What’s the Best Fix for Failing Retirement Security?

The past two years have seen serious discussion among progressives about the way to restore retirement security in the face of disappearing defined-benefit pensions and private savings.

The most prominent proposal is based on a 2007 working paper by Teresa Ghilarducci, whose proposal--Guaranteed Retirement Accounts, or GRA--has been included as one model by the recently formed “Retirement USA” coalition. The coalition’s working paper goes beyond the GRA to present three other models, each of which depends in part on (sometimes mandatory) employer contributions and in large part on market investments.

Because the GRA seems superior to these three in its stability and efficiency, the remainder of this article will respond primarily to the GRA proposal.

GUARANTEED RETIREMENT ACCOUNTS

Here is a broad outline of the main points:

• Mandatory participation by employees, unless they are participants in a better employer-provided defined-benefit pension plan.

• 5% of earnings, split equally between employer and employee, deducted and credited to individual accounts. Married couples’ contributions are combined and divided equally into both their accounts.

• Employee contributions are offset by a $600 refundable tax credit; if annual contributions are less than $600, the credit is applied to the individual’s account to guarantee a minimum accrual of $600 per year.

• Funds are pooled and administered by the Social Security Administration. Workers can track the value of their individual accounts.

• “The pooled funds are conservatively invested in financial markets. …participants earn a fixed 3% rate of return adjusted for inflation, guaranteed by the federal government.”

• Benefits can be collected at the same age as Social Security, and cannot be used before retirement except in case of death or disability.

• Benefits take the form of an inflation-indexed lifetime annuity, although a small, partial lump sum may be withdrawn at retirement.

There is indeed a crisis in retirement for most Americans. While the recent market crash, which dissipated much of the value of 401(k) accounts and IRAs, has brought awareness of this to the fore, reliance on voluntary, individual, market-based savings had never been adequate, even as a supplement to Social Security. In 2006, reports the Economic Policy Institute, "half of those who had a 401(k) were nearing retirement with less than $40,000 in their account.” The coalition’s models for alternatives, including the GRA, are based on the perspective that this mode of savings cannot ever be adequate, and that a safe, reliable system of retirement income savings must be based on several principles that counter current trends:

Universal Coverage. Every worker should be covered by a retirement plan in addition to Social Security. A new retirement system should include all workers unless they are in plans that provide equally secure and adequate benefits.

Secure Retirement. Retirement shouldn’t be a gamble. Workers should be able to count on a steady lifetime stream of retirement income to supplement Social Security.

Adequate Income. Everyone should be able to have an adequate retirement income after a lifetime of work. The average worker should have sufficient income, together with Social Security, to maintain a reasonable standard of living in retirement.

Shared Responsibility. Retirement should be the shared responsibility of employers, employees and the government.

Required Contributions. Employers and employees should be required to contribute a specified percentage of pay, and the government should subsidize the contributions of lower-income workers.

Pooled Assets. Contributions to the system should be pooled and professionally managed to minimize costs and financial risks.

Payouts Only at Retirement. No withdrawals or loans should be permitted before retirement, except for permanent disability.

Lifetime Payouts. Benefits should be paid out over the lifetime of retirees, and any surviving spouses, former spouses, or domestic partners.

Portable Benefits. Benefits should be portable when workers change jobs.

Voluntary Savings. Additional voluntary contributions should be permitted, with reasonable limits for tax-favored contributions.

Efficient and Transparent Administration. The system should be administered by a governmental agency or by private, non-profit institutions that are efficient, transparent, and governed by boards of trustees that include employer, employee, and retiree representatives.

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Effective Oversight. Oversight of the new system should be by a single government regulator dedicated solely to promoting retirement security.

While all of these seem excellent principles, note that many of them either apply to Social Security as it exists, or assume that Social Security will continue to be inadequate for full retirement security.

GRAs certainly meet most of these criteria. But they share two serious faults with current private retirement programs. First, while assets are pooled (and returns guaranteed), they retain the structure of individual accounts, continuing and encouraging the individualization of collective good that the recent expansion of individual retirement accounts (in place of defined-benefit plans) has exacerbated.

Any progressive reform should be very careful of falling into the trap of adding to the illusion that any of us can be secure in retirement without the whole economy, and each person in it, being also secure. Second, and more importantly, the proposal suggests that assets be invested in financial markets, but with minimum returns (3% real return) guaranteed by the federal government.

I don’t intend to respond here to the more obvious problem with this suggestion: that recessions or even long-term falling rates of return could create fiscal dilemmas for administrators and political dilemmas for the national government. What I want to argue is (1) that progressive reforms should never advocate that public savings be used for speculative private purposes, such as investing in stock and financial markets, and (2) that the traditional rules of fiduciary responsibility for investment would prevent what should be social control of the public’s savings.

While we might advocate that public monies be invested in private companies in ways that benefit the public, there is no way to assure that such priorities could or would be implemented by plan trustees. The proper form for investment is U.S. Treasury securities. As with current Social Security, then, individuals’ retirement security would be as strong (or as weak) as the nation, but not dependent on the vagaries of private markets.

WHERE DOES THIS LEAD US?

Why do we all stick with the assumptions of the “three-legged stool"--the long-held notion that retirement income must depend on Social Security, a private pension, and individual savings? Why should secure retirement be linked to employers—even with portability—at all? Defined-benefit pensions, like employer-provided health insurance, arose in an era when workers had strong bargaining power and employment was generally considered a long-term relationship.

For unions, these were (and, to some extent, are still seen as) organizing tools: “Unionize and you can get these benefits!” But the contradictions of weakened employment relationships and weaker bargaining power have turned these privately provided benefits into albatrosses, on both employers and unions. Firms are weakened in international competition against those in other advanced industrial nations, nations in which such benefits are part of the social wage. And unions are unable to gain better wages or working conditions (let alone address issues of power at work) when they must invest all their bargaining leverage into maintaining health and retirement benefits.

So why not just expand Social Security so it represents adequate savings for everyone’s retirement! Ghilarducci notes that the U.S. Social Security system was never designed to provide all the income that retirees need, and is less generous than those in most other advanced industrial countries…And while it remains by far the largest source of retirement income for most Americans, replacement rates (the percentage of a worker's on-the-job income that Social Security provides) are falling as the Social Security full-benefit age is pushed up, at the same time that Medicare premiums are rising.

But there is no more reason to assume that these limitations are permanent than that we could implement GRAs! Throughout the GRA proposal, Ghilarducci uses the Social Security system as both a model and as a practical base for the new benefit (proposing, for example, that the accounts be managed by the Social Security Administration, and that retirement age be tied to the Social Security retirement age).

Here is her response to the question "why not just expand Social Security?" (emphasis added):

"If subsidies for 401(k)-style plans and IRAs can be reallocated to Guaranteed Retirement Accounts, why not use this money to shore up and expand Social Security?
"This is certainly an option. Social Security is the cornerstone of our retirement system, and will continue to be the most important source of retirement income for the majority of retired Americans.

"Moreover, estimates by the Social Security trustees and the Congressional Budget Office predict that the Social Security trust fund will be solvent until 2040 (trustees) or 2052 (CBO), even if Congress does nothing.

"These estimates are based on pessimistic assumptions, including economic growth projections below current and historical levels. Nevertheless, for political and practical reasons, we cannot ignore the possibility that a relatively modest shortfall will eventually emerge that will need to be dealt with. Meanwhile, the forecast for Medicare is genuinely bleak in the absence of major health care reform.

"In contrast, the appeal of GRAs is that they are fully pre-funded and annuities are adjusted to take into account changing life-spans. This means the system will never need to be bailed out because of demographic factors, though the government does incur some financial risk.

"Admittedly, the benefit structure is not as progressive as that of Social Security, which provides more generous disability benefits as well as a higher replacement ratio for low-income workers (the progressivity of the Guaranteed Retirement Account plan comes, rather, from the funding side). However, they are a realistic, affordable supplement to Social Security that will provide an adequate and secure retirement for most workers."

In other words, the only reason to even consider GRAs is that there are problems with Social Security as it is currently structured. Were Social Security reformed to be adequately financed and to provide sufficient income to retirees, there would be no need for such a plan. And while some parts of the GRA proposal deserve attention (such as compensating credits for low-income workers and broader annuity rights for survivors), there is no logical barrier to adding these to a reform of Social Security.

Is expanding Social Security off the political agenda? Clearly at the present political moment there are other priorities for progressives. But the struggle around health care reform is very instructive, so let me comment on the political lessons from that effort.

Even though polls showed that a majority of Americans favor “Medicare for all,” and even though such a plan would solve the cost issues facing other proposed reforms, President Obama and congressional leaders have refused to advocate for such a plan, ostensibly because they believe it could not pass. The result of this hedging is that even the next-best plan may not even pass, and—if it passes—may not result in any real change.

So those of us who believe that Social Security should be expanded and strengthened (and we can discuss the details of that in some other context; the most obvious is removal of the cap on the FICA tax) need to be careful about advocating for any lesser goal. When compromise is needed or anticipated, one had better start from one’s true goal (or something even more radical), not from an already second-best position.

I urge the Retirement USA coalition partners to reconsider their focus. Shore up and expand the plan that is already working, that most Americans understand and are comfortable with, that has the most collectivity, and that uses its savings to provide working capital to the commonwealth we call the United States: Social Security.

[Brent Kramer is a long-time labor activist and an economist.]