Security You Can Bank On
As Social Security prepares for Baby Boom retirees, some adjustments are needed. The questions facing us: How much? Who will benefit? Who will lose?
WASHINGTON, D.C.
Social Security is the most efficient and effective arm of America’s economic safety net. It has not missed a pay day in 60 years.
Not just a retirement system, Social Security is a family protection plan with benefits that cover all generations. In addition to basic retirement income, the system provides benefits to disabled workers and their families and to the family survivors of workers who have died.
Social Security needs some adjustments, but it is not facing bankruptcy, as some have suggested. The system has always engaged in long-term planning. Because of this, it is fully funded until 2032, when there will still be enough money to cover 75 percent of expenses.
Two-thirds of retirees depend on Social Security for half or more of their income. But the system was never meant to be a stand-alone retirement system. It has been described as one leg of a three-legged stool. The other two legs are personal savings and a pension.
PRIVATE ACCOUNTS. As options for safeguarding the system are discussed, one seems to be receiving most of the attention: privatizing the system. Most of the proposed privatization plans would give covered workers private accounts that they would use to invest part or all of their Social Security contributions. The return on these investments would determine their Social Security benefits.
Brookings Institution economists Henry Aaron and Robert Reischauer point out two major risks of privatization. Operational costs would be very expensive; it could cost as much as 6 to 20 percent of each worker’s annual contributions to have the funds managed by private brokers. Administering the current program costs about 1 percent of total benefits paid out per year.
Aaron and Reischauer also note that most people know little about financial markets and investing, a particular concern when one’s retirement base is at stake.
In his January State of the Union address, President Bill Clinton offered a program that responds to concerns about keeping the current Social Security system intact and propping up the second leg of a sound retirement program — personal savings.
Clinton’s recommendations include investing 62 percent of projected budget surpluses over the next 15 years — $2.8 trillion — to build Social Security’s cash reserves. Clinton also proposed to invest 15 percent of the cash reserves in the stock market. The two moves combined would fully fund the system through 2055.
In addition, Clinton would establish Universal Savings Accounts — similar to 401(k) plans — to which workers could contribute voluntarily. Workers would have their choice of stock and bond funds, and the government would match some part of the contribution. The start-up costs and the matching funds would come from the budget surplus and would not deplete the Social Security Trust Fund.
KEEP ’EM WORKING. Many plans to change Social Security recommend extending the retirement eligibility age to 70 or beyond. Americans are living longer and healthier lives, say those who offer this idea. And they are right. But they don’t consider workers whose jobs are physically challenging and dangerous. It’s hard to imagine most 70-year-olds operating jack hammers or collecting trash.
Many Americans don’t know that plans are already in effect to gradually extend Social Security’s eligibility age to 67 between 2003 and 2027.
Other recommendations include: reducing guaranteed benefits, cutting cost-of-living adjustments that help Social Security keep up with inflation, and weakening insurance protection for disabled workers and survivors of deceased workers. While these changes would affect all workers, low-income workers would suffer disproportionately. One adjustment that would only hit higher-wage workers is raising the earnings cap: Currently, workers pay Social Security tax on earnings up to $72,600 a year. Raising this earnings cap would bring more income into the Social Security Trust Fund.
PUBLIC PENSION CONCERN. There is one idea that could affect many AFSCME members: mandatory coverage for all future state and local government employees. When Social Security was established, states and other public entities were excluded from participation.
Today, about 25 percent of AFSCME members are not covered by Social Security. Most of them work in the following states, cities and counties: Ohio, Massachusetts, Louisiana, California, Illinois, Nevada, Alaska, Maine, the city of Chicago and Cook County in Illinois, Los Angeles city and county in California, the city of Minneapolis in Minnesota, and a scattering of other public jurisdictions.
Over the years, jurisdictions that did not join Social Security developed pension plans that make up for the benefits workers would have received under the national system. Many are comprehensive plans funded by contributions of up to 9 percent of pay from employees and an average of about 14 percent from employers.
If mandatory coverage were extended to these public entities, new hires and employers would each face an additional 6.2 percent tax on wages. Faced with this mandate, public employers would have to look at ways to reduce their costs.
In the restructuring that would follow, new retirement tiers would be developed providing lower benefits for future retirees; and privatizers would seize the opportunity to sell risky “defined contribution” plans (personal investment accounts) to replace the dependable “defined benefit” plans now in effect.
Restructuring would financially destabilize pension plans for current participants, even if they were allowed to retain their current coverage. If new hires were placed into separate plans, new funding to existing plans would be cut off. This would reduce plan assets and threaten benefits.
By Susan Ellen Holleran
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