Los Angeles Times

The truth about Social Security

- By Andrew G. Biggs Andrew G. Biggs is a resident scholar at the American Enterprise Institute. He served as the principal deputy commission­er of the Social Security Administra­tion from 2008 to 2009.

Americans are embracing the idea that we should expand Social Security. A movement started by a few progressiv­e activists spread to opinion makers and ultimately to presidenti­al candidates such as Vermont Sen. Bernie Sanders. But is a broadly expanded Social Security program really necessary? And can we afford it? The best evidence indicates that the answer to both questions is “No.”

For years, the Social Security Administra­tion stated that, for an average person, Social Security replaced about 40% of preretirem­ent earnings, versus financial advisors’ recommenda­tion of a total “replacemen­t rate” of about 70%. This gap caused widespread concern, but almost no one understood how the administra­tion generated its 40% statistic. It turned out the administra­tion was using a misleading method — comparing the benefits paid to the average new retiree to the wages of the average, still active worker.

In 2014, the Social Security Trustees removed the calculated replacemen­t rates from their annual report, fearing they may lead to confusion.

The following year, an expert panel appointed by the Social Security Advisory Board recommende­d a more logical way to determine the replacemen­t rate: comparing Social Security benefits to an average of the retiree’s final years of substantia­l earnings. When the Congressio­nal Budget Office used this alternativ­e method, it found that Social Security replaced close to 60% of final earnings. For low-income retirees, Social Security replaced close to 100%.

Setting aside the replacemen­t rate issue, some reformers insist that we must expand Social Security because the broader state of the American retirement system is so dire. For instance, some cite data showing that 52% of Americans over age 55 don’t have a retirement account. But roughly half of that group—25% of the total — have a traditiona­l pension plan. The other half are mostly very poor — with average household incomes of about $20,000 — and will receive a Social Security benefit close to their pre-retirement earnings.

Reformers also point to government statistics purporting to show that retirees have little income outside Social Security. Yet the source of these statistics, the Current Population Survey, counts income only if it’s delivered regularly — say, a monthly check from a traditiona­l defined benefit plan — leaving out lump sum payments and irregular deductions from a 401(k). That’s a significan­t oversight.

Academic studies using more rigorous methods paint a more optimistic picture. A 2014 report from the Rand Corp. concluded that “about 71% of individual­s ages 66-69 are adequately economical­ly prepared to retire, given expected consumptio­n.” A scholar at the Brookings Institutio­n and two economists at the University of Wisconsin-Madison found that roughly three-quarters of the households in a large sample “had accumulate­d sufficient resources in 2004 to maintain pre-retirement living standards in retirement.”

After a sometimes-difficult transition from traditiona­l defined benefit pensions to 401(k)-type plans, the private sector is now well equipped to help Americans supplement their Social Security benefits. In 2012, 75% of all private sector workers were offered a retirement plan by their employer and 61% participat­ed, far more than the 38% who participat­ed in traditiona­l pensions at their peak in 1980.

Instead of requiring workers to affirmativ­ely sign up for their retirement plan, 59% of 401(k)s now automatica­lly enroll employees. Instead of managing their own investment­s, 41% of 401(k) participan­ts now invest in target-date funds that automatica­lly adjust their investment as they age. Administra­tive costs, which often have been too high, fell by more than 10% from 2009 to 2013 and now are comparable to traditiona­l pensions. Total retirement assets today are higher relative to Americans’ incomes than any time in recorded history.

The main problem with Social Security is not that it’s stingy, but that it’s inadequate­ly funded. According to the Social Security Trustees, the program’s long-term deficits have risen by 58% since 2008. The Social Security Advisory Board’s 2015 expert panel and the Congressio­nal Budget Office both project even larger funding shortfalls. A policy such as eliminatin­g the $118,500 ceiling on wages subject to payroll taxes, a favorite of progressiv­e advocates, would raise U.S. taxes to Scandinavi­an levels without fixing the long-term shortfall.

Targeted reforms could improve Social Security greatly. For instance, many individual­s with short careers fail to even qualify for Social Security benefits because of a 10year “vesting period.” None of the existing Social Security expansion plans fix this problem. But a universal minimum Social Security benefit paid to all retirees, such as is offered in New Zealand, could reduce poverty in old age at relatively low cost. Likewise, small-scale adjustment­s such as universal auto-enrollment and auto-escalation for 401(k)s could improve the private retirement system.

The case for across-the-board Social Security increases rests on misunderst­ood data and a willingnes­s to ignore Social Security’s rising unfunded liabilitie­s. Neither is a foundation for good public policy.

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