WASHINGTON – Experts told a Senate panel Congress should expand Social Security for the poor and encourage middle- and upper-income individuals to ramp up private savings to improve their retirement prospects.
Sens. Sherrod Brown (D-Ohio) and Patrick Toomey (R-Pa.) recently held the first of a series of hearings focused on how to enhance retirement security for Americans.
From 1979 to 2011, the number of private workers with retirement plans covered by defined benefit pension plans fell from 62 percent to 7 percent. At the same time, the percentage participating in defined contribution plans increased from 16 percent to 66 percent. This shift to defined contribution plans as the primary retirement vehicle has transferred the responsibility and risk for capital accumulation for retirement from employers to employees.
“At a time when we’re told that we are in charge of our retirement futures, only one quarter of American workers have automatic access to a defined contribution plan,” Brown said.
Both Republicans and Democrats on the panel acknowledged Social Security’s role in keeping millions of Americans out of poverty. They agreed that Social Security needs to remain in place to protect the elderly, the disabled, extended families, and children in the United States.
“Maintaining or expanding Social Security is the single most effective thing we can do to prevent poverty and economic ruin for millions of senior citizens, while promoting economic mobility for their children and grandchildren,” Brown said.
Around thirty-million Americans between the ages of 50 and 64, one half of those nearing retirement, have no retirement savings at all, according to research by the Schwartz Center for Economic Policy Analysis at the New School.
Brown said that many middle-class and low-income seniors rely on Social Security for a majority of their retirement income.
“The vast majority of economic gains in the last 25-30 years have gone to those at the very top of the income distribution in this country, obviously affecting savings and retirement,” Brown said.
He said the picture is bleaker for minorities. The median wealth of white households is 20 times that of black households, 18 times that of Hispanic households, the highest ratio since the government began publishing this data a quarter century ago.
Retirement security in the U.S. has traditionally been thought of as a “three-legged stool” consisting of Social Security, employer-provided pensions, and personal savings and investments.
Toomey said that “government policy should protect all three pillars of retirement security, recognize the strengths of the retirement system and preserve what works.”
The Pennsylvania Republican praised the various savings options available now and criticized attempts to reduce the amount Americans can save in tax-deferred accounts, such as the Obama administration’s proposal to place a $3 million cap on money accumulated in retirement accounts.
Robert Romasco, president of the AARP, said that Social Security is the only “dependable” leg, noting that traditional pensions have gone away, retirement income has shrunk, healthcare costs are increasing and 50 percent of the workforce have no employer-provided retirement plan.
He said his organization has done a study on the impact of Social Security benefits on the economy. It found that for each dollar to beneficiaries, there was $2 in spending, adding $1.4 trillion to economic output in 2012.
“We have to make sure Social Security is strengthened as a critical source of income [Americans] can rely upon,” Romasco said. “We also must help the American public understand that Social Security is not just a critical piece of the retirement security, but also a powerful engine in our economy.”
According to the AARP, the Social Security program had about 57 million beneficiaries at the end of 2012, including 36 million retirees. The average monthly benefit is about $1,300 a month, and the maximum individual benefit is $2,530.
Fidelity Investments surveyed thousands of American households to understand how prepared people were to cover basic expenses like housing, food and healthcare in retirement. They found that 55 percent of American workers were not on track to cover their essential expenses in retirement. They also found out a third of the households surveyed are prepared to cover 95 percent of essential expenses.
John Sweeney, executive vice president of Fidelity Investments, said the results are generally good for those that enroll early in their careers, save as much as possible, and increase their savings as their earnings increase.
He said Fidelity’s latest data show that for people who have been continuously saving for 10 years, the average balance in a 401(k) account has reached more than $223,000, up from approximately $53,000 a decade ago – an annual increase of more than 15 percent.
“Our research shows that a 25-year-old earning $40,000 a year, by increasing savings just 1 percent a year can mean up to $300 per month more in income in retirement,” Sweeney said.
He said the baby boomer generation, on average, will be able to cover essential household costs in retirement.
Sweeney proposed doubling the default savings rate in employer-sponsored retirement accounts, currently at 3 percent, and said more employers should add an automatic escalation feature that increases the percentage saved to at least 10 percent over time.
Andrew Biggs, a scholar at the American Enterprise Institute, suggested reforms to make the Social Security system more efficient, such as a flat benefit at poverty level for every retiree, currently at $11,490 for a household of one. He said this would address the complexity of the benefit formula that makes Social Security a risky benefit for low-income people and the disparity in benefits for individuals with the same lifetime earnings.
“I have argued for a more far-reaching reform, similar to what you have in New Zealand or the U.K., where every retiree receives a flat benefit at the poverty level. The idea is that you take poverty among [American] seniors, which today is at 9 percent, down to zero percent,” he said.
“On top of that, if you want to have a benefit above poverty, we need to sign people up for employer-sponsored plans or IRAs or something along those lines,” Biggs added. “Social Security – I’m not going to say that it does not cut poverty. Clearly it does.”
Biggs said that many people can and should retire later. Even though jobs are of a less-demanding nature today than those in the highly industrialized economy of the 1950s, people are retiring earlier now. In the 1950s, the average age for claiming Social Security was 68, and now it is 63.
“It’s not something, I’d say, has to happen, but I think it’s something that people should at least be open to,” he said.
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