During the first Democratic primary debate, Bernie Sanders advocated for Social Security to be expanded to provide greater assistance for seniors, as millions of retirees are struggling to survive on that income alone. While Sanders looks to expand the program to help seniors, Republican presidential contenders like Marco Rubio and Chris Christie support means-testing beneficiaries and gradually raising the retirement age to keep the program intact for future generations by limiting eligibility. The conversation on retirement security is dominated by ideas on how to reform the massive entitlement program, but there is little mentioned in the way of encouraging greater private savings from workers to prepare for retirement.
According to most recent estimates, the Social Security trust fund will be completely depleted by 2034. At $848.5 billion in FY 2014, Social Security is one of the largest entitlement programs – combined with Medicare, the behemoth constituted 42% of federal government expenditures last year. Its depletion presents a major gap in the form of retirement security for millions of workers.
Policy options to improve the program range from increasing payroll taxes, limiting benefits, and even changing program eligibility. While these measures seek to extend the life of the program, they do little to address individual retirement planning. Current incentives exist for individual savings, but these efforts must be revisited to better improve the retirement savings of the most vulnerable within our population. Policymakers can best address the lack of access to retirement savings, which predominantly affects minority and underemployed communities, by pushing for different incentives and options for individual plans.
The Current Gridlock
Social Security is unique because its depletion is the result of both the longevity of retirees that draw more benefits and demographic shifts resulting in a larger influx of retirees entering the program with far fewer workers paying in. Some of the most common policy options for reform that aim at extending the life of the program are met with disdain. For example, opposition to any form of tax increases prevents raising the current payroll tax of 12.4% or raising the maximum taxable income for workers that could help finance more retirees. At the same time, changing the eligibility for receiving entitlements by raising the retirement age or by determining benefits based on means-testing individuals has met fierce opposition. In addition, large constituencies of retirees oppose the elimination of the cost-of-living adjustments (COLAs) and other cuts to monthly benefits. Some other financial suggestions, including investing a portion of the trust fund into stocks would help expand the longevity of the program, but the financial risks associated are unforeseeable and can hinder retirement security.
The solutions presented are not entirely out of the question, and combined, they could actually help stabilize the program’s funding streams.
However, the political feasibility of these suggestions remains minimal, with both sides sticking to their traditional views of maintaining the current program benefits for retirees and refusing to raise taxes on workers. Individuals with their own retirement accounts and savings are much better prepared as they can supplement their retirement income and are less reliant on entitlements.
Challenges for Individual Retirement Savings
Current options for individual savings are taken advantage of by many workers who contribute toward employer-sponsored 401(k)s or IRAs (individual retirement accounts). Incentives for saving are mostly through tax-deductible contributions or tax-deferments, with some employer-sponsored plans even matching their employee contributions.
These individual savings options have existed for decades, but are they helping us save for retirement? Labor Secretary Tom Perez recently noted that nearly $12 trillion has been accumulated in individual retirement savings, but data from his department highlights that just 53% of American workers take part in retirement plans through their jobs. The data shows that employers who are less likely to engage in retirement plans are part-time, small employers, or businesses with lower revenues.
For ways to bring retirement security to minority populations and those who need financial security the most, there are alternative models being proposed. Last year, Marco Rubio proposed giving workers without access to a 401(k) plan the option to enroll in a Thrift Savings Plan (TSP), similar to those available to members of Congress. TSPs allow individuals to invest pre-tax income into savings with the government matching that amount for all but military personnel. The TPS model would benefit a large portion of the population and workforce not eligible for employer-sponsored plans and those earning too little to invest into their own savings account.
At the state level, credit unions have also introduced a lottery-based system that has proven to incentivize savings for middle- and low-income Americans. The “prize-linked savings” (PLS) account was popularized at the state level, where depositors, in lieu of receiving interest on savings, would be entered into a raffle if they did not withdraw funds for a specific period of time. In states like Michigan and Nebraska, this model has proven popular. Legislation passed by Congress in late 2014 has attempted to build on this momentum by offering PLS products at banks and savings and loan associations. This option has led to increased savings because the chance of winning a lottery is a great motivator, and more deposits and contributions to PLS will yield larger returns for winners and secure savings for others.
While the entitlement program has time before depletion, reform must be considered soon to preserve benefits for future generations. As solutions to extend the life of Social Security are explored, reforming our current retirement saving system is the best way to ensure a secure retirement for our workforce. Providing incentives to lower-income or minority populations to start saving now will help supplement entitlement earnings in the future. Prize-linked accounts and TPSs are just two ideas that represent the forward-thinking individual retirement solutions that can help increase access to retirement plans and secure savings for a more stable retirement.
In a GAO report released today, the agency found that shorter life expectancy will actually reduce the projected lifetime benefits for lower-income individuals. “For example, according to studies GAO reviewed, lower-income men approaching retirement live, on average, 3.6 to 12.7 fewer years than higher-income men.” Here is a link to the report, as well as a one-pager (for those who don’t feel psyched about reading a 61-page government report). http://www.gao.gov/products/GAO-16-354