No Secure Three-Legged Stool to Support Seniors

My recent post on Social Security left out two related pieces of the story — why retirement benefits don’t cover basic living costs and why the concept underpinning Social Security merits rethinking.

Why Social Security Doesn’t Give Seniors Income Security

If Social Security afforded seniors financial security, we wouldn’t have about 6.5 million of them in poverty — or nearly 13.8 million more constrained to live on incomes less than twice the applicable, very low threshold.

This, as I’ve said, is partly because Social Security retirement benefits are based on past wage income. But it’s also because they’re not supposed to suffice for financial security. And they never were.

Sometime in the late 1940s, financial security for retirees came to be commonly characterized as a three-legged stool, supported by Social Security benefits, pensions and private savings.

We see this assumption baked into the benefits, which now average $1,348 a month. That’s less than 150% of the poverty threshold for a single senior.

And the average, of course, masks the range. At the low end, roughly 30% of retirees and their dependents get less than $1,000.

How Other Legs of the Stool Don’t Support It

“All three legs of the stool have been whittled away,” says economist Jesse Rothstein in a paper that proposes a multi-part expansion.

But for Social Security, the whittling is only prospective, i.e., benefits cuts that will occur if Congress doesn’t do something to shore up the Trust Fund — or if Republican policymakers take a knife to them sooner.

What then about the other two legs? Pensions, as you know, are going the way of the woodbine and twine, especially in the private sector.

Employers that can have replaced them with 401(k) accounts or the equivalent — at least, those that think they’ve got to provide some sort of retirement benefit. Far from all do.

The rest don’t necessarily let all their workers participate. They can legally exclude those who don’t work, on average, close to half time. They may, in some cases, exclude workers supplied by temporary agencies — and in all cases, those they’ve misclassified as independent contractors.

Workers who are eligible don’t all seize this opportunity to save for retirement. About 16% of those nearing retirement age don’t — roughly the same as the percent of workers nearing middle age.

Those who do participate often don’t contribute the maximum they can. Only 10% did shortly before the Great Recession set in. Many of the rest presumably couldn’t afford to. Probably still can’t.

Rothstein flags other problems with the 401(k)-type plans. First off, they generally allow workers to decide how to invest the money they’ve contributed, within limits imposed by the financial plan or plans their employers offer.

These come with fees that look small, but add up over time. And, face it, knowing enough to choose which funds to invest in — stocks, bonds, a variable mix — and knowing when to move money around and when to sit tight require considerable expertise.

This is one, but far from the only reason that long-time workers lost, on average, 25% when the Great Recession set in.

These hazards apply equally to Individual Retirement Accounts, though the much lower limit on contributions necessarily limits losses. Gains also, of course.

Don’t look to the third leg to offset the weaknesses of the others. Seems that a very large number of working-age adults simply don’t have enough money to save — or at the very least, spend all their take-home pay.

Well over a third who earn less than $50,000 a year have no money in a savings account, according to a recent survey. An additional 35% have less than $1,000 — a minimal cushion against any unusual expense or income loss.

Low-income households headed by someone nearing retirement age have less than $10,000 in liquid assets, including money in bank accounts, retirement savings accounts and other sources they could readily tap, e.g., the cash value of a life insurance policy.

For all these reasons, Social Security is the major source of income for most of us older folks — and virtually the only source for 21% of married couples and about 43% who aren’t married, including presumably those whose spouses have died.

What If We Do Nothing

Rothstein is far from the only expert to seize on problems with our current system for financial security in our “golden years.” A team of economists predicts that the number of poor and near-poor retirees will increase 146% by 2022 if nothing’s done about Social Security and retirement savings accounts.

The increase could actually be larger because they don’t project for seniors over 74 years old. Even so, nearly 24% of all but the top-earning workers who were nearing retirement age in 2012 will be poor or near-poor only four years from now.

And if they’re struggling then, they sure won’t be better off if they manage to survive to a ripe old age, despite the hardships they’ll have suffered.

 

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