Why Social Security works so well – and one way it doesn’t

Social Security is a solid base upon which fortunate workers have been able to build. It is unquestionably the most important source of retirement income for the nation’s working families, even those fortunate to have other assets.

Nancy Altman, President, Social Security Works

Though the wealthiest among us may not recognize Social Security’s importance to them, they might be enlightened by the cautionary tale of Neil Friedman, a millionaire who invested his entire fortune with Bernie Madoff. When Madoff’s Ponzi scheme was revealed, Friedman and his wife found themselves forced to survive on their Social Security and money they could earn selling note cards emblazoned with photos of their former lavish vacations. Moreover, the Friedmans were not the only Madoff victims left destitute.

Like those Madoff victims, about one out of three retirees depend on Social Security for virtually all of their income. Around two out of three retirees depend on Social Security for the majority of their income.

As important as Social Security is for virtually all of us,it is especially important to women, people of color, those who are LGBTQ, and others who have been disadvantaged in the workplace. Those groups are less likely to have jobs with employer-sponsored pensions. On average, they have lower earnings and therefore less ability to save. They are more likely to have health problems and physically demanding jobs that force early retirement. Also, they are more likely to have periods of unemployment or take time out of the paid work force to work as family caregivers. Moreover, because women and Hispanics have, on average, longer life expectancies, they have even greater need of Social Security’s guaranteed benefits that last until death.

Almost one out of two divorced, widowed or never-married female beneficiaries aged 65 and older rely on Social Security for virtually all of their income (46 percent in 2016).More than one out of two unmarried African American beneficiaries aged 65 and older rely on Social Security for virtually all of their income (55 percent in 2016). For Hispanic Americans the percentage is even higher. Nearly six out of ten unmarried Hispanic beneficiaries aged 65 and olderrely on Social Security for virtually all of their income (58 percent in 2016).

African Americans and Hispanics disproportionately qualify for Social Security disability and survivor benefits, as do their children. African American children constitute 14 percent of all American children, but 22 percent of the children receiving benefits as the result of a parent with a disability and 21 percent of the children receiving benefits as the result of the death of a parent.

Social Security is the Nation’s Most Universal, Efficient, Secure, and Fair Source of Retirement Income

Social Security’s importance and success derive from its essential purpose and ingenious design. It is insurance against the loss of earnings in the event of old age, disability, or death. Insurance is most cost-efficient and reliable when the risks can be spread across as broad a population as possible and when no one can purchase the insurance when personal risk factors increase – a practice known as adverse selection. The only entity that has the power and ability to establish a nationwide risk pool that covers all workers at the moment they start work and, in that way, avoids adverse selection is the federal government. It is the only institution that can make the insurance mandatory and universal.

Social Security is, of course, mandatory and nearly universal. Nearly nine out of ten seniors receive Social Security retirement benefits. Around 175 million workers contribute to Social Security.

For the same reasons, Social Security is extremely efficient. Moreover, when the federal government administers the insurance, overhead is minimized. Instead of high-paid CEOs, hardworking civil servants are in charge, and other costs, like advertising and marketing, are unnecessary. Consistent with that predictable efficiency, less than a penny of every Social Security dollar is spent on administration. The rest – more than 99 cents of every dollar – is paid in benefits. That extremely low administrative expense is unachievable by employer-sponsored retirement plans or private insurance.

Social Security has other attributes that add to its value and importance. Like employer-sponsored defined benefit plans, its benefits are pegged to final pay. That is important because replacing final pay in order to maintain one’s standard of living in retirement is the goal. Also like employer-sponsored defined benefit plans, Social Security benefits are paid in the form of joint and survivor annuities. Consequently, they last until death, in contrast to savings, which can be outlived.

In addition, Social Security’s guaranteed benefits are extremely secure. They are much more secure than retirement savings, which can be lost as the result of a market downturn or simply poor or unlucky investment decisions. They are also much more secure than employer-sponsored traditional pensions and much more secure, as well,than the life insurance, disability insurance, and retirement annuities sold by private insurance companies. Unlike private sector retirement plans and insurance products, Social Security is sponsored by the federal government, which is permanent, and so will not go out of business. It has the power to tax and issue bonds backed by the full faith and credit of the nation. Furthermore,all risks are spread nationwide, not concentrated on single employers,insurance companies, or worse, individual workers.

Moreover, unlike savings, the benefits are only available when an insured event occurs and cannot be withdrawn to meet more immediate needs. Contributors understand that the benefits are only payable as a result of disability, death, or old age. They do not expect or seek early withdrawals or lump-sum payouts. In addition, the benefits are protected from private-sector creditors. Consequently, they are efficiently targeted, certain to be paid only in old age or when an insured worker becomes disabled or dies.

In contrast to employer-sponsored defined benefit plans, Social Security is completely portable from job to job. Consequently, it is as good for mobile workers as it is for workers who remain with one employer.

Also, Social Security imposes fewer administrative costs on employers. It is carried from job to job; records are kept seamlessly by the Social Security Administration through the use of Social Security numbers. Wages from all covered employment are automatically recorded by the Social Security Administration and used in the calculation of benefits. Employers are free from the record-keeping,reporting, and fiduciary requirements of their own sponsored plans.

Of course, Social Security provides for more than retirement. Its benefits are payable in the event of disability, if that occurs prior to retirement, and in the event of death, if there are eligible survivors. Indeed, as a result of these provisions, Social Security is the nation’s largest children’s program.

Furthermore,Social Security includes features that are not found in private sector alternatives. For example, private sector annuities and defined benefit pensions reduce the annuity amount of the primary insured, if a spouse is added. In contrast, Social Security’s annuities automatically include add-on benefits for the joint and survivor portion of the annuity without reducing by a penny the life annuity portion paid to married workers.

If the worker has been divorced after having been married ten years, there are add-on spouse and widow(er) benefits for every ex-spouse. Again, those add-on benefits don’t reduce the worker’s retirement, disability, and family benefits by a penny. Importantly, those divorced spouse and widow(er) benefits are the ex-spouse’s as a matter of right. The parties to the divorce are spared the burden of having to negotiate or go to court to secure their benefits.

Similarly, the benefits Social Security provides to children when adults supporting them lose wages as the result of death, disability, or old age, are, like spousal and widow(er) benefits, add-on benefits that do not reduce by even a penny the primary insured’s benefits.

Importantly, all benefits are annually increased to offset the effects of inflation. Social Security provides inflation protection without limit, regardless of the rate of that inflation. Consequently, unlike traditional private pension benefits which erode over time, Social Security maintains its purchasing power. (It should be noted that the measure of inflation is in need of updating to make it more accurately reflect the costs of beneficiaries, but, even so, the availability of uncapped inflation protection is one of Social Security’s most valuable attributes.)

Social Security’s One Shortcoming is that its Benefits are Too Low

As vital and well-designed as they are, Social Security’s benefits are extremely modest by virtually any measure. In absolute terms, the average monthly Social Security benefit in December 2018 was $1,342, or $16,104, on an annualized basis. That is below the 2019 official federal poverty level for a two-person household, and substantially below the amount needed to satisfy the Elder Economic Security Standard Index, a sophisticated measure of the income necessary to meet bare necessities.

Social Security’s benefits are also extremely low compared to the retirement benefits of other industrialized nations,as the following chart reveals. (The bars designating U.S. benefits are highlighted with arrows.)

Social Security Replacement Rates in OECD Countries by Earnings Level

As informative as are Social Security’s absolute benefit levels and its levels compared to other nations’ benefits, the most important measure of the inadequacy of Social Security’s benefits is what proportion of pay is replaced, since replacing lost wages is the goal of the program.

Experts estimate that workers and their families need about 70 to 80 percent of pre-retirement pay to maintain their standards of living. Those with lower incomes need higher percentages; those more affluent, with more discretionary income and other assets, need somewhat less.

While Social Security appropriately replaces a larger proportion of pre-retirement pay of workers who have lower wages, it does not come close to providing sufficient income to meet the goal of maintaining standards of living in retirement. Workers earning around $50,000, who retired at age 62 in 2018, received only 32 percent of their pay or about $16,000 a year. Lower-income workers, earning around $22,500, received around 43 percent of their pay, but that is only about $9,700 a year.

Previous: How Social Security transformed America by making independent retirement a reality

Next: Four things Congress shouldn’t do (and one it must remember) about Social Security

Excerpted from testimony given by Nancy Altman, President of Social Security Works, at the February 6, 2019 hearing of the U.S. House Ways and Means Committee on improving retirement security for America’s workers.

How Social Security transformed America by making independent retirement a reality

Nancy Altman, President, Social Security Works

Prior to Social Security, Americans inevitably found themselves unemployed, unable to continue to work as they aged. In those circumstances, they routinely moved in with their adult children. Those who had no children or whose children were unable or unwilling to support them typically wound up in the poorhouse.

When Social Security became law, every state but New Mexico had poorhouses (sometimes called almshouses or poor farms). The vast majority of the residents were elderly. Most of the “inmates,” as they were often labeled, entered the poorhouse late in life, having been independent wage earners until that point. A Massachusetts Commission reporting in 1910 found, for example, that only one percent of the residents had entered the almshouse before the age of 40; 92 percent entered after age 60.

Social Security made independent retirement a reality. Prior to its enactment,the verb “retire” did not mean what it means today. It was generally used to refer to withdrawing temporarily, as, for example, to retire to the bedroom at the end of the evening. The first known usage of the noun “retiree” was in 1935, the year Social Security was debated in Congress and enacted into law. It was only in the 1940s, once Social Security started to pay monthly benefits, that the word “retiree” became commonly used.

Social Security is the Foundation of the Nation’s Retirement Income System

The nation’s patchwork system of retirement income is largely an historical accident. Shortly after Social Security was enacted and expanded to include benefits for dependents, the nation entered World War II. During the war, Social Security benefits were not increased and consequently eroded in value.

During the Depression and war years, the federal government substantially increased income taxes, and, in response, business owners created pension plans as “tax-avoidance mechanisms,” as they were called at the time. Moreover,the government imposed wage and price controls during World War II. The controls, however, applied only to current compensation, not to private pension arrangements or other forms of deferred compensation. Consequently, employers offered private pensions as a way of competing for labor made scarce by the demands of the war.

Following the war, Congress, now controlled by Republicans, failed to increase Social Security benefits. At the same time,unions began to bargain aggressively for pensions. As a result of all these factors, Social Security benefits eroded during the 1940s, while employer-sponsored pension plans grew substantially.

It was during this period that the metaphor of a three-legged stool to describe the nation’s patchwork retirement income system was first used. It was coined in 1949 by Reinhard Hohaus, a prominent actuary who worked for the Metropolitan Life Insurance Company.

The metaphor was a useful image for Metropolitan Life and others
promoting private pensions, but it was never accurate, because the legs
were never equal. Even for workers fortunate to have employer-provided
pensions and personal savings to supplement their Social Security,their
Social Security benefits have generally been the most important and
secure source of retirement income. A more apt image of the nation’s
retirement system, therefore, is the pyramid below:

Next: Why Social Security works so well – and one way it doesn’t

Excerpted from testimony given by Nancy Altman, President of Social Security Works, at the February 6, 2019 hearing of the U.S. House Ways and Means Committee on improving retirement security for America’s workers.

The Social Security 2100 Act holds huge promise for America’s future

Representative John B. Larson (D-Conn.) has introduced the Social Security 2100 Act

For years, conservative fiscal hawks have claimed they want to ‘save’ Social Security through ‘reforms’ — like privatization, raising the retirement age, and stingier COLA formulas — that cut benefits for future retirees. Today, Rep. John Larson (D-Conn.) and more than 200 members of Congress have proven America can do better, by introducing the Social Security 2100 Act.

Larson’s legislation would expand Social Security benefits across the board, improve the program’s cost-of-living adjustment formula, reduce income taxes on benefits, and close Social Security’s long-term funding gap by lifting the cap on income subject to payroll taxes and slightly raising those tax rates. He proposes:

  • An increase in benefits for all current and new beneficiaries that is the equivalent of 2% of the average benefit.
  • Changing the cost of living adjustment (COLA) formula to more accurately reflect seniors’ costs for health care and other necessities by using the CPI-E.
  • Setting a new minimum benefit at 25% above the poverty line and tying it to wage levels, ensuring no one who has paid into Social Security retires into poverty.
  • Increasing the threshold for taxing Social Security benefits: when non-Social Security income exceeds $50,000 (individual) or $100,000 (couple) — up from $25,000 or $32,000, respectively.
  • Making Social Security taxes more equitable by applying the Social Security payroll tax to wages above $400,000. Currently payroll taxes are not collected on wages over $132,900. This would affect only the top 0.4% of wage earners.
  • A gradual increase in Social Security payroll premiums beginning in 2020; by 2043, workers and employers would each pay 7.4% instead of 6.2% today. The average worker would pay an additional $26 per year.

Rep. Larson’s legislation is promising for several reasons:

  1. Social Security is crucial to Americans’ economic security. With employer-sponsored pensions in decline, 401(k) savings plans inadequate for most workers, and wages stagnant, Social Security will be more important than ever in the future.
  2. Social Security works. Compared to any private-sector system available, it wins hands-down because it is universally available, inflation-protected, and fully guaranteed. It literally lasts a lifetime, with administrative costs of less than 1 penny per dollar collected.
  3. Social Security is not only popular, Americans of all political stripes support expanding it. During the 2016 Presidential primaries, 73% of Donald Trump supporters, 66% of Ted Cruz supporters, 71% of Hillary Clinton supporters and 72% of Bernie Sanders supporters all agreed that “Social Security benefits should not be reduced.”

When Larson introduced identical legislation during the last Congress, the GOP majority ensured it went nowhere. But with the House now under Democratic control, Larson is chairman of the Ways and Means subcommittee on Social Security. And with more than 200 co-sponsors — including House Ways and Means Committee Chairman Richard Neal (D), who relied on Social Security payments to help pay for college after his father died — the bill stands a strong chance of passing.

In the Senate, where Richard Blumenthal (D-Conn.) and Chris Van Hollen (D-Md.) have sponsored a companion bill, Republican control means it likely won’t be considered. That may not matter: if Larson’s bill passes out of the House, not only will House Republicans be on record for or against expanding and improving Social Security, but Senate Republicans (or at least, Majority Leader Mitch McConnell) will be too.

That’s going to send a clear message to potential 2020 voters and the ever-growing crop of Democratic presidential contenders: Expanding Social Security expansion isn’t just on the table — it’s the centerpiece.

*In a nice bit of historical timing, Larson’s bill is rolling out on the birthday of President Franklin Delano Roosevelt, who established Social Security as part of the New Deal in 1935.

UPDATE: News coverage of the Social Security 2100 Act

  • A Huge Step Forward In The Quest To Expand Social Security | Forbes
  • A new proposal to expand Social Security would make it much better for working Americans | LA Times
  • Expanding Social Security: Popular from sea to shining sea | The Hill
  • House Democrats Unveil Social Security Expansion Bill With Unprecedented Support | Huffington Post
  • Social Security expansion to get serious hearing in U.S. House | Reuters

Why millions of Americans are still working past the age of 65

McDonnell Douglas Long Beach factory. Photo: Piergiuliano Chesi via Wikimedia Commons.

Retiring comfortably at 65 is now out of reach for millions of Americans. Tom Coomer was a machinist at the aerospace manufacturer McDonnell Douglas for 29 years, but the plant closed one year before he was due to get his full pension. Now 80 years old, he works as a greeter five days a week at a Walmart in Oklahoma. 

While Coomer and his wife have downsized their lifestyle, it’s still hard for them to make ends meet. They’re just two of nearly 10 million Americans still working past the age of 65.

According to CBS News business analyst Jill Schlesinger, Americans are facing three main obstacles to retirement. They’re living longer, median wages have stagnated over the past 20 years and a shift from pension plans to 401(k)s have all put a burden on employees.

Read more (CBS News) »

Let’s Honor MLK’s Fight for Economic Justice by Expanding Social Security

Photo: Alves Family via Flickr Creative Commons, https://flic.kr/p/bdMNSV

We live in a divisive time, where the president of the United States focuses on our differences instead of our common humanity. Though Dr. Martin Luther King was controversial, he sought to unite us, to appeal to our better angels. Dr. King believed strongly in the dignity of all of us. He understood that we are all created equal.

Because of these beliefs, he pushed not just for racial justice, but for economic justice, understanding that they are inextricably linked. He worked tirelessly for worker security, economic equality, and social justice.

Indeed, when Dr. King was assassinated in Memphis, Tennessee, he was there to support sanitation workers who were on strike for decent wages, safer working conditions and the recognition of their union. For weeks before his death, he spent time planning a Poor People’s March on Washington.

Three years before his assassination, he gave a sermon in the Ebenezer Baptist Church in Atlanta, Georgia, in which he said:

“[In the 1963 ‘I Have a Dream’ speech,] I tried to tell the nation about a dream I had. I must confess to you this morning that since that sweltering August afternoon in 1963, my dream has often turned into a nightmare; I’ve seen it shattered… I’ve seen my dream shattered because I’ve been through Appalachia, and I’ve seen my white brothers along with Negroes living in poverty. And I’m concerned about white poverty as much as I’m concerned about Negro poverty.

“So yes, the dream has been shattered, and I have had my nightmarish experiences, but I tell you this morning once more that I haven’t lost the faith. I still have a dream… I still have a dream this morning that truth will reign supreme and all of God’s children will respect the dignity and worth of human personality. And when this day comes the morning stars will sing together and the sons of God will shout for joy.”

Dr. King was focused on the poorest among us. Consistent with King’s concerns, Social Security is the nation’s most effective anti-poverty program. But, unlike means-tested programs, Social Security is designed not just to alleviate poverty, but to prevent working families from falling into poverty in the first place.

The values embodied in Social Security are Dr. King’s values and beliefs. Indeed, they are basic American and religious values. Among those values are that it is our birthright as human beings to have dignity, freedom and independence; that we have responsibilities and concern for ourselves, our families, and our neighbors; and that we are all connected, sharing the same risks and benefits.

There are some who seek to divide us along all sorts of fissures. They can be seen at work in their lies about Social Security. They try to convince us that Social Security benefits earned by and paid to seniors are harming our children. They tell us that Social Security benefits earned by and paid to those with disabilities are harming seniors. They claim that Social Security is unfair to African Americans, young people, women—indeed every demographic group for which they can manufacture a case.

None of those charges about Social Security’s supposed unfairness are true. Social Security is essential for all generations of families. It is essential to every race and gender. It is essential to families where a worker dies prematurely, becomes seriously disabled, or lives to age 100 or beyond.

Fortunately, the American people recognize the importance of Social Security and value it. Numerous current and past polls show that the overwhelming majority of Americans value Social Security, recognizing that it will be more important in the future. For that reason, they oppose cutting its modest but vital benefits and would like to see it expanded.

Read more (Common Dreams) »

Five ways the influx of women in Congress can improve retirement security

Women serving in the U.S. Congress by party through 2019. Source: Wikimedia Commons

The record number of women legislators on Capitol Hill could have a positive impact on women’s retirement security. More than 100 women were sworn into office as members of the U.S. House last week. 

This new “sisterhood” of lawmakers brings a stronger female perspective to the nation’s retirement challenges — which disproportionately affect women — and the possibility of reversing long-term trends that will decrease women’s financial stability during their senior years.Historically, women have had fewer assets and income in retirement, and depend more heavily on Social Security to make ends meet. The ongoing gender pay gap – and time away from the workforce caring for family — diminish women’s Social Security retirement benefits. In 2018, women’s average monthly benefits were 21 percent lower than men’s. At the same time, women’s greater longevity means their retirement dollars must stretch over a greater number of years. 

As mothers, caregivers, and members of the workforce, most women of the 116th Congress understand these critical issues and are well positioned to affect change. Elle magazine described some of the incoming lawmakers as “women who can’t afford their rent until their new job starts… women who look nothing like Mr. Smith, and who are revolutionizing Washington.”

Boosting Social Security and Medicare benefits would go a long way toward improving women’s retirement security. But there is even more to be done.

Read more (The Hill) »

Pension spending supports 7.5 million jobs, $1.2 trillion in economic output across U.S.

Real Estate, Food Services, Health Care, and Retail Sectors See Biggest Employment Impacts

Defined benefit (DB) pensions are a substantial contributor to the U.S. economy, according to a new report. Retiree spending of pension benefits in 2016 generated $1.2 trillion in total economic output, supporting some 7.5 million jobs across the U.S. Pension spending also added a total of $202.6 billion to government coffers, as taxes were paid at federal, state and local levels on retirees’ pension benefits and their spending in 2016.

“The analysis shows that virtually every state and local economy across the country benefits from the spending when retirees spend their pension benefits,” said Diane Oakley, NIRS executive director. “Pension expenditures are especially vital for small and rural communities where other steady sources of income may not be readily found if the local economy lacks diversity.”

For example, when a retired nurse receives a pension benefit payment, s/he spends the pension check on goods and services in the local community. S/he purchases food, clothing, and medicine at local stores, and may even make larger purchases like a car or laptop computer. These purchases, combined with those of other retirees with pensions, create a steady economic ripple effect. In short, pension spending supports the economy and supports jobs where retirees reside and spend their benefits.

This study finds that in 2016:

  • $578.0 billion in pension benefits were paid to 26.9 million retired Americans, including:
    • $294.7 billion paid to some 10.7 million retired employees of state and local government and their beneficiaries (typically surviving spouses);
    • $83.0 billion paid to some 2.7 million federal government beneficiaries;
  • $200.3 billion was paid to some 13.5 million private sector beneficiaries, including:
    • $41.8 billion paid out to 3.5 million beneficiaries of multi-employer pension plans, and
    • $158.6 billion paid out to 10.0 million beneficiaries of single-employer pension plans.

Expenditures made out of those payments collectively supported:

  • 7.5 million American jobs that paid nearly $386.7 billion in labor income;
  • $1.2 trillion in total economic output nationwide;
  • $685.0 billion in value added (GDP); and
  • $202.6 billion in federal, state, and local tax revenue.

Defined-benefit pension expenditures have large multiplier effects:

  • Each dollar paid out in pension benefits supported $2.13 in total economic output nationally.
  • Each taxpayer dollar contributed to state and local pensions supported $8.48 in total output nationally. This represents the leverage afforded by robust long-term investment returns and shared funding responsibility by employers and employees.

Pensionomics 2018: Measuring the Economic Impact of Defined Benefit Pension Expenditures, was released today by the National Institute on Retirement Security. The full report is available here. A map with downloadable state fact sheets is available here.