Tunnel Vision Jeopardizes Program

Posted December 5, 2003 at 11:53am

A secure retirement is part of the American dream for every family. After a lifetime of hard work, seniors look forward to spending their golden years free from economic anxiety and hardship. Social Security remains the bedrock of that security. Prior to its enactment in 1935, half of America’s seniors lived in poverty. Today, only 10 percent of those over 65 live below the poverty line.

But Social Security was never intended to be the sole source of retirement income for seniors. On average, it replaces from 41 percent to 47 percent of a worker’s pre-retirement income, while research shows that 80 percent is necessary to maintain a similar standard of

living in retirement. That’s why it makes sense to think about retirement as a “three-legged stool” comprised of Social Security, personal savings and an employer-sponsored pension.

Although we tend to think of the first leg, Social Security, as a retirement plan, it is actually a comprehensive insurance program: life insurance in the form of survivor’s benefits, disability insurance for workers and their families, and finally, insurance against poverty in old age. There is no question that the program has been extraordinarily successful over the years. One of the reasons for its success is that the retirement component of Social Security guarantees seniors an inflation-protected annuity that they cannot outlive. This first leg of the stool is the most critical and most successful. With proper maintenance it will remain so long into the future.

But the other two legs — personal savings and company pensions — have been weakened to the point of crisis. Current incentives have not succeeded in increasing the rate at which America’s families save. In fact, in 2002 the personal savings rate was just 3.9 percent, down from 10.6 percent only two decades ago. Critical measures of retirement savings show that on average, near retirees have saved only one-third of what they will need to maintain their pre-retirement standard of living. In addition, much of near retirees’ savings is held as home equity, making it an inaccessible source of income for the daily costs of living.

Workers cannot count on employer-sponsored pension plans to make up the difference. Today, only about half of all private-sector workers are covered by an employer-sponsored retirement plan, and this rate varies widely among different groups of workers. Significantly lower rates of pension coverage exist among part-time workers, women and minorities, and fewer than one in five low-wage workers receive a pension. Not surprisingly, these are the very same people who rely most heavily on Social Security for their retirement income.

[IMGCAP(1)] Inadequate pension coverage is only part of the problem. Workers have seen a significant shift in the type of pension benefits offered, from traditional defined benefit pension plans to defined contribution programs. In fact, over the past 25 years, the number of defined contribution plans has tripled while the number of defined benefit plans fell by almost half. Operated by the employer, defined benefit plans promise a lifetime stream of income, and are largely guaranteed by the federal government. In contrast, defined contribution plans, such as 401(k) plans, are similar to savings accounts where the employee, employer or both contribute. Unlike Social Security and traditional pensions, defined contribution plans place investment risk squarely on the employee, leaving their retirement income to the ups and downs of the market, the timing of their retirement, and their individual investment skill.

Even more troubling is the fact that over the past several years the downturn in the market and a string of corporate scandals have resulted in significant losses in workers’ 401(k)s. And now there are indications that those managing these funds are charging excessive fees, further diminishing their value. Clearly, 401(k) plans are no panacea when it comes to retirement security.

Proposals by this administration and Congressional Republicans to privatize Social Security mimic this shift from defined benefit to defined contribution plans. Beyond the significant and immediate benefit cuts and the enormous costs associated with privatization, turning Social Security into another 401(k) would destroy the only guarantee of retirement income seniors currently have. In the current environment of inadequate saving, shrinking pensions and volatile markets, it is paramount that Social Security remain the one leg of the stool that families can count on no matter what. Privatization eliminates this guarantee.

The irony of course is that privatizing Social Security by diverting some portion of a worker’s payroll taxes into private accounts weakens the one leg of the stool that is currently stable while neglecting the legs that require our immediate attention. This tunnel vision places the future of Social Security in jeopardy and detracts from efforts to address the current crises in personal savings and the employer-sponsored pension system.

Achieving economic security for seniors requires a broad vision that takes all three legs of the stool into account. First, we must expand incentives and create new vehicles for workers to save before retiring. Second, we must increase pension coverage and enact sensible reforms to protect workers from pension manipulation, corporate fraud and abuse. Finally, we must preserve and strengthen Social Security as a defined benefit insurance program. To do anything less, would undermine the retirement security our seniors have earned and deserve.

Rep. Robert Matsui (D-Calif.) is ranking member of the Ways and Means subcommittee on Social Security.