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 A show of hands from retirees, please. How many of you would
describe your Social Security benefit as "generous"?
Hmmm ... not too many hands are going up, I see. That is not
surprising. The average monthly benefit this year is $1,341, or
$16,092 a year - just enough to stay out of poverty.
But ask this question in Washington and you can get a different
answer. A political debate is raging among policy experts,
economists and actuaries about the most important measure of Social
Security benefit adequacy: just how much pre-retirement income is
replaced. For years, Social Security’s nonpartisan professional
actuaries have provided a standard answer: about 40 percent for
average wage-earners.
But conservatives have mounted a campaign to discredit that figure,
arguing that the replacement rate is actually about 60 percent - a
dramatically higher figure that would mean most people retire
comfortably.
Their campaign seemed to reach a crest in December, when the
Congressional Budget Office (CBO) - which provides budget and
economic information to Congress - embraced the higher numbers. But
in a remarkable turn of events, CBO retracted its analysis earlier
this month when it discovered calculation errors. The agency
backtracked and published revised figures very close to those of the
Social Security actuaries.
The debate may sound like a tempest in a teapot, but it matters very
much for retirees. Replacement rates are the central numbers
measuring the adequacy of Social Security benefits, and they also
inform our broader policy debate about how to encourage saving for
retirement.
Most experts say that retirees need to replace 70 to 80 percent of
their wages to retire comfortably. If Social Security actually
replaces 60 percent of income, that suggests a much smaller saving
challenge than previously thought.
Congress and the next president likely will have a debate on Social
Security reform, and we will need a common, agreed-upon set of facts
if we want the outcome that is best for future retirees.
The program's two key trust funds - for retirement and disability
programs - are on track to be exhausted in 2034, according to the
Social Security trustees, absent an injection of new revenue,
benefit cuts or some combination of the two.
FUTURE DEBATE
Progressives hope to not only restore the trust fund's health, but
expand Social Security benefits as part of the reform debate.
Already the issue is being debated on the presidential campaign
trail, with Hillary Clinton and Bernie Sanders arguing for increased
revenue and expanded benefits, and various GOP candidates proposing
to cut benefits by boosting retirement ages or means-testing the
program.
Adequacy of benefits will be central to the debate - and the CBO
decision to backtrack seems to settle the dispute about the current
replacement rates. So, too, should a 2014 review of various
replacement methods conducted by the Social Security actuaries. It
found only miniscule differences between various measurement
approaches.
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“I’m absolutely convinced that Social Security is not an excessively
generous program. It would be impossible to summon a panel of
working people who felt like they were getting just what they needed
from it,” said Alicia Munnell, director of the Center for Retirement
Research at Boston College (CRR). Munnell chaired a technical
advisory panel last year that reviewed the program's financial
projections.
Replacement rates will fall in the years ahead, from 40 percent in
1985 to a projected 30 percent in 2030, according to CRR. The steep
drop is due mainly to the higher retirement ages legislated in 1983
(from 65 to 67). That change gradually raises the bar for attaining
a full retirement benefit - effectively a benefit cut. But higher
Medicare premiums, which are deducted from Social Security benefits,
also will contribute to lower rates.
So will a rising share of benefits subject to taxation. CBO
estimates that taxes paid will rise from 6.5 percent of total
benefits in 2014 to more than 8 percent by 2024, and more than 9
percent by 2039.
Meanwhile, just 23 percent of workers within earshot of retirement -
those aged 45 and higher - have saved more than $250,000, according
to the latest Retirement Confidence Survey of the Employee Benefit
Research Institute (EBRI). Just 14 percent told EBRI they are
confident of being able to afford long-term care expenses.
The conservative campaign on replacement rates is part of a larger
argument about retirement security - namely, that there is no
retirement security crisis. “Ask retirees about their standard of
living, and most say it’s fine,” said Andrew Biggs, resident scholar
at the American Enterprise Institute and one of the chief proponents
of the higher replacement rate theory. And there is research
supporting the claim that retirees have greater economic security
than the working population.
From where I’m sitting, much of that security stems from Social
Security, with its guarantee of lifetime income and automatic
inflation adjustments. Muddying the waters with arguments that
Social Security already is too generous is a sure way to damage the
economic security of future retirees.
(Editing by Matthew Lewis)
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