The Real Retirement Crisis

“The lifespan of any civilization can be measured by the respect and care that is given to its elderly citizens, and those societies which treat their elderly with contempt have the seeds of their own destruction within them.”

—Arnold J. Toynbee

The astounding, and potentially tragic, aspect of Washington’s three-plus-decade Social Security debate is that it carries on with little regard to the challenges facing the program’s participants. Politicians on the right and center-right feel free to decry resistance to even “modest cuts” in Social Security benefits while ignoring the vulnerability of seniors who are living the effects of reductions already mandated in the program’s last major overhaul, in 1983.

But the situation for seniors – and future retirees – is becoming alarming. A new, supplemental poverty measure introduced by the Census Bureau last November nearly doubled the official estimate of Americans over 65 living in poverty, to 15.9%, mainly due to medical costs not counted in the official numbers. More than 34% were either poor or near-poor—defined as having family income less than twice the poverty line. Half of all retirement-age persons who were no longer working—that is, who were receiving Social Security—had total yearly income of less than $16,140—only a fraction more than the federal minimum wage.

Even small reductions in benefits, or slower growth over a period of years, could tip many of these people into poverty. Countless others, who once believed their personal savings, 401(k)s, employer-sponsored pensions, or the equity in their homes made their retirements secure, are finding out that this isn’t the case either. Meanwhile, the White House, Republicans, and centrist Democrats are reportedly negotiating a Grand Bargain built on the deficit-cutting Bowles-Simpson proposals, which would include deep reductions to Social Security. And state and local governments are scrounging for ways to cut back the rest of the safety net for seniors—targeting Medicaid funds for nursing homes and home health care, housing subsidies, and other benefits.

A true retirement crisis is looming in the U.S., but politicians, obsessed with Social Security projections decades into the future, are disinclined to address it. Financially vulnerable older workers will be affected almost as soon as they retire; workers in their 20s, 30s, and 40s today will be hit much harder.

The Social Security “deficit”—the amount by which annual old-age and Disability Insurance benefits are expected to exceed revenues—was projected in 2011 to total about $6.5 trillion over the next 75 years. But for all the political attention focused on it, the economic impact of that shortfall will be quite moderate, equaling just .7% of GDP. Even the Baby Boom retirement wave wouldn’t make a very big dent in the economy, according to the Social Security trustees, whose 2011 Annual Report estimated that the annual cost of benefits will rise gradually to 6.2% of GDP by 2035, decline to about 6% by 2050, then stabilize at about that level.

By contrast, the U.S. faces a “retirement income deficit” of $6.6 trillion—larger than Social Security’s projected 75-year shortfall and five times the size of the current-year federal deficit. The Retirement Income Deficit is a new measure unveiled in fall 2010 by the Center for Retirement Research at Boston College. It lumps together all the resources that Americans in their peak earning years will have to retire on: Social Security and pension benefits, retirement savings, home equity, and other assets. It calculates the income people will need in retirement, based on tax scenarios as well as the income replacement targets that Americans at different income levels will likely need to meet.

Social Security and Medicare are perhaps the only ingredients in the Retirement Income Deficit calculation that the elderly can still rely upon. Nearly two-thirds depend on Social Security for more than half their income, and roughly one in five for all of it. Without Social Security, nearly half of Americans over 65 would be living in poverty. If anything, dependence on Social Security has increasing since the latest economic slump, thanks to the collapsed housing market, the recession, decades of stagnating wages, and the disintegration of other elements of the social safety net, among other factors.

Not that it’s a lot to lean on. Social Security only replaces 37% of the average worker’s pre-retirement income at 65. More than 95% of recipients get less than $2,000 a month from the program. Women average less than $12,000 a year in benefits, compared to $14,000 for retirees overall, thanks to the gender pay gap—partially explaining why 75% of old people living in poverty in the U.S. are women. While this seems to merit little discussion in deficit-obsessed Washington or on Wall Street, it draws an alarming picture for anyone familiar with what’s happening in the rest of the country, where a Gallup poll found 90% of people aged 44 to 75 agreeing that the country faces a retirement crisis.

Even before the economic slump, however, there were reasons to worry about the erosion of Social Security.

First was the age at which retirees can begin collecting full benefits—which, under the 1983 changes, is scheduled to rise gradually from 65 to 67 for those born in 1938 or later. Second are the premiums for Medicare Parts B and D, which the government deducts straight from recipients’ Social Security checks, and are expected to go up sharply. Third, seniors with moderate incomes can expect the tax rate on their Social Security payments to rise because the ceilings built into the tax code aren’t inflation-indexed.

The fourth and perhaps largest problem is wage stagnation. Rising wages alone don’t ensure Social Security’s solvency. While higher wages boost payroll taxes, they also raise benefits. But the fact remains that Social Security can’t pay benefits without an adequate revenue stream to cover benefits over time.

Wage stagnation has been depressing payroll taxes for many years—real hourly wages in 2010 were at about 1974 levels—and the economic crisis exacerbates the problem. Payroll tax revenues declined by 1.13-percentage-points of payroll in 2010—more than $60 billion—from what the trustees projected in 2009, “due to a deeper recession and slower recovery than had been expected.”

Unless Americans get a raise, their prospects—and Social Security’s—will only worsen, because other resources that working people once thought would carry them through retirement—and thus relieve the pressure on Social Security—are disappearing.

The crisis is approaching fastest for older workers. A poll of Americans aged 47 to 65, by the Associated Press and, found that almost three-quarters expect to work after reaching retirement age. Getting work won’t be easy, however. Labor Department statistics show that 17.4% of Americans nearing retirement—those between 55 and 65—either are unemployed or have been looking for work so long that they have given up. More than 60% of those over 50, in a Rutgers University survey, say they don’t expect to hold another full-time position in their field.

The nature of programs for the elderly, meanwhile, is changing. Far from easing into retirement, nearly half of all workers aged 58 and older hold physically demanding jobs that put them at risk of becoming disabled. Disability Insurance has become a sort of early-early retirement plan for some workers, although a stingy one—it pays an average of only $1,064 a month. The ranks of “disability retirees” are bound to grow, too, swelled by the aging baby boomers.

One of their biggest budgets worries will be health care. Medicare co-pays only cover between 20% and 45% of the cost of many outpatient treatment programs and services. The average cost of a private room in a nursing home tops $75,000 a year, and government doesn’t provide assistance unless the patient is financially tapped out. Medigap insurance policies help, but the premiums run $150 to $250 a month per person, and many insurance companies are getting out of covering long-term care. It was welcome news last October when Social Security announced that seniors would be getting their first cost-of-living raises in two years in 2012—a healthy boost of 3.6%. For retirees who were lower-income earners, however, Medicare Part B premiums will slice about 43% off the increase, deducted before their Social Security checks are even printed.

Yet, according to the Center for Retirement Research, some two-thirds of Americans are expected to require long-term care at some point during their retirement, whether at home or in nursing facilities. One study projects that spending on long-term care for the elderly will triple by 2040. Alzheimer’s Disease is increasing among the very old. Medicare itself remains largely a reactive system, however, emphasizing acute in-patient care over preventive care. ObamaCare includes money for some promising projects that focus care on the small number of patients—including many of the elderly—who drive the rise in health care spending. But Republicans are determined to wipe these out along with the rest of the law.

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While the right and center-right beaver away at schemes to cut supports for seniors and their families, a few voices are trying to raise awareness of the retirement crisis.

The Commission to Modernize Social Security, a coalition that includes labor-funded groups as well as ethnic advocates like the National Council of La Raza and the National Asian Pacific Center on Aging, released a report last October calling on Congress to update Social Security to fit the profile of what will soon be a “majority-minority” U.S. population, much of it low-income. The commission’s “Plan for a New Future” includes eliminating the cap on income subject to payroll tax and making the Social Security benefit formula less generous for high earners. With the savings, the commission proposes four ideas for benefits improvement:

*  Updating Social Security’s special minimum benefit to 12% of the poverty level, to help people who worked largely in low paying jobs;

*   Reversing the Reagan-era cancellation of survivors’ benefits for students through age 22;

*   Increasing benefits for low-income widowed spouses; and

*   Providing benefits for unpaid caregivers.

In the Senate, Vermont’s Bernie Sanders is promoting an amendment to the Older Americans Act that would increase funding for programs that directly benefit the elderly, including meals programs, senior centers, and services to help them find employment. Significantly, Sanders’s bill would change the stated objective of the original, 1965 legislation from providing the elderly with “an adequate income in retirement in accordance with the American standard of living” to “economic security in later life in accordance with….” Another Senate bill, introduced by Democrats Sherrod Brown of Ohio and Barbara Mikulski of Maryland, would change the formula used to calculate Social Security benefits to better reflect expenses the elderly face.

What makes all these proposals – incremental as they may be – so starkly different is that they accept the reality that the U.S., like other industrialized economies, is aging. No magic-bullet solution, like converting Social Security into personal investment accounts, is going to allow society to avoid addressing this change collectively – unless the elites prefer to let a much larger percentage of elderly working people sink into poverty. Instead, society will have to figure out collectively how best to adjust its policies on housing, health care, and many other vital needs to the fact of an aging population. Arguably, more money can be saved by finding better ways to prevent and treat Alzheimer’s than by shoehorning seniors and their families into a consumer-empowered system of health care buying.

But that would require investing in old age—for instance, by increasing funding for research at the National Institute on Aging. The preference in Washington is simply to cut spending on the aged and transfer the cost to families and city- and county-level poor relief programs – just where it was lodged 77 years ago, before Social Security existed. The four ideas that the Commission to Modernize Social Security advanced have all been circulating for years; several were in Al Gore’s 2000 presidential platform. None has ever enjoyed serious consideration on Capitol Hill.

Yet, the need for Social Security and other social protections keeps growing. In 1980, according to the Census Bureau, 30% of American households received Social Security, subsidized housing, unemployment insurance, or other government benefits. In third-quarter 2008, the figure was 44%. In 2010, a record 18.3% of total personal income in the U.S. consisted of payments from these programs—up from a fairly stable 12.5% from 1980 to 2000. The title of an article in the Wall Street Journal covering this trend, indicates the attitude of most members of the policymaking elite: “Obstacle to Deficit Cutting: A Nation on Entitlements.” But one reason the public remain loyal to Social Security is their quite realistic assessment that they can’t get its modest but essential benefits anywhere else.

It would cost a 66-year-old male $128,000 to purchase an annuity providing $10,000 a year for life, according to one estimate; a woman the same age would have to pay some $138,000. An annuity paying out $40,000 a year—a more realistic income requirement for most people—would cost about $550,000. A survey by the Employee Benefit Research Institute found that less than half of workers had $25,000 in savings, while only one-third had saved $50,000 or more. Most life insurance companies don’t offer inflation-protected annuities—essential for retirees expecting to live a long time—and those that do, charge more.

What would happen if a proposal similar to Bowles-Simpson—the gold standard of the center-right—was enacted? Contrary to its sponsors’ assertions, older workers would be affected very quickly by the stingier benefits formula. But most of the impact would be felt by workers who retire beginning in the 2020s. Gradually eroding benefits would force retirees to rely more on SSI and disability insurance and other forms of relief from state and local governments. Costs would go up for those governments. They, in turn, would move to cut costs. End result: a growing burden on retirees, their families and communities, and on non-profit relief organizations.

The media don’t ignore, exactly, the plight of the elderly, the ways in which the system of public support that did so much to lift them out of poverty in the pre-Reagan decades is now failing them, and the refusal of Washington and the private sector to prepare for their needs in coming years. Articles and features appear fairly often in major publications and on TV, radio, and the Internet.

But the corporate media almost never link the mounting problems facing the aged to the ongoing effort to slash Social Security, Medicare, and Medicaid. Even coverage of the 2011 and 2012 Republican House budget resolutions focused almost entirely on how deeply they would cut spending and the deficit, largely ignoring their impact on seniors and other at-risk groups. Since the major media tend to reflect the thinking of center-right Washington, this isn’t unexpected.

This obliviousness explains why one of the fundamental concepts behind Social Security seldom makes it into the public discourse, and when it does, only to be dismissed. When mutual aid was translated into State-administered social insurance programs in Europe and – during the New Deal – in the U.S., it passed on the understanding that each generation owes a debt to the ones that came before—a debt it pays through, among other things, old-age pensions.

In place of this idea, Social Security’s critics are attempting to implant the notion that each generation should begin and end with a clean balance sheet—that virtually any intergenerational “debt” is somehow unfair. This is an impossibility—or at least, a utopian vision that has never existed on earth. To journalists whose public-policy school is Capitol Hill and the think tank community, however, it sounds at least plausible—and more hard-headed than the idea of mutual aid. That’s why pundits like the New York Times’ David Brooks can reflexively describe “entitlements” as “fundamentally diseased” and dismiss politicians who balk at cutting them as “too ideologically rigid.”

The tragedy of the three-decade debate over Social Security’s future solvency isn’t just that it’s frozen the program in place, rendering any effort to update and improve benefits nearly impossible, but that it’s desensitized the business and policymaking elite as well as the punditocracy to the needs of the very people Social Security was created to serve. Washington, both knowingly and unknowingly, is running away from the real retirement crisis, preferring to focus on a fiscal future that may be an illusion.

This essay is adapted from Eric Laursen’s new book The People’s Pension: the Struggle to Defend Social Security Since Reagan.

Eric Laursen is an independent financial and political journalist. He is the co-author of Understanding the Crash. His latest book is The People’s Pension: the Struggle to Defend Social Security Since Reagan.

Eric Laursen is the author of Polymath: The Life and Professions of Dr. Alex Comfort, Author of “The Joy of Sex” (AK Press).