LDN - Business

Column: The dangers of cutting future retirement benefits for the young

[March 01, 2017] By Mark Miller

CHICAGO (Reuters) - President Donald Trump outlined a budget plan this week that steers clear of cuts to Social Security and Medicare. That will not sit well with congressional Republicans and some Trump Cabinet members, who think both programs are pushing the government toward financial collapse and want to shrink them.

Deficit hawks likely will pressure the White House to accept cuts in Social Security and Medicare for future retirees, protecting those already retired or close to it. Their political goal will be to defang public opposition, since younger workers tend not to focus much on retirement when it is several decades away.

But that approach is not going to work. Retirees and their advocacy groups will fiercely resist cutting benefits down the road, because they understand the critical importance of Social Security and Medicare benefits. They also care about the future retirement of their own children. And numerous polls show that the public opposes benefit cuts - a view that is common across all demographic groups and political affiliations.

Politics aside, cutting future benefits would be bad policy. As I noted last week, Medicare’s financial challenges stem from demographics and rising healthcare utilization - not the program itself. (http://reut.rs/2lEyx7o) And while per-enrollee spending is rising as a share of gross domestic product, that growth is somewhat smaller than spending growth in the private health insurance market.

RISING LONGEVITY

Social Security, meanwhile, faces a long-term imbalance in cost and revenue, but the gap is manageable. More importantly, future retirees will need Social Security more, not less, than their parents did.

First, consider that longevity is rising. In 2015, a woman turning 65 could expect, on average, to live to 86.6 years of age, according to the Social Security Administration trustees. That average is expected to increase by more than a year by 2035, and by almost two years in 2045. (Men can expect similar gains.)

Rising longevity often is cited as a reason to cut benefits, but the opposite is true. Savings alone cannot hedge against longevity risk - the uncertain prospect of exhausting resources before the end of life. Simply put, no one can predict their lifespan with accuracy. The only way to guarantee income for those lucky enough to live very long lives is with annuity-style benefits like Social Security and pensions.

But far fewer of today’s younger workers will be covered by pensions than in the past. Today, 57 percent of near-retirement households (age 55-64) that participate in workplace retirement plans are covered by a traditional pension, according to the National Institute on Retirement Security; just 30 percent for age 35-44 are covered.

Social Security already is on track to provide less support to retired Americans than in the past, the result of changes to the program during the last round of reforms in 1983. In 1985, Social Security replaced 40 percent of pre-retirement income; by 2030, the rate will be just 30 percent, according to the Center for Retirement Research at Boston College. The falling replacement ratios stem from the impact of higher retirement ages, rising Medicare premiums and a rising share of benefits subject to income taxes.

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U.S. Social Security card designs over the past several decades are shown in this photo illustration taken in Toronto, Canada on January 7, 2017. REUTERS/Hyungwon Kang

Retirement saving will not close the gaps. The share of workers offered workplace 401(k) plans actually has fallen in recent years, and savings accumulation has not been strong. Just 26 percent of workers said last year that they have managed to save more than $100,000, according to the Employee Benefit Research Institute; 42 percent have saved less than $10,000.

PROTECT AND EXPAND

Meanwhile, the overall cost of building a secure retirement is rising sharply - as measured by the amounts workers need to sock away. Recent research by three top retirement researchers concludes that a low-return outlook - along with the aforementioned rising longevity - will require today’s workers to boost their savings by 40 percent or more to maintain their lifestyles in retirement.

The research comes from David Blanchett, Morningstar’s head of retirement research, and Michael Finke and Wade Pfau, who both teach at the American College of Financial Services. They begin with the assumption that returns will be lower in the future than they have been historically. Noting today’s negative bond returns (net of asset management fees) and inflation, they suggest that today’s workers will need to adjust their plans accordingly on how much to save.

Social Security does face a long-term imbalance between costs and revenue. By law, the program cannot deficit-spend, so legislative reform will be needed by 2034 in order to avoid an immediate 21 percent cut in benefits. The reforms could include new revenue to the system, benefit cuts or a combination of both.

But the dim retirement outlook for today’s young people means the smart play is to expand benefits. That can be achieved easily by lifting the cap on wages subject to payroll taxes, or raising payroll tax rates very gradually. We could also permit Social Security to invest a small portion of the trust fund in the equity market.

U.S. House Speaker Paul Ryan likes to talk about Social Security and Medicare as programs in crisis. “Medicare and Social Security are going bankrupt. These are indisputable facts,” he said in a 2012 vice-presidential debate. Really, those are alt-facts.

The job now is to hammer home the importance of our two most important retirement programs. We must protect, preserve - and yes - expand them.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(Editing by Matthew Lewis)

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