Wednesday, November 13, 2013

Academic’s Social Security Assessment is Best Argument for Retirement Saving

One of the hot potato issues in Congress over the last several sessions has been Social Security; preserving its solvency, and how best to run a program that provides millions of Americans with replacement of a share of their working-years income during retirement.  “Hot potato” because dialogue on how to maintain this important benefit for older Americans almost inevitably leads to two opposing solutions: reduce benefits, or raise more revenue, chiefly through taxes. 

Regardless of your political leanings, it is likely that one or the other of these options will raise your blood pressure.  To some, the Social Security benefit is a sacred cow that can’t be sacrificed at any cost.  To others, the program and the taxes that support it are increasingly becoming a drag on the economy.  But politicians of all stripes recognize Social Security as the “third rail of American politics.”  It’s a comparison to the danger of getting anywhere near the “third rail” that carries electricity to a subway or commuter train.  Do so at your own peril!

Some, however, can critique and comment on Social Security from a safe distance without getting bloodied in the political slugfest.  One who recently did so from her safe vantage point as an academic also happens to be one of the leading critics of the defined contribution retirement system, Alicia Munnell, Director of the Center for Retirement Research at Boston College. 

In an April, 2013, Bloomberg article Ms.  Munnell stated that the retirement savings workers need beyond that provided by Social Security “cannot be met by a voluntary employer-based system.”  Ms. Munnell advocated “…new, mandatory … retirement accounts—initiated by the federal government but managed by the private sector… [to] replace 20 percent of preretirement earnings.”  In a political climate in which the concept of mandatory health insurance has fractured the Congress and the national electorate to a degree rarely before seen, it’s hard to imagine that federally-mandated retirement saving will find its way onto many lawmakers’ to-do lists.  

Ms. Munnell’s latest retirement analysis is entitled “Social Security’s Real Retirement Age is 70,” published by The Center for Retirement Research.  It is a source of some good information about the relative income replacement effects of workers beginning to receive Social Security benefits at various ages, from the earliest permissible age—62—to as late as age 70.

The study begins with the unequivocal assertion that “Social Security was designed to replace income once people could no longer work.”  Perhaps this is taking Ms. Munnell too literally, but in point of fact Social Security was originally intended to be a safeguard against destitution, to provide a minimum level of income after one’s working years, not to “replace income once people could no longer work.”

Ms. Munnell goes on to provide what many will find to be a valuable and insightful history of the evolution of Social Security benefits, from changes implemented in the 1960’s to allow early access to benefits at age 62, to congressional action in the 1970’s and 1980’s granting enhanced benefits to those who wait beyond normal retirement age, waiting to as late as age 70. 

There is a strong implication that the maximum benefits that are now available only to late-claiming retirees should be available to those who retire at younger ages, because not everyone will be able—or want—to work to age 70.  Ms. Munnell states that when you factor in the Medicare premiums that are deducted from Social Security payments, and the taxation of Social Security benefits for many retirees, “Retiring at age 62 will not be a reasonable option for those who have any ability to stay in the labor force.” 

The answers to this are twofold.  The first answer is “Well, that depends.”  It depends on whether the retiree has other savings, in the form of IRA or employer plan assets, nonqualified savings, property, etc.  Keeping in place robust tax-advantaged saving opportunities—like IRAs and employer plans—is a key to making such savings possible.  These savings, combined with Social Security and Medicare benefits, will hopefully provide a satisfactory quality of life for many Americans and allow them to achieve their retirement goals.

The second answer is really a question: is it necessarily everyone’s right to be able to retire at age 62—or before age 65, 67, or even 70—when life expectancies are rising as they clearly have been?  It may be the hope, or the ideal, of many to have the option of spending 20, 25 or more years in full retirement.  But that may not be realistic for everyone.  Nor should it be looked at as an entitlement.
Retirement at earlier ages may be an option only for those who make a contribution toward that end through their own saving.  And for that reason, we need to strengthen—not give up on—the private retirement system.