Bill Bradley raises many cogent points about the looming insolvency of the pension industry in the United States, both defined benefit pension plans and Social Security. One can only hope that our elected officials in Washington will at last take heed of his warnings.
The baby boom generation, particularly those boomers age 50 or over, is not likely to be the victim of Washington inattention. A report by the Congressional Budget Office (CBO) concludes:
Some studies have compared boomers’ finances with those of preceding generations; others compare them with the official poverty level. Those studies conclude that, on the whole, boomers will almost certainly be better off in retirement than their parents and will be much less likely to live in poverty.
But the outlook is not as optimistic for the younger Generation X and Y cohorts. The defined benefit plans offered in the private sector will probably all but disappear over the next several years as companies continue to terminate those plans with neither the intention nor adequate government incentive to reinstate them. (Whether public sector pension plans can continue to maintain promised benefits is open to question as federal, state, and local governments confront ever-increasing fiscal shortfalls, not to mention burgeoning public outcry over the perceived generosity of the benefits.) Thus, the vast majority of future retirees will have to rely solely on Social Security and personal savings to fund their retirements.
Bradley enumerates a variety of solutions to the problems, many of which would be very costly. Gradually raising the minimum retirement age, however, is one “costless” fix that should be palatable to the Congress and its constituents. As long as it is implemented gradually beginning well into the future, there’s likely to be little objection. After all, the current batch of nascent retirees seems to be enduring the higher retirement age (capping out at age 67) – passed by the Congress decades ago - without squawking, because they knew it was coming.
I wish the author had been more supportive of the possibility of personalizing (the naysayers call it “privatizing”) a portion of Social Security. There’s a lot of potential benefit – actuarially and otherwise – to initiating a program to permit younger workers to voluntarily invest a portion of their Social Security withholdings in a limited array of index funds, the most aggressive of which would contain 60% stocks and 40% bonds. He points out that the stock market has suffered protracted periods of decline in the past. But is it too risky to permit, say, a 40 year old who won’t be tapping into the money for at least a couple of decades and who will need to rely on it for decades after retirement, to assume a moderate amount of risk with part of the money in exchange for enjoying a higher income from Social Security than is now promised (but may not be delivered if the status quo is maintained)?
Americans need – and deserve – a bipartisan effort in Washington to address these challenges. While the majority of the baby boom generation is well-prepared for retirement, a real danger of insolvency faces the Generation X and Y cohorts. We owe it all future generations to take bold action now to assure that:
1. The Social Security system can permanently deliver on its promises, and
2. Incentives to save and invest for retirement are bolstered for Americans of all financial circumstances.
Bill Bradley has done a real service delineating the problems and proposing bold solutions. It’s time to press our members of Congress to get serious.
Jonathan D. Pond is the author of You Can Do It! The Boomer’s Guide to a Great Retirement
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Comments: 13
I'm getting tired of saying this. Social Security increases have been too generous as well. It was supposed to be a retirement aid not a retirement package. To bring it back into solvency all they need to do is reduce the cost of living increases by 1% per year and the system will self correct, especially if they lift the $90,000 dollar cap which allows the top 5 percent to get off tax free above that artificial limit. With the cap gone (and a cap on benefits) the mega-rich will begin to pay their fare share -- after all the money they make is on the back of the common worker. It's not like they actually EARN IT by working.
If I live to an old age I will most likely die on the job (barring some huge financial windfall that could come my way).
David - I'm pretty sure that Social Security was originally set up as a basic retirement package. My recollection of history lessons being that it was started to counter the massive numbers of working class old folks who were consigned to lives of extreme destitution when they became to infirm to labor.
The country's conscience did not want to bear the idea that it would cold heartedly abandon workers who had conscientiously labored all their lives to the benefit of society as a whole.
The conclusion I've come to is that no political leader is going to step up (risk his or her career) and try to mitigate or resolve this issue due to the likelihood that any meaningful corrective action (without existing broad-based support) will cause meaningful pain to one or more constituency groups.
Without broadbased support across different groups of Americans (an understanding of the problem and a realization that we all need to share in the effort to address it) which doesn't exist yet, there is virtually no chance any reforms will be made. Some refer to this as our "leadership challenge" in America--no political leader willing to risk his/her career by taking on this issue. Without a true, sustained leadership effort, we must wait until enough Americans to full grasp the problem and (I would hope) realize that a BALANCED solution is needed (e.g., a compromise of tax increases over time and reduced promised/future benefits--we don't have to impact current beneficiaries yet.)
I've found that this view frustrates many who assume our elected (ideally bi-partisian) leaders have the will to take on these big challenges but in this case, we continue to be disappointed.
With the overly generous INCREASES during the 1960 - 1990 period the basic benefit was artificially increased so that many people are now drawing more than twice what a minimum wage worker makes working full time. This is absurd as a retirement program and the only reason they got away with it was that 5-10 people were paying in for each recipient. Now it's closer to 3-4 to 1 and the abuses of public officials buying votes is coming back to bite us.
To solve the problem I say again: All we have to do it subtract 1% per year off the INCREASE to bring it back into line over the next 30 or so years. The projected shortfall is only 34% -- in 34 years the problem is solved without all the groaning and moaning of public officials that caused the problem in the first place.
As far as pensions are concerned the same thing happened. Some companies and fat labor unions tried to defer expenses by promising huge and unrealistic retirement packages. If those plans were reset to a reasonable rate they wouldn't be any problem. For example: I know several retired people who are making more than I make working full time at $17 an hour! How ridiculous is that? It wouldn't bother me one bit if they lost half their income since retirement pay is in effect stealing from those working now in decreased wages and benefits. If larger companies didn't pay those rates half the jobs going over-seas would still be here (in my opinion -- as I have no proof of this, only a common sense perspective).
David
As part of the discussion, we absolutely should look at cutting the "promised" GROWTH of these benefits. In my mind, the question is how much less and over what time horizon (e.g., no cuts for current beneficiaries but big cuts in promised benefits to my generation, Xers, and a sliding scale in between)? Conceptually, a lot of boomers nearing retirement are counting on the level of Social Secruity and Medicare benefits that have effectively been promised, rightly or wrongly . To pull part of the rug out from underneath them by even cutting the growth in the benefit is no trivial matter. If you consider that the Boomers represent a huge pool of voters it is going to be difficult to get their support unless they believe that not making such changes will be unfair to younger generations and feel a moral obligation to "accept less" than what has been promised.
A fundamental issue is how much the Boomer generation will demand in benefits from the then current generation of works--they will probably have the politcal muster to get what they want at the expense of Xers and Yers. I'm personally bracing for a pessimistic scenario of my effective tax rate going from ~19% to 30% or higher over the next 20 - 40 years. I just wonder if the economy can withstand that kind of tax increase to pay for these benefits? (Note: another variable to consider is economic growth--through greater productivity and economic growth, more tax revenues can be generated to help pay for these benefits to Boomers but by most accounts "growth" cannot do it alone. My point is that the more we can grow the economy during this period, the bigger the pie for everyone, and the less financial impact on everyone.)
1)
When Social Security was launched 70 years ago Sunday, it was meant to be a supplement for retirees, not a full pension. But today, 10.6 million people, or 22% of the 48 million who will receive Social Security benefits this year, live on that check alone, the Social Security Administration says.
2)
Specifically, in 2042 and for many decades thereafter, the Social Security system can continue to pay benefits, but benefit payments will be constrained by the revenue base from the 12.4% FICA (Social Security payroll) tax on wages. According to the Social Security trustees, continuing FICA tax revenues at the rate of 12.4% will enable Social Security to pay about 74% of promised benefits during the 2040s, with this ratio falling to about 70% by the end of the forecast period in 2080.
The Social Security Trust Fund is based on future income tax alone. Hmm...
On the books it's up to 2 Trillion Dollars but of course there are no assets to back it up.
Lastly, a small percentage payout reduction and a removal of the $90,000 cap would be enough to make up much of the short fall. I still can't see what the problem is other than congress not wanting to tax the wealthy who pretty much pay a lower percentage than an average middle class worker. Shame on them!
Politics is becoming a power play game. Look at how the Republicans and Democrats vote as blocks -- no regard to the importance of the issue at hand. The founding fathers said a two party system would destroy the country and they were pretty much on target.
I would be very interested in seeing your plan. Perhaps we could set up a web discussion on it and get a grass roots movement.
We can call it THE DOTANI PLAN and get you into the history books.
no one seems to like my 1% plan. I've posted it about 6 times now and not one specific comment on its reasonableness.
The problem with Social Security has to be understood in the overall context of the US economy (income we can produce for government services) and government programs (govt spending we've promised and need to maintain an orderly society).
Raising taxes on just the rich (immediately) and waiting until 2042 to reduce the benefit because of trust fund insolvency will NOT solve the problem in the context of the entire economic and budget picture.
Please visit http://www.facingup.org/why for a more thorough understanding of this and by all means please challenge the analysis.
It all revolves around US Saving Bonds. The US Saving Bond is a very secure investment. It doesn't pay a lot of interest, but the plan is not just focused on the individual citizen. It is also meant to help our country financially.
Here's the gist:
1. All workers would have the right to purchase US Saving Bonds from monthly withdrawals from their salary. These bonds would be for retirement only and could not be redeemed until age 62. (A disbursement plan would need to be set up). The key here is choice, not mandate. A worker could buy as little as a $25 bond a week, or more if wished. These bonds could only be redeemed before retirement in the case of medical emergency or death (transfer to heirs).
1a. These bond purchases would give our government a needed steady stram of revenue. To make these bonds more attractive to the public, I would suggest that all interest earned be earmarked for education.
1b. If a worker started buying just a $25 bond per week starting at age 22, with a minimum interest rate of 4% (compounded quarterly), the worker would have a nest egg in excess of $200,000 at age 62.
2. The burden that poverty puts on our financial system through welfare and crime needs a solution. I would propose that the government give each worker at or below the poverty level (worker, not welfare recipient) a $50 US retirement Saving Bond per month. The only restriction would be that the worker be required to work a minimum of 28 hours a week. Once a worker's salary is above the salary line, this benefit ends.
This is just the gist of my plan.
I am ashamed of one Senator for taking lobbyist money and not thinking of the real needs of our soldiers in procurement of a military vehicle. I had always respected him and voted for him, but I find his actions disgraceful. He owes the public a sincere explanation and apology. Our government must be honest and for the people, if the people are to trust our leaders and give our Democracy strength.
Jonathan