On June 15, the Senate Special Aging Committee heard testimony on proposals to include personal retirement accounts within Social Security.
In his opening statement, Chair Larry Craig (R-ID) explained that the purpose of the hearing is for Congress to understand how different proposals to strengthen Social Security would affect low-income workers. Referring to a Congressional Budget Office (CBO) study on Social Security released earlier this week, he stated, “It appears the CBO projects that many low- and middle-income retirees will be receiving lower benefits than the actuaries are projecting. As a result and contrary to the “do nothing” crowd’s response to the CBO study today’s hearing on benefit levels takes on even greater importance in light of the CBO findings.”
Comptroller General David Walker summarized a General Accounting Office (GAO) report on the future of Social Security and various proposals to reform the program. He explained that Social Security has always been a pay-as-you-go system current workers’ taxes pay current retirees’ benefits and faces a budget shortfall: “The retirement of the baby boom generation is not the only demographic challenge facing the system. People are retiring early and living longer. A falling fertility rate is the other principal factor underlying the growth in the elderly’s share of the population. In the 1960s, the fertility rate was an average of 3 children per woman. Today it is a little over 2, and by 2030 it is expected to fall to 1.95 a rate that is below the level necessary to replace the population. Taken together, these trends serve to threaten the financial solvency and sustainability of this important program.”
In examining various proposals to reform Social Security, Mr. Walker said that the GAO’s assessment was comprised of three basic criteria: the extent to which a proposal achieves sustainable solvency and how it would affect the economy and the federal budget; the relative balance struck between the goals of individual equity and income adequacy; and how readily a proposal could be implemented, administered, and explained to the public. One proposal under consideration was Model 2 of the President’s Commission to Strengthen Social Security, which “proposes a new system of voluntary individual accounts along with a combination of certain benefit reductions for all beneficiaries and selected benefit enhancements for selected low earners and survivors.” Mr. Walker said that according to the GAO simulations, “The distribution of benefits under Model 2 could favor lower earners more than the distribution of benefits under either currently promised or currently funded benefits. For example, assuming universal account participation, households in the lowest fifth of earnings may receive about 14 percent of all lifetime benefits under Model 2, compared with about 12.5 percent under the current program.” He noted that the privatization aspect of Model 2 exposes recipients to greater financial risk than the current program, adding, “Greater risk may be more problematic for lower earners, who likely have fewer resources to fall back on if their accounts perform poorly.”
Jeffrey Brown, a professor at the University of Illinois at Urbana-Champaign College of Business, said that for a number of reasons the current Social Security system does not transfer resources from high-income to low-income individuals as intended: 1) On average, high-income individuals live longer than low-income individuals and therefore receive a higher level of lifetime benefits; 2) Social Security’s spousal benefits are based on the earnings of the primary worker, so a spouse of a high-income individual will receive larger benefits regardless of how much he or she contributed to the program; 3) Much of the apparent redistribution is from high-income to low-income individuals within the same household; and 4) Many workers with low lifetime earnings are really high-income workers who voluntarily chose to exit the formal labor force, such as stay-at-home parents. Dr. Brown argued that the personal retirement accounts under Model 2 would benefit low-income workers because they would be able to contribute a higher fraction of their earnings to the accounts, benefits for low-wage workers would be increased to provide protection against poverty at retirement, the benefits for low-income widows and widowers would be increased, and surviving spouses would inherit the remaining account balance of the deceased spouse. He concluded, “Model 2 provides a very useful blueprint for how Congress can reform Social Security so that the program lives within its means, while still serving the important redistributive purpose for which the program was intended.”
Examining the future state of retirement security, Christian Weller of the Center for American Progress stated, “A household may be considered adequately prepared for retirement if it can maintain a similar real level of consumption as during its working years. Usually, 80% of pre-retirement income is considered adequate since the income needs of retirees are likely to be lower than those of workers.” He cited a number of statistics to show that most Americans have not saved enough for their retirement, including:
Mr. Weller explained that the current Social Security system favors the low-income worker, adding, “Women, minorities and those with less than a college education can expect to have higher rates of return than their counterparts.” Noting that the average benefit is typically low, Mr. Weller said that women receive lower average benefits than men. “Yet, despite low replacement ratios and average benefit amounts, Social Security plays a disproportionately large role as [a] source of retirement income for those 65 and older,” he stated, adding, “For all but the top 20% of income recipients 65 and older, Social Security was the single most important source of income.” Mr. Weller argued that personal retirement accounts offer little protection against financial risk: “Because workers usually get labor income the primary source of savings from just one employer, they are not diversified on their income side and consequently vulnerable to large fluctuations in income arising, for instance from lay-offs, reduced overtime, and the employer’s bankruptcy…Some groups of workers are more likely than others to have a more tenuous attachment to the labor market. For instance, women, minorities, those with less education, among others, have higher unemployment rates, longer spells of unemployment, and greater variability in earnings than their counterparts. These groups, thus, face systematic greater labor market risks than their counterparts.” Mr. Weller also noted that women “tend to see substantially lower real accumulations per dollar invested than men” in retirement accounts.
