Social Security and the Vanishing 401(k)

Eric Kingson
Professor of Social Work and Public Administration, Syracuse University
Originally Published 12/28/08, The New York Times Online

The availability, stability and value of traditional defined benefit pensions are diminished. Americans are experiencing dramatic losses in 401(k) and I.R.A. retirement savings accounts. Home equity is shrinking. Employers have been bailing out of retiree health plans. Unemployment is increasing and now, faced with mounting pressures, some employers are reducing contributions to 401(k) plans.

This unfortunate state of affairs serves to remind the nation of the importance of the core mission of Social Security — to provide widespread and basic protection against loss of income due to death, disability or retirement.

Although this comes as a surprise to some, Social Security is fundamentally sound, backed by the full faith and credit of the United States government. Projected financing problems, though real, are relatively modest, manageable and many years in the future.

For those of us fortunate enough to have retirement savings, we can only wish that the value of the other assets in our portfolios are as well positioned to withstand the current economic uncertainty.

Social Security and the Vanishing 401(k) - The New York Times Online

Challenges and Opportunities for Retirement Security

Anna M. Rappaport, F.S.A., M.A.A.A.
President, Anna Rappaport Consulting

We are truly at a crossroads with respect to retirement security in America. We have an opportunity to improve and build on what we have in the longer run, but only if we effectively address some short-term challenges. We need to do several things or we will lose our opportunities:

Find a forum where diverse stakeholders will work together effectively – those who represent the public, labor and business must work together to strengthen the system. Repeated failure to work together has led to regulatory instability and chaos that for decades has been a major contributor to the decline of pensions and loss of retirement security.

Address a critical short-term issue – the existing legislative structure (the Pension Protection Act) is designed to strengthen the funding of pension plans. Its requirements are much more stringent than prior laws, and produce very strange (and I believe unintended) impacts in the face of the financial crisis. The business community and hundreds of plan sponsors have petitioned Congress to protect the workers covered by pension plans by relaxing the requirements for faster contributions. This request would not relieve businesses from paying the required contributions, but it would give them more time. We need to remember that this is a voluntary system. If there is no temporary relief, the PPA requirements will lead to the freezing of many more defined benefit plans and to benefit curtailments. For more information on the critical PPA issues, look at http://www.eric.org/.

Maintain and strengthen Social Security – The system should be maintained as an income based system with the fine tuning needed to make it work effectively.

Understand the realities – We need to recognize the realities facing diverse stakeholders:

• Risk pooling and sharing are a very important part of a financial security system.


• Individuals are far more willing to save in an employer plan, and they are more likely to trust information provided through an employer than in the marketplace.


• Regardless of what changes are made for future benefits, people who are age 50 and over today will get their benefits primarily from existing systems, and they will not have adequate time to earn much benefit from a new system. For a very large number of people, these benefits include defined benefit plans.
  
• Choice and individual freedom are highly valued. However, a system that requires individuals to act and make decisions to ensure their long-term security will fail for many people because of lack of knowledge or discipline.


• For Americans who want to work longer or who do not have adequate assets, work options that enable work to higher ages are critical.


• We need to remember successes and as well as failures as we build on current systems.


• We are living longer. Periods of retirement have increased each decade, and we have failed as a society to adjust out benefits to demographic realities.


• Americans are retiring gradually. Many have a period between full-time career commitment and total exit from the labor force where they are working at a slower pace, and often partially retiring.


• The size of the program and risk pool matters. A large program can access the market on an efficient basis with much lower expense charges and better results than an individual or small employer.

What should the future system look like? As we focus on retirement security for the next generation and look for new options, we should be prepared for a Tier II system that is different from the existing system. But at the same time it is vital not to throw out the baby with the bath water. Many ideas and options are surfacing. It is critical that we find solutions that offer adequate pooling of risk, respond to the realities of how individuals behave, and build on the strength of our employment and market based system. Rather than focusing on a specific solution immediately, we need to think about trade-offs and options as we balance stakeholder issues.

My wish is that first we deal with the immediate critical issues to not further damage the system that will be the bedrock for the next 10-15 years of retirees and that we work together to create a sound future for Americans. Today, I see our priorities as:

• Creating the right platform to work together.


• Dealing with the short-term crisis so that the long-term situation is not far worse.

A Social Security Fix for 2008

Robert M. Ball
Founding Chair of the National Academy of Social Insurance
This op-ed piece is the last op-ed written by NASI founder Robert M. Ball, who died in January 2008. It was originally published on October 29, 2007 in The Washington Post.

In the Oct. 19 editorial " Mr. Giuliani's No-Tax Pledge ," The Post stated: "It's no more responsible for Republicans to rule out tax increases [to strengthen Social Security] than it is for Democrats to insist on no benefit cuts." The Post praised, as a "bipartisan blend," President Ronald Reagan 's acceptance of a 1983 fix that included both.

I take exception. It's the essence of responsibility, in my view, to insist on no benefit cuts. In 1983, I served on the National Commission on Social Security Reform (better known as the Greenspan Commission) and represented House Speaker Tip O'Neill in negotiations with the White House . What was right in 1983 -- a balanced package of benefit cuts and tax increases as part, roughly half, of the final agreement -- would be wrong today.

Social Security benefits are modest by any measure and are already being cut -- by raising the age of eligibility for full benefits and by deducting ever-rising Medicare premiums from benefit checks. So the benefits provided for under present law will replace, on average, a lower percentage of prior earnings than in the past. To cut them further would undermine all that Social Security has achieved -- exposing millions of vulnerable people, both elderly and disabled, to needless economic hardship.

Social Security has never been more important to more Americans than it is now. Private pension plans continue to dwindle -- currently covering only about 20 percent of private-sector employees -- and the national rate of savings hovers around zero. We just can't afford to cut Social Security benefits further. There's no way to make up for the loss.

Social Security benefits are vital to nearly all recipients. About a third of the elderly rely on Social Security for 90 percent or more of their income; two-thirds count on it to supply at least half of their income. The program lifts 13 million elderly beneficiaries above poverty.

Without Social Security, 55 percent of the disabled -- and a million children -- would live in poverty. The program is particularly important to women and minorities. It provides 90 percent or more of the incomes of almost half of all unmarried women age 65 and older (including those who are widowed, are divorced or never married), and it is the sole source of income for 40 percent of elderly African Americans and Hispanic Americans.

Social Security is the nation's most effective anti-poverty program. But it's much more than that. For every worker it provides a solid base on which to try to build an adequate level of retirement income. To weaken that foundation would be grossly irresponsible.

The good news is that there's no need to weaken it. We can shore up Social Security for the future without cutting benefits -- or raising contribution rates. The program can be brought into close actuarial balance over the long run with just three revenue-enhancing changes that are desirable in any case:

• Gradually increase the maximum amount of earnings covered by Social Security so that the traditional goal -- covering 90 percent of all earnings -- is once again achieved. This change would affect only the 6 percent of earners who make more than the maximum covered amount (now just under $100,000), and implementing the change gradually over the next 20 to 30 years would have only a minimal impact on them.
  
• Allow Social Security to improve earnings by investing some of its assets -- up to 20 percent, say -- in equities, as just about all other public and private pension plans do.
  
• Provide a new source of income by retaining a residual estate tax and dedicating it to Social Security. By 2010, the estate tax will affect only individuals with estates worth more than $3.5 million ($7 million for couples). Dedicating the income from the tax to Social Security would considerably improve the progressivity of Social Security financing as well as increasing revenue.

Presidential candidates should be expected to discuss Social Security financing. But in 2008 they shouldn't be held to a 1983 formula. We're in a different time, with different needs -- and there are much better options available than benefit cuts.

Robert M. Ball was commissioner of Social Security in the Kennedy, Johnson and Nixon administrations. You can see his entire plan at http://www.robertmball.org.

A Prime Target for Health Care Reform: The $300 Billion, Yes Billion, Spent Wastefully on Processing Bills

Merton C. Bernstein
Coles Professor of Law Emeritus, Washington University; Former Principal Consultant to the 1982-83 National Commission on Social Security Reform; Founding board member of the National Academy of Social Insurance

Over 15% of the medical care dollar gets spent on “processing bills, claims and payments” according to a McKinsey Quarterly analysis.¹ That tots up to some $300 billion a year. In contrast, Medicare spends about 3% of its outlays for administration.

The reason is simple enough: health care providers – doctors, hospitals, laboratories and imaging centers – obtain most of their reimbursement from hundreds of insurers with thousands of insurance programs with different rate schedules. Some large hospitals have a hundred or more rates for the very same procedures depending upon the insurance arrangement for the patient, if any. This balkanized payment system deploys armies of clericals in medical care provider offices to match their billings – roughly a billion a year outside of Medicare – with those nearly countless programs. In addition, insurers often seek to pin the tab on other insurers, as when parents have different coverages from their employers or an injury or illness is allegedly work or accident related.

By contrast, Medicare sets uniform rates within each of its fifteen administrative regions. That makes it much simpler for Medicare to match bills with the appropriate fee. Medicare participants – providers and insurer intermediaries – develop familiarity with Medicare’s procedures and rates. That enables them to process bills more speedily, with fewer mistakes and at lower costs than non-Medicare charges require. Bottom line: Medicare’s system takes less time and much less money.

In addition, analysis of federal data for 2003 (before the Medicare Modernization Act with its subsidies for private insurers and a drug program that prohibits bargaining over charges) shows that the means-tested Medicaid and SCHIP (State Child Health Insurance Program) combined cost four percentage points more to administer than Medicare does. ² Medicaid and SCHIP must repeatedly ascertain whether applicants meet their low-income tests. Doing so runs up the non-benefit costs. Ditto innumerable other federal/state child health programs, such as well-baby services that focus on low-income people.

Further, Medicare intermediaries do not have the conflicts of interest that can spark controversies between insurers and medical care providers and patients. Whether any particular charge is reimbursed does not affect the bottom line of Medicare insurer intermediaries. But a non-Medicare private insurer determination in favor of reimbursement reduces its profits. And where an insurer acts as an employer’s plan administrator, it always wants to show the employer/client that it is holding down costs. That provides a powerful incentive to deny claims; insurers and their employer/customers even come out ahead by delaying payments.

The multi-billion dollar differences in non-benefit costs between Medicare on the one hand and private insurance and public means-tested programs on the other argue for locating insurance where it costs least - in Medicare. Medicare does not own or provide health services any more than private insurers do. Medicare uses private insurers to perform its detailed administrative clerical work. No “socialism” is involved; only practicality and common sense.

¹ Nick A. LeCuyer and Shubham Singhai, “Overhauling the US health care payment system”, The McKinsey Quarterly (June 2007). It used 2005 data from the Center for Medicare and Medicaid Services (CMS). The over 15% includes the more efficient payments for Medicare; hence the non-Medicare component is much higher than 15%.
² Centers for Medicare and Medicaid Services, National Health Expenditures by Type of Service and Source of Funds, CY 1960-2006.

The Economical Way to Assure Medical Care for Children and Young People That Also Reduces Strains on Family, Business and State Budgets: Medicare

Nancy J. Altman and Merton C. Bernstein
Former senior staff to the 1982-1983 National Commission on Social Security Reform in the United States Senate and Board Members of the National Academy of Social Insurance

President-elect Obama’s proposed health care reform includes a requirement of mandatory, universal, and comprehensive health care coverage for all children. No reform is more urgent, offers greater returns, or is more readily achieved at such low cost.¹

We suggest that Medicare offers the readiest and least expensive platform for this advance,² one already familiar to the nation’s health care providers, insurers, and consumers. A straightforward, universal children’s health plan is extremely efficient. Social Security, which has low administrative costs (less than 1% of outgo), demonstrates how cost effective an objective test like age is. Using Medicare’s simple and low cost machinery, rather than the myriad private and public sector programs, like SCHIP³ and Medicaid,⁴ will assure universal coverage while eliminating a number of costly and time consuming steps, such as processing hundreds of thousands of billings using innumerable differing formulas. Massachusetts alone, for example, has used eight different eligibility/payment formulas for similar populations. Private plans vary in coverage and procedures. Using but one formula saves effort, time, and lots of money.

Funds now applied to SCHIP and Medicaid will go farther by eliminating the costly means testing that must be done repeatedly – every thirteen weeks in the case of Medicaid. Indeed, the Urban Institute has concluded that Medicare’s administrative costs are about 4 percentage points lower than Medicaid’s.

In addition to its efficiency, a unitary, comprehensive program for children will improve health outcomes. When medical attention is needed, no one need first ascertain which program, if any, will foot the bill; patients can proceed directly to the intake nurse, without first stopping at the financial office.

Reducing the per capita cost of children’s medical care and shifting those costs to Medicare will reduce the financial stress upon families and business. Employers will find the costs of employment-based insurance reduced, as will their employees. Inclusion of children in employment-based insurance has always been a matter of convenience; consequently, it can be modified without violating principle.

Such a program will increase the nation’s productivity. By assuring timely and adequate health care to all of our children, we reduce the disruptions to family life and employment that inevitably accompany child sickness, which can be especially disruptive for single parents. Fewer sick kids mean fewer work absences by adults.

By assuming the cost of the state shares of SCHIP, Medicaid coverage for children, and similar state programs, the federal government can deliver effective assistance to state governments where they urgently need it. Expenditures for Medicaid and the health care costs of public employees have become the largest or second largest outlays by states.

We will all be better off by fully meeting the health needs of all the nation’s children in the most effective, least costly way. Providing health care to children is comparable to our national policy of providing education, free of cost, to all children. As a nation we debated and settled that policy in the 19th century. We decided as a nation that we all have a stake in the education of everyone’s children.

We must recognize children’s health and child education are as much a part of the national infrastructure as our ports, roads and bridges. Medicare provides an efficient, time-tested platform for making this goal a reality.

¹In 2006, Medicaid covered more children (29.5 million) than any other beneficiary category and with the lowest per capita cost - $1,070 as compared with $1,310 for adults, $6,630 for aged, and $7,360 for blind and disabled (Congressional Budget Office fact sheet, March 6, 2007). What we propose here would lower per capita cost even further.
²Out-of-control costs are pervasive throughout both public and private health care programs. Controlling all such costs are essential to overall health care reform.
³State Children’s Health Insurance Programs, enacted in 1997, have substantially decreased the numbers of children lacking assured health care. Together, SCHIP and Medicaid have improved coverage of poor children. However, the older the youngster, the less likely such coverage is. Further, both programs are limited by income caps – typically 200% of the federal poverty level. The most dramatic element of the Massachusetts plan is that it raised the cap for subsidized assured health care to 300%. SCHIP and Medicaid coverage keeps changing; a recent study of five states, all with generous standards, found temporary but substantial coverage gaps (How Stable Is Medicaid Coverage for Children?”, Fairbrother, Emerson and Partridge, Health Affairs, March 20, 2007).
⁴Medicaid provides more extensive care than SCHIP. Both use federal and state funds with the federal share the larger. As with several other economic stimulus measures, this proposed shift of the state contributions would require deficit spending.

Pensions for Everyone

Jonathan B. Forman
Alfred P. Murrah Professor of Law
University of Oklahoma College of Law
Originally Published on 1/11/08

Only half of American workers have a pension plan, and only a fraction of those have traditional pensions that replace a meaningful part of their final pay. Instead, most workers with a pension today have a 401(k) plan or an individual retirement account, and according to a recent report by the U.S. Government Accountability Office, only a fraction of those workers will save enough to get a meaningful monthly benefit.

This month the oldest baby boomers started turning 62, and millions more will follow in the coming decades. Before it is too late, we need to adopt policies to ensure that every worker has adequate retirement savings.

Prior to 1980, many workers had traditional "defined benefit" pension plans that provided monthly benefits based on a percentage of their final pay. Since then, most private-sector employers have shifted to 401(k) plans and other "defined contribution" plans. In these plans, workers accumulate money in individual accounts and withdraw it during retirement.

Unfortunately, many of these workers will end up "arriving at retirement with insufficient savings to support themselves." The title of the GAO report says it all: "Private Pensions: Low Defined Contribution Plan Savings May Pose Challenges to Retirement Security, Especially for Many Low-Income Workers."

The GAO found that the typical worker had just $22,800 set aside in a defined contribution plan in 2004. Worse still, only 8 percent of workers in the poorest 25 percent of households had a defined contribution plan.

Even workers age 55 to 64 in 2004 had a median account balance of just $50,000. At age 65, that would buy a lifetime annuity of that would pay just $367 per month ($4,400 a year).

The GAO also estimates that the current defined contribution system could replace about 22 percent of final pay for a typical worker, but replacement rates would vary widely across income groups. The richest 25 percent of workers would get almost 34 percent of final pay, but the poorest 25 percent would get just 10.3 percent of final pay.

Moreover, 37 percent of workers would have absolutely no savings from defined contribution plans when they retire, and 63 percent of those in the poorest 25 percent of households would have no defined contribution savings.

To be sure, Social Security would still provide a basic benefit for older Americans. The typical retired worker now gets around $1,050 a month. But many retirees get far less, and Social Security will provide lower replacement rates in the long run, even if we somehow come up with the $4.7 trillion in new revenues needed to cover the current shortfall.

On the bright side, since 2004 we have made it easier for employers to automatically enroll employees in 401(k) plans, and we have made the retirement savings tax credit permanent. But these small steps will not avert a retirement income crisis for the baby boomers and beyond.

At the very least, we need to make sure that every worker has an easy way to save for retirement. We might, for example, let state government entities create "State-K" pension plans for employers that do not already have pension plans. Or we could require that those employers offer payroll-deduction IRAs to their workers.

Even with universal access, however, many workers simply will not save for retirement. In the end, we will need a mandatory universal pension system.

For example, we might collect another 3 percent of payroll from every American worker and place that money into individual retirement savings accounts. Those accounts could be held by the government, invested in a broadly diversified portfolio of stocks and bonds, and converted into a monthly annuity at retirement. In a new discussion paper for the Urban-Brookings Tax Policy Center, Adam Carasso of the New America Foundation and I estimate that these 3-percent-of payroll accounts would provide 13.8 percent of final wages at retirement for every worker.

Our paper, "Tax Considerations in a Universal Pension System," also shows how targeted tax subsidies could lead to even larger benefits for low- and moderate-income workers.

Millions of American workers have been left out of the current pension system and have no retirement savings. A system of 3-percent-of- payroll individual accounts would ensure that every worker has at least some retirement savings. Altogether, Social Security and these "add-on" individual accounts would guarantee that every worker has an adequate retirement income.

Another Lesson from Today’s Financial Meltdown

Henry J. Aaron
Senior Fellow, Economic Studies
The Brookings Institution
Originally Published on 10/02/08

In the midst of the financial chaos enveloping Wall Street and threatening the economy of the nation and world, it is hard to think of much else. But it is worth a moment to recall the quite serious debate about partly privatizing Social Security that absorbed national attention just three years ago.

President Bush had just won a second term as president. He had, he claimed, "political capital." He intended to spend it fighting for ideas in which he believed. One of those ideas was a proposal to divert a portion of payroll taxes into personally owned savings accounts. These accounts were to be invested in privately traded assets, portfolios of stock or bonds. According to the president, privately traded bonds and stocks had earned higher returns for decades than Social Security pensioners received on the payroll taxes they and their employers paid. To be sure, the diversion of payroll taxes from the public system would eventually force large reductions in Social Security benefits. And, of course, financial experts reminded people, higher returns come with increased risk—in finance there is no free lunch. But the president and his advisers assured the public that the personal accounts would support benefits that would more than make up for these reductions.

The proposal went no where. It evoked the unanimous opposition from Democrats and lukewarm support or tepid skepticism from most Republicans. No bill embodying the president's proposal ever made it to the floor of either house of Congress.

As American financial markets are hammered by a financial storm more frightening and more damaging than Hurricane Ike, it is worth imagining what the world would have been like had President Bush’s Social Security proposal been enacted and been effective for a couple of decades. Of one thing, we can be sure. Whatever changes in regulation of banks and financial organizations Congress may yet enact, another financial storm will surely strike. It will differ from the current calamity, as surely as the current mess differs from that of the Great Depression. But regulators, however well intentioned, cannot anticipate the infinite imaginativeness of really smart financial and legal experts at finding new ways to skirt controls put in place to prevent the recurrence of the last crisis. It would be naive to imagine that regulators who have never been able to plug all the ways around previous safeguards will suddenly find the perfect fix that prevents financial crises from ever happening again.

So, picture this imaginary future. President Bush’s partial privatization plan was enacted. People have been socking away funds in individual accounts for years. Social Security benefits have eroded continuously, as was inevitable under President Bush’s plan. People will have adjusted their consumption and savings to leave themselves with savings that they expect to be sufficient for retirement.

Then, bang! After people have retired or become disabled, or just on the eve of claiming benefits, a financial panic they could not possibly have anticipated strikes. Even worse, stock prices collapse as much as they did in 2001 when over-the-counter shares fell roughly 80 percent and the New York Stock exchange fell by more than 40 percent. Those are the assets in which private accounts were invested. Retirement income, once thought adequate, becomes insufficient. To be sure, Social Security benefits would remain, as they are today, rock solid. But under the typical privatization plan, they would provide much less of retirement income than they do today. The financial crisis would become a personal calamity for tens of millions of retired baby-boomers and their successors.

In the midst of today’s well-founded angst about whether current financial turmoil will precipitate serious and sustained economic recession or even depression, it is worth taking a moment to recognize that Social Security has remained what it was intended to be—a solid foundation of financial security for retirees and people with disabilities. It is also worth breathing a sigh of relief that Congress recoiled from the proposal that president Bush put forward to partially privatize Social Security, a measure that would have eroded that foundation as surely as Hurricane Ike washed away homes and businesses on the Texas coast.

Towards Guaranteed Retirement Security

Teresa Ghilarducci
Bernard L. and Irene Schwartz Chair of Economic Policy Analysis
The New School for Social Research

American workers lack pension security, beyond Social Security, because individual commercial retirement accounts are tied to the volatility of finance markets, are inadequately funded, have poor net-of-fees returns, and do not pay a guaranteed rate of return for the rest of a retiree’s life. Also, employers have conflict of interests between their needs and their workers' needs when choosing 401(k) investment vehicles. Pension coverage is stuck at half of the workforce

I propose a short term and long term solution to inadequate pensions. Short term, workers should be able to swap out their 401(k) assets – if they choose -- (valued mid August) for special issue government bonds paying a guaranteed 3% plus inflation rate of return. Long term, everyone should be able to be in a national “cash-balance” fund where the contributions are a steady percent of pay – at least 5% -- and the returns are guaranteed (3% plus inflation.). Workers’ contributions should be subsidized by a government tax credit of $600 (adjusted for inflation). The short term swap would be voluntary and the participation in the Guaranteed Retirement Accounts would be mandatory if there was no other pension plan available. One way to pay for the $600 subsidy is to turn the tax deduction for 401(k)s into a tax credit.

Welcome

The historic 2008 election is over and the new administration and Congress are about to begin work. This is an exciting time for our country, and it is crucial that the President and Congress consider thoughtful policy changes to help alleviate the economic insecurity felt by many Americans.

NASI’s membership embodies the brightest policy thinkers in the country, and we have solicited their ideas as to what policies Congress and the White House should focus on. Policy ideas about Social Security, Medicare, unemployment insurance, workers’ compensation, taxes and the economy in general are welcome.

Comments from other NASI members and the general public are welcome.