Social Security, the Wrong Retirement Crisis

President Bush has been working hard to promote belief in a Social Security crisis. Unfortunately for him, the numbers refuse to cooperate. The latest numbers from the Social Security trustees show that the program can pay all scheduled benefits through the year 2042 with no changes whatsoever.

An independent assessment from the non-partisan Congressional Budget Office (CBO) shows that the program can pay all benefits through the year 2052. Even after these dates, the projections from both the trustees and CBO show that the program will always be able to pay a higher benefit than that received by current retirees, although not the full scheduled benefit.

Furthermore, sets of projections tell us how much money would be needed to keep the program paying full scheduled benefits through the program's seventy-five year planning period. The trustees estimate the size of the gap as 0.7 percent of GDP over this period, while CBO puts the gap at just 0.4 percent of GDP. By comparison, the cost of the Bush tax cuts is approximately 2.0 percent of GDP, with the richest 2 percent of families collecting an amount equal to 0.8 percent of GDP.

Looking historically, if one had accurate projections for the future, Social Security would have appeared in much worse shape in the decade of the fifties, sixties, seventies, and eighties, all decades in which the program needed immediate tax increases. In short, if Social Security is facing a "crisis" today, then it has faced a crisis for most of its seventy years of existence.

When Bush attacks Social Security he is not only threatening the nation's most important social program. He is also diverting attention from the real crisis in retirement income – the country's private pension system.

Social Security is not, and was never intended to be, the sole source of workers' retirement income. It is supposed to provide a core income that ensures retirees a modest standard of living in their old age. However, to sustain their pre-retirement standard of living, it was expected that workers would have employer provided pensions and personal savings to supplement their Social Security. It is these legs of the retirement stool that are in crisis.

Traditional defined benefit pension plans are fast disappearing, and only half the workforce even has access to a 401(k)-type defined contribution plan. Even where workers do have access to defined contribution plans, they often have very little money saved for retirement. A recent study by New York University professor Ed Wolff found that more than 40 percent of workers approaching retirement (ages 47 to 64) would be unable to replace even half of their pre-retirement income. He projected that more than 50 percent of African-American and Hispanic workers in this age group would be unable to replace half of their pre-retirement income.

While part of the story here is that many workers are simply not earning enough to save, part of it is due to the lack of easy mechanisms and a reasonable incentive structure. Simply making a low cost portable defined contribution pension system available to all workers would likely lead to a substantial increase in savings.

It can be difficult and time consuming to navigate through the complex savings plans offered by the financial industry. Hence, many people don't save, even if their employer offers the option of a 401(k) or similar plan. Many studies have shown that workers are far more likely to put money aside if they instead have the option of having money deducted directly from their paycheck. Savings rates would be increased even more if there were a default contribution to their accounts (e.g. 3 percent of wages). Workers could opt to have this money immediately, if they needed it, but their decision to do nothing would lead them to save.

A simple centralized low-cost system of accounts could also drastically increase retirement savings. Instead of money flowing to the financial industry in fees and commissions, it would accumulate in workers' accounts, adding as much as 15 percent to their retirement savings, compared to the current system of high-cost 401(k)s.

A universal pension system would also have the advantage that workers could keep a single pension plan throughout their working lives, regardless of how many employers they have. Much savings is lost under the current system because workers often withdraw their money when they change jobs.

Ideally, the tax structure would also be changed to increase savings incentives for low-and moderate-income workers. When a worker earning $100,000 a year saves, he or she gets a tax deduction equal to 25 percent of his or her savings. However, a worker earning $16,000 a year gets no tax incentive whatsoever. It would be simple – and relatively cheap – to change the tax code to extend savings incentives down the income ladder.

In short, we do have a real retirement income crisis in the private pension system that does need to be addressed. Unfortunately, as long President Bush is pulling false alarms on Social Security, this crisis is not likely to be addressed.

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.c=

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