal Responsibility and Reform (often called Simpson-Bowles) met to recommend fiscal reform, including recommendations to reform Social Security. Despite widespread popular support, the report failed to get enough support to send it to Congress for approval. 
• June 1, 2016: President Barack Obama, nearing the end of this second term, reminded us that Social Security’s finances needed strengthening. “We should be strengthening Social Security… it’s time we finally made Social Security more generous and increased its benefits so that today’s retirees and future generations get the dignified retirement that they’ve earned.”  No proposal was ever made.  See:  https://obamawhitehouse.archives.gov/the-press-office/2016/06/01/remarks...  
• Today’s GAO report echoes President Obama: “… (we) better ensure a secure and adequate retirement, with dignity, for all.”  But, it offers no plan of action other than another committee.  

Retirement in America is a relatively new phenomenon.  As recently as the 1960’s, only a handful of Americans successfully prepared for retirement.  Very few had a retirement plan - defined benefit or defined contribution – and only a small minority of those workers vested, and only a subset of those who vested survived to receive the promised benefit. Due to the Depression and WWII, many had breaks in employment, which depressed their Social Security benefits. Most wage earners had minimal savings – few owned mutual funds or certificates of deposit. Most relied on passbook savings at their bank or savings and loan.  Work was much more physical, blue collar.  Just 50 years ago, retirement in America was very different; most worked until physically spent then “retired” to a mostly sedentary lifestyle and survived maybe 10 or so years.

Progress is being made.  Workers are successfully retiring.  Some are redefining retirement through second careers and phased retirement.  Our voluntary, employer-sponsored retirement system deserves lots of credit – many plan sponsors made improvements after the Pension Protection Act of 2006 (PPA 2006).  The biggest risks we face to this progress is our failure to take action on Social Security funding and the potential of tax reform proposals that would curtail employer-sponsored plans.     

Congress should start first with Social Security funding, while allowing plan sponsors more time to consider, adopt, and implement PPA 2006 automatic features.