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April 13, 2013

Social Security is a system worth saving

By Laura McClure
The Daily Star

---- — Half of millennials (people aged 18-29) say in surveys that they don’t think Social Security will exist by the time they reach retirement age. Young people – and the rest of us – are being fed the idea that we can’t rely on each other for our retirement through a social system, we can only rely on ourselves.

The opposite is true.

We can and do rely on government for our retirement. In fact, since its creation in 1935, Social Security has been the only thing seniors could truly rely on, with stock investments, pensions, and nest eggs evaporating left and right. Social Security provides at least two-thirds of the income middle-class and working class retirees live on.

As any fact-based economist will tell you, Social Security can continue to provide its current modest benefits to generations going forward. Since 1984, this largely pay-as-you-go system has amassed a huge trust fund that was intended to help get us through the period when the outsized baby boom generation retires. As a result, Social Security, as currently constructed, is good to go till 2033 and needs only modest tweaking to keep it healthy after that.

Social Security is one of the world’s most efficient bureaucracies – it spends 1% on administrative costs, yet manages to keep almost every senior out of poverty (except workers who are unfortunately excluded from it, like farmworkers). It also acts as an economic stabilizer. In hard times, as jobs disappear and consumer spending plummets, the seniors keep getting, and spending, their small monthly allotments.

Yet many politicians, including President Obama, want to throw Social Security into the maw of deficit reduction. While the program has so far proved too popular and worthy to totally privatize or eliminate, the president proposes to chew away at it by reducing the its cost-of-living increases, biting into the already small checks seniors are getting.

How small? In Otsego and Delaware Counties, where more than 15 percent of the population is receiving retiree benefits from Social Security, the average monthly benefit is $1,200. Do we really want to cut that? It’s hard to get by on $1,200.

But this is where that “relying on ourselves” part comes in, right? To supplement Social Security (or even, as some people argue, to replace it altogether), we’ve got private pensions, 401(k)s, IRAs ... The idea is that if we work hard and we’re frugal, we’ll do well. And if we’re really clever, we’ll make out like bandits.

Or not. We’ve been running this experiment for over three decades, and it has totally failed.

Until the 1990s, private pensions were a big help. Before then, a pension was usually a fixed check you’d get every month from a pension fund set up by your employer and/or union. At their high point, these “defined benefit” pensions covered over half of full-time workers, providing a dependable and sometimes sizable monthly benefit from retirement till death (and often beyond, through survivor benefits). Unfortunately, today, less than a fifth of workers have this kind of pension plan.

The 401(k) was invented in 1981 as an executive perk. With a 401(k) retirement account, the amount you pay in is fixed, but the payout isn’t: It depends on how your investments are doing. So you, not the employer, bear all the risk. Sometimes employers contribute a bit, sometimes they don’t. Sometimes the market pays out, sometimes it doesn’t. What’s more, many employers don’t offer 401(k)s, and many workers opt not to participate even if they’re an option. The same vicissitudes apply to IRAs and other retirement “products.”

All this adds up to trouble for those banking on do-it-yourself retirement accounts: Seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their accounts. That won’t go very far. And it definitely won’t go far if they happen to retire at a time when the stock market is going bust. In short, while money management firms are making a mint off 401(k)s, workers aren’t.

So… how are people going to live off that $1200 Social Security check?

We need to improve Social Security. There are lots of ways we could do this. We could increase our contribution to Social Security, we could remove the cap on it (currently,only the first $110,100 is taxed). Or we could consider the plan by economist Teresa Ghilarducci to create guaranteed retirement accounts for every American to supplement Social Security.

Social Security is a gem. Let’s not just save it. Let’s improve it.

Laura McClure is a writer and editor based in Bovina Center.