Posts Tagged ‘Social Security’

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FellP20171201_low  Can't we all just get along?

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Social Security may have decreased the rate of poverty among retirees in the United States.* But it certainly hasn’t solved the problem of inequality.

As is clear from the chart above, from a recent report from the Organisation for Economic Co-operation and Development, old-age inequality among current retirees in the United States is higher than in all other OECD countries, except Chile and Mexico.

But wait, it’s probably going to get worse. That’s because, within each generation of workers, inequality has been rising. For example, researchers tracked U.S. income inequality for four different generations—people born in 1920, 1940, 1960, and 1980. For each group, inequality has been more extreme than the previous generation.

The inequalities among people of working age are a primary reason for inequalities among older Americans. That’s because, with highly unequal current incomes, only households at the top are able to accumulate adequate retirement savings. Everyone else is forced to have the freedom to rely on Social Security payments.

But that’s not the only reason for rising retirement inequality. Ill health is another critical source of difference. It can cause problems at work and trigger the loss of earnings, and of course work can also damage people’s health. As the authors of the report note,

Americans are far more unhealthy than their peers in a number of other countries and people from low socio-economic backgrounds are particularly affected by bad health.

And if ill health follows workers into old age or strikes them after retirement, they will need some kind of long-term care—but the social support for such care is much lower in the United States than in other countries.

Someone with median income receiving home care for moderate needs in the some US states may have as little as 6% of the cost of their care paid by the social protection system. This compares to about 45% in the Czech Republic and Israel and almost 100% in Sweden, Iceland and the Netherlands.

As the authors of the report observe, “ageing unequally starts early and builds up from childhood to old age.” This is no more so than in the United States where severe and growing inequalities in different dimensions—such as education, health, employment, earnings, and wealth—reinforce each and grow over the course of people’s lives.

What we’re seeing, then, is high levels of inequality among older Americans. And, given current trends, it’s only going to get worse for future generations.

 

*But the poverty rate among Americans older than 65 years is still high, at almost 20 percent, and the depth of poverty—the amount by which the average income of poor older people falls below the poverty line—is greater than 30 percent. And, just as worrisome, the poverty risk appears to be shifting from the old to the young. For example, while poverty rates for the elderly have fallen since the mid-1980s (by 2.5 percentage points for Americans 66 to 75 years), they’ve increased for younger workers (by 4 percentage points for those 18 to 25 years).

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I find myself thinking more these days about the fairness of Social Security and other government retirement benefits.

One reason, of course, is because I’m getting close to retirement age—and, as I discover each time I raise the issue with students, young people don’t think about it much.* Another reason is because Social Security (in addition to Medicare, Disability, and other programs) is the way the United States creates a collective bond between current and former workers, by using a portion of the surplus produced by current workers to provide a safety net for workers who have retired.

That represents a kind of social fairness—that people who have spent a large portion of their lives working (most people need 40 credits, based on years of work and earnings, to qualify for full Social Security benefits) are eligible for government retirement benefits provided by current workers. Another aspect of that fairness is the system should and does redistribute from those with high lifetime incomes to those with lower lifetime incomes. While that makes the actual “rates of return” unequal across groups, it’s designed to provide a floor for the poorest workers in society.

Many people consider the U.S. Social Security system fair on those two grounds. That’s true even though some people, by random draw, may live longer than others. However, as Alan J. Auerbach et al. (pdf [ht: lw]) report, that fairness may be put into question if there are identifiable groups that vary in life expectancy, “as this introduces a non-random aspect to the inequality.”

Here’s the problem: retirement benefits in the United States are increasingly unequally distributed on a non-random basis. As I’ve written about many different times (e.g., here, here, and here), there’s a gap in life expectancies between those at the bottom and top of the distribution of income. And the gap has been growing over time.

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That result is confirmed by Alan J. Auerbach et al.: for the male birth cohort of 1930, life expectancy at age 50 rises from 26.6 to 31.7—a difference of 5.1 years. For the 1960 cohort, the lowest quintile has a slightly lower life expectancy than the 1930 cohort but then rises a level of 12.7 years higher for the top quintile, “indicating a very large increase in the dispersion.”

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Not surprisingly (since benefits rise with earnings), Social Security benefits also rise with income quintiles. Thus, for example, for men in the 1930 cohort, workers in the lowest quintile can expect to receive, on average, $126 thousand in benefits over the rest of their lives (discounted to age 50), while workers in the top quintile can expect to receive $229 thousand, or 82 percent more than the lowest income workers.

What is particularly troubling is how the results change when we move to the 1960 cohort. The additional 6-8 years of life expectancy for the top three quintiles lead to large increases in expected Social Security benefits, with benefits for the top quintile reaching $295 thousand. The difference between the highest and lowest quintiles is then expected to be $173 thousand, or 142 percent of the lowest income workers’ benefit.

According to the authors of the study,

These results suggest that Social Security is becoming significantly less progressive over time due to the widening gap in life expectancy.

Not only does the growing gap in life expectancies undermine the basic fairness of the Social Security system. It calls into question capitalism itself.

 

*For understandable reasons. I certainly didn’t think about retirement at that age. (I barely thought about getting a job. I just presumed I would—and would be able to—at some point.) However, when students are induced to do think about retirement, as I’ve written before, most take it for granted that Social Security is doomed. While they expect to pay into Social Security, they don’t expect to receive any Social Security benefits when they retire. Then, of course, I explain to them that making only one change—raising the taxable earnings base—would eliminate the projected deficit and keep Social Security solvent forever.

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Posted: 27 February 2017 in Uncategorized
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Setting aside enough of the surplus to support workers who have retired is one of the basic tasks any society faces.

Clearly, the United States is failing at that one simple task.

Yes, Americans do have Social Security. But, at an average monthly payment of $1,360 in 2017, it’s obviously not enough.

That’s why American workers are forced to have the freedom to come up with their own savings for retirement. And most are finding it difficult, if not impossible.

Overall, only one-third of American workers are saving anything in a workplace retirement account.

One reason is because, according to a recent study, only 2 out of 5 employees with access to 401(k)s and other defined-contribution retirement saving plans are actually using them. They simply aren’t being paid enough to buy what they need for themselves and their families and, at the same time, to put away money for retirement.

It’s no coincidence that the Census analysis found Americans with higher incomes were more likely to be socking money away for their old age. That dovetails with other data, such as the Federal Reserve’s annual survey on household finances, which found that almost 9 out of 10 Americans with more than $100,000 in annual income have a 401(k), compared with just four out of 10 earning less than $40,000.

The other reason is only 14 percent of companies actually offer these types of retirement plans, far lower than previous estimates.

The low percentage of employers that offer 401(k)s was especially noteworthy, [retirement specialist Arielle] O’Shea said, since previous estimates pegged the number at about 40 percent. “That is a significant problem,” she said.

Yes, indeed, that is a problem. Fourteen percent instead of 40 percent.*

The combined effect is that two-thirds of American workers are simply unable to save enough to fund their own retirements. They will have spent most of their lives working—and then they will struggle to stop working and enjoy their retirement.

Contrary to the advice of countless retirement specialists and politicians, who exhort American workers to tighten their belts and increase their savings, they’re not the ones who have failed. It’s a system that keeps workers’ pay in check and yet relies on their finding a way to accumulate individual savings—it’s that system that has failed American workers.

As I see it, the system that relies on individual decisions to save for retirement can’t be saved. Instead, it should be retired. And then replaced by the obvious alternative: transferring a portion of the growing surplus to workers when they retire. Such a system would be able to provide more generous benefits, starting at an earlier age—exactly what is need right now.

We can even give that system a name. Let’s call it Social Security 2.0.

 

*Now, it’s true, larger employers are more likely to offer 401(k)-style plans than smaller ones. So, 79 percent of Americans do in fact work at places that sponsor retirement plans. The problem is just 41 percent of those workers are making contributions to such a plan—more than 20 points lower than previous estimates.

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