INSIGHTS: THE RETIREMENT CRISIS FACING BOOMERS
By Guest Columnist Teresa Ghilarducci, a labor economist and nationally-recognized expert in retirement security.
She is an economics professor at the New School and author of several books on pension reform.
The nation faces a retirement crises and American workers know it.
As Americans grow older, income anxieties will only grow.
According to the U.S. Census Bureau 10,000 Americans a day will turn 65 for the next 20 years, by 2025, the numbers of prime aged (34-55) Americans will increase by 3.6 million, while the numbers of people aged 65-74 will increase by over 10 million. Americans becoming age 65 in the next few decades face higher risks of downward mobility than any cohort since the end of World War 11 when Social Security, old age assistance, employer pensions, and the economy was expanding. The so far unseen, unrecognized, unspoken financial burden the poor and near poor elderly will place on taxpayers and families when many elderly can no longer support themselves is unmeasured. If nothing is done; the number of 65-year-olds per year who are poor or near poor will increase by 146% between 2013 and 2022.
Unfortunately 1.7 million of the 18 million older workers who are aged 55-64 live on incomes below twice the federal poverty level (less than $11 a day for food and less than $500 a month for rent) – they are poor and near poor. But in a few years the poverty levels in this group will begin to triple as they age because of diminished assets, increased Medicare premiums, and sole reliance on Social Security. Of the 18 million workers aged 55-64 in 2012, 4.3 million of them will be poor or near poor at age 65.
Acting because the federal government has not moved to supplement Social Security, California, and a handful of smaller ,states aim to partially solve the retirement need and income gap. A July 23 New York Times editorial praised the California initiative – the California Secure Choice Retirement Savings Program – taking a step towards a national solution to help all workers access a safe place to save for retirement.
A low cost pooled large fund can payout safe returns for the rest of the retiree’s life. One such universal, safely and prudently invested, low fee option is called a Guaranteed Retirement Account (GRA). GRAs would invest workers’ contributions in a safe, low-fee account that earns a secure, modest, guaranteed rate of return and preserves savings for retirement benefits paid out in annuities. The guarantee will be backstopped by a private insurance company or public agency. There is no risk to the government or taxpayers. The guarantee changes every year, and it is similar to the guarantee in a cash balance account or TIAA in American university professors and researchers retirement plan. The GRA acts as a “TIAA for all.” A GRA is a top – up of Social Security. Just like Social Security, one of the most popular government programs, savings is mandatory.
Nudging, cajoling, and paying people with tax breaks to save voluntarily and consistently for the future has been proven by many economic studies and open eyed observation to be more than futile[i]. For thirty years, the U.S. experimented with soft policies, nudges, voluntary options – but the voluntary approach does not work in retirement savings.
Mandated retirement savings is the best solution for tens of millions of workers who do not participate in a savings plan. Mandates are necessary, a voluntary Social Security system would have been crippled during financial crises when workers would be tempted not to fund their retirement. Congress and political leaders should harness the anxiety driven momentum and support a federal add on to Social Security. I call such a plan a Guaranteed Retirement Plan. A supplemental savings vehicle to augment Social Security benefits is the only practical method to help American workers save responsibly for their retirement in a professionally managed retirement savings vehicle.[i] http://crr.bc.edu/wp-content/uploads/2014/11/wp_2014-17.pdf, http://www.cbpp.org/research/retirement-tax-incentives-are-ripe-for-reform
ON THE ECONOMY: THREE LOCK BOX
By John Dunham:
Managing Partner, John Dunham & Associates
Suckers walk, money talks, but it can’t touch my three lock box! Uh! Oh, yeah! Mysteries of the days of old, you find the key, you got the gold. One, two, three lock box. Treasure’s here, sunken there, buried treasure’s everywhere. One, two, three lock box. One, two, three lock box. So begins the title track to Sammy Hagar’s 1982 album of the same name. And while the song is generally considered to have more carnal connotations, Hagar was quoted as saying “It’s got to do with deep sea diving, when you look for a buried treasure. The ultimate treasure would be a sunken treasure with three locks on it, because that means it was the most valuable stuff that the queen had on that ship. … If you unlock the treasure of your physical, and your mental and your spiritual potential – those three in balance – you are a real human being and almost godly.” Another interpretation brings up Al Gore’s campaign pledge to put Social Security in a Locked Box.
Recent declines in the equities markets have taken a toll on many retirement accounts, not only IRAs but also private and public pension funds, many of which need to invest in equities in order to even come close to their expected rates of return. Social Security, on the other hand, is claimed to be invested in safe government securities.
In other words, the funds in the Social Security locked box have been lent to the Federal Government at negligible interest rates to be spent on current projects and transfer payments, leaving behind a box of Treasury Bills that need to be redeemed to pay for future retiree benefits.
This is similar to someone loaning themselves their paycheck to spend on ice cream, and promising to pay themselves back when the rent comes due. While it is nice to have an ice cream in the heat of August, come September 1, there is nothing with which to pay one’s self back. New Jersey’s Governor and Presidential candidate Chris Christy has brought this issue to the forefront in his campaign, but for the most part, Congress and the American public has ignored this problem, hoping that it will simply go away. But it will not.
In its most recent annual report (http://ssa.gov/oact/TR/2015/tr2015.pdf), the Board of Trustees of the Social Security System recognized that the two components of the program (OASI or retirement insurance, and DI or payments to people declared to be disabled) would run out of funds by 2034 using the most reasonable assumptions, with the Disability Insurance pool running out of funds by 2016. Only by using heroic assumptions about employment growth and birth rates can the Trustees claim that the fund will continue to be solvent through the end of the Century.
In truth, there are measures that can help keep Social Security solvent, including reducing benefit growth rates, increasing taxes, for much higher rates of immigration that are currently allowed, and even allowing the fund to be better invested in a broad range of asset classes; however, all of these are politically difficult. Governor Christie proposes among other things, eliminating Social Security for retirees with incomes above $200,000 and reducing the growth in benefits for everyone else. At the same time he would force more people who have claimed disability back into the workforce. While it is likely that these reforms, along with a change in the investment strategy of the plan can keep the program technically solvent, they will be politically difficult measures to pass. They also fail to address the key problem with Social Security, and that is that the “locked box” is full of Treasury Bills and not actual money.
Unlike real pension programs, Social Security is not an annuitized fund, in that it does not hold assets and investments with which to generate income and pay benefits. Rather, like the rest of the Federal Government, it operates on a cash accounting basis – it is a pay as you go program. Up until 2009, Social Security taxes generated more than was required to pay beneficiaries, but beginning that year, and continuing throughout the foreseeable future, the plan has had to start redeeming the loans to the Federal Government. The rent is now due and the government has spent all of the money on ice cream. And the famous locked box – well it is as empty as the safe from the Andrea Doria (https://www.washingtonpost.com/archive/lifestyle/1984/08/17/andrea-doria-safe-opened/2b6fbc39-4000-42ef-baf0-67d59f66ed01/).
So in order to pay Social Security Benefits the Federal Government is simply borrowing more from itself. The Federal Reserve Bank now holds $2.46 trillion in Treasury Securities, up by $1.99 trillion dollars since 2009, and this is even before the trust fund starts to really start to lose money. Simply put, the government printed script to pay the rent, and for now, the landlord is accepting the script in lieu of real money. The reason for this is that all of the other tenants are also paying in script and their script is not as pretty as the US government’s (even though Alexander Hamilton and Andrew Jackson’s pictures are still on it). Over time though, the landlord is going to have to invest in the building to keep it standing and it is questionable whether the suppliers, or the property tax collectors will be as enamored with the script that she is trying to use.
So even if Governor Christie or anyone else is able to stop the bleeding in the Social Security system, the inflationary aspects of the fund’s call on assets will eventually come to roost. Suckers walk, money talks, but there is nothing in that three lock box!
The Monthly Manifesto is published by John Dunham and Associates, 32 Court Street, Brooklyn, NY 11201 as a service to our clients and friends. For more information relating to the content or for a free consultation on how we can assist your company or organization with your issues please contact us at 212-239-2105, or click the button below…