Editorial: Social Security, Pensions, Economic Credibility, and Freedom

Editorial: Social Security, Pensions, Economic Credibility, and Freedom

Well, I have something from the horse’s mouth: my current (as of October 2004) Social Security Retirement Account statement. My projected benefits appear to have diminished very slightly. But there appears this statement:

“Your estimated benefits are based on current law. Congress has made changes to the law in the past year and can do so at any time. The law governing benefit amounts may change because, by 2042, the payroll taxes collected will be enough only to pay about 73 percent of scheduled benefits.”

The controversy over the actuarial soundness of Social Security derives somewhat from technicalities in accounting practices. You can get different spins on the soundness of Social Security from different but responsible sources, including Cato and Brookings. The obvious and attractive remedy is at least partial privatization, allowing younger individuals to place some of their social security contributions into conservative investment vehicles that they can control. Alan Greenspan, chairman of the Federal Reserve, repeatedly warns that retirement benefits will have to be scaled back and retirement ages raised in conjunction with life-spans and birthrates, but it is not clear how this affects people about to retire now.

Remember, however, the basic problem that underlies Social Security and makes it somewhat a Ponzi scheme if viewed as a forced savings vehicle. That is, when it was first implemented, beneficiaries did not have to have paid in. Today, if younger workers are allowed to set aside some of their contributions for their own personal security, less money is available to pay current retirees. Other countries, especially in Europe, have regarded social security frankly more as a redistribution of wealth supported by taxes. People tell me that, regarded this way, the total middle class “tax” burden in Britain is comparable to that in the United States when FICA (that is, Social Security) and Medicare taxes are figured in (and FICA and Medicare have caps, so they are less progressive). People also argue that the European model would facilitate single payer health insurance.

I’ll set aside social security for a moment to make a supplementary point about private pensions. Most insurance and benefits textbooks explain the terms defined benefit plans and defined contribution plans pretty well, so we won’t rehash them here. Since the 1970s, and up to the economic downturn in 2001, companies had often encouraged older workers, often as “young” as 50, to accept early retirement buyouts, or forced them out with combination retirement/severance/outplacement separation packages. I accepted such a “retirement” at age 58 at the end of 2001 after my employer was hit hard by 9/11-related losses and lower stock valuations. My defined benefit pension includes (as do, I believe, many other corporate plans) a social security bridge, that goes away at age 62 and would encourage me to start social security benefits at age 62 in order to maximize my benefits. (There is a related but distinct social security offset that gets deducted from many pensions; see like below.) My employer, as did many others, froze defined benefits around the end of 1999, and converted to defined contribution plans (that is, various kinds of matching contributions to 401Ks or similar tax-deferred accounts). At the same time, Social Security will reduce pre-full-retirement-age benefits when retirees (having started benefits early) decide to work again and earn wages of a certain threshhold (although Social Security does not reduce benefits for investment or non-work income). A few employers provide pensions that terminate if the retiree works for a competing company in the same industry, so this possibility might also create tricky situations in some circumstances.

Recently, media reports have focused upon corporations terminating their pension plans and terminating payments promised to retirees. These terminations have occurred mostly in manufacturing industries, or in certain other companies (as in telecommunications) caught up in financial scandals. There is talk that some older and heavily unionized airlines may face default or termination of plans.[1] Most plans are insured by the Pension Benefit Guaranty Corporation. The tendency of legacy companies to default is placing more economic pressure on healthier companies, and Congress apparently has written accounting rules that allow companies to make their pension plans look healthier than they really are.[2] [3]Furthermore, many companies are dropping retiree health insurance, which can be especially critical for persons who retire before 65 when they can start Medicare; up to that age, they are actuarially unlikely to be able to afford individual health insurance by themselves.

Generally, pension plans can be terminated legally only when companies are in financial distress, but PBGC payments will only be made on some fraction of the dollar. While employees and retirees are supposed to have considerable protection under ERISA, there is concern over legal arrangements for pensions made in large corporate mergers or leveraged buyouts, if a subsidiary goes under. There is also considerable concern that the “pension default virus” can spread to other industries, requiring a big taxpayer bailout of the PBGC, on a scale that dwarfs the savings and loan bailout at the end of the 1980s.

Most 401K and IRA accounts seem reasonably safe, but they are not insured with deposit insurance the way savings accounts are, and systematic withdrawal option terms (and charges) with many employers may be tricky, limited and difficult to understand.

All of this creates a picture where retirees, even those leaving their employers with what appear to be ample and generous separation packages, may not be nearly as financially secure as they had expected to be. (Remember, too, that severance often has strings attached to it, such as signing “release of all claims” (will-not-sue) documents and may be affected by tricky circumstances after some corporate mergers.) Retirees seeking new places to live may find that mortgage lenders or property managers do not trust their complicated and possibly unreliable sources of “retirement” income if they seem to be unable to stay at their income level through actual work. Stability and confidence in the financial system (protecting any accumulated wealth or savings seems important to the freedom and dignity that seniors (at least those no longer competitive in conventional employment markets with everyday skills) can enjoy.

Phillip Longman has suggested the idea of an early retirement account, where one-sixth of a worker’s FICA contributions are stashed in a private account that he or she can start drawing on without penalty at age 62. The normal social security benefit would be reduced, and the various retirement ages (including the minimum after at which benefits can start) could increase substantially. In a book on falling birthrates, Longman has suggested relieving parents some of the burden of social security “taxes,” to be paid by non-parents who are not raising future workers.

Another factor to consider is the kind of work that retirees are likely to find or pursue. Sometimes, retirees may have very specific ideas about what they want to do (such as writing in my case) but they will need financial resources, savings and stability to see them through. Other times retirees are “expected” to attempt (with some investment on their part) life-style-related sales careers selling real estate, life insurance or financial planning services, or possibly various kinds of financial gimmicks (like cash flow services). Keeping people working longer at middle-class wages is becoming difficult in a nation beset with staggering health care costs and risks, and global labor competition from overseas, so seniors are expected to become opportunistic.

But an overriding major issue still will be the attitude that society has toward older citizens. Up to now, many seniors have enjoyed financial resources and considerable political clout. However any instability or loss of confidence in promises made to retirees can seriously degrade our attitude toward them and even their longevity. The demographic trend toward having fewer children, whose cultural lives are likely to diverge considerably from those of their parents, will complicate providing custodial eldercare and even justifying life-extending surgeries or medical care for elderly parents. It sounds likely that ideas about legal filial responsibility might have to be considered to protect the value of the lives of older citizens. The endpoint of all of this can be a Jonathan Swift-like proposal where impoverished elderly are expected to commit suicide, remove themselves as “burdens” and admit their personal “competitive failures” in a highly individualistic world of extreme capitalism.

President Bush offered some details as to his partial social security privatization proposal (his “ownership society”) in his State of the Union Address on Wed. Feb. 2, 2005. Persons over 55 will not have their benefits affected, according to his proposals. Workers would be able, after retirement, to purchase single life annuities (with survivorship) from the auxiliary accounts. Persons slightly younger than 55 might find themselves quite compromised. Later, in May 2005, the President would go along with reducing benefits for younger workers having medium to high incomes by basing benefits on cost of living rather than wage levels (which would be used only for low income workers), partly to balance the deficit created by diverting contributions to private accounts. The Wall Street Journal points out, in libertarian spirit, that private accounts use the legal mechanism of property rights, and can be passed on to heirs at the person’s will, rather than just by special legislation (as with spousal benefits for social security).

Readers Question Social Security Philosophy (4/2006)

I see search arguments on my server logs that suggest concern about when people can draw social security if they have other income. Generally, before full retirement age, social security applies earnings tests based on income earned from other actual "work." I've tried to present the links and bibliographic references below. Generally, SSA will follow its own regulations in POMS to the letter, but of course we always know from English 101 that any sentence or rule can be interpreted, it seems.

There is a lot of ideological uncertainty as to whether Social Security should be looked at as an individual annuity that one saves up for during working years, or it if is "welfare" or "insurance" against actual inability to work because of advancing age. The president obviously wants to see the former view implemented. We do hear social policy debate about "means testing," and about whether those who don't "need" it should be able to collect it, especially given future and demographic solvency questions. The practical consequence of policies emanating from such a debate could be, whether someone like me can afford to make much less money doing what he wants for a few years and building a new livelihood, or whether he or she must defend (through "involuntary" political solidarity with family or with others who are displaced) a way of living that could become obsolete anyway because of technology and globalization.

Nevertheless, we should not mix up political debate with the rules as they are written now.

End notes:

The Cato Institute link is http://www.socialsecurity.org , especially Michael Tanner’s paper at http://www.socialsecurity.org/catoplan/

The best Brookings paper seems to be “Budget Deficits, Social Security and Younger Generations,” by Peter R. Orszag, at http://www.brookings.org/views/testimony/orszag/20040913.htm

American Association of Retired Persons

The Phillip Longman article is called “Fixing Social Security” and appears in the Nov. 2004 Fortune (link at http://www.fortune.com/fortune/investing/articles/0,15114,725031,00.html

and this may require a paid subscription).

A review of Longman’s The Empty Cradle: How Falling Birthrates Threaten World Prosperity and What We Can Do About It is at http://www.doaskdotell.com/books/blongman.htm

See Jonathan Weisman, “Pension Promise No Guarantee of Security: Bankruptcies Can Mean Sharply Reduced Payouts,” The Washington Post, Oct. 12, 2004, p. A6.

James M. Broder of The New York Times provides a Dec. 11, 2004 story “Gay Rights Groups in Debates over Social Security,” and it seems rather superficial, with emphasis on partner benefits, and ignores the whole big question of falling birth rates. The references (may require NY Times subscription and a small fee) is http://www.nytimes.com/2004/12/11/national/11gay.html

Gary Becker provides The Wall Street Journal on Feb. 15, 2005 with the op-ed, “A political case for Social Security reform.” Becker analyzes the “pay-as-you-go” system and disagrees that there are major transition problems as long as “future generations, under all systems, have to pay the implicit debt due to commitments toward present and future retirees—unless, of course, they default on these commitments…All other issues are really diversions, because neither advocates nor opponents of privatizing Social Security generally answer the most meaningful question: Is there a strong political economy case for eliminating government management of the retirement industry as there is for eliminating its management of most other industries? The answer is ‘yes.’”

The Nation, editorial, “Retirement Security Fight,” Feb. 21, 2005, considers social security and pension instability together.

James K. Galbraith provides Mother Jones (May-June, 2005) with “The Parent Trap: Social Security ‘reform’ is being touted as fiscal liberation for the young. What will young families do when it condemns them to care for their elders.” The essay does mention Bush’s “family responsibility” notion.

Dale Russakoff, “Retirement’s Unraveling Safety Net: Social Security Is Least of Newer Generations’ Worries,” The Washington Post, May 15, 2005.

Apparently global insurance giant ING is trying to help clients restructure their defined contribution plans to make them more efficient, as defined benefit plans wane: http://biz.yahoo.com/prnews/060523/cltu037.html?.v=56 (May 23, 2006)

Blog entry on lobbying letter from Barbara B. Kennelly, President and CEO, National Committee to Preserve Social Security and Medicare

Blog entry on social security bridge and social security offset.

Return to controversial issues page

Go to Personal Retirement Notes (more detailed discussion of arcane topics like social security working penalty, social security offset)

Go to Table of Social Security Proposals

Go to health care editorial

Go to filial responsibility editorial

Go to editorial on Senator Sessions proposal for PLUS (Portable Lifelong Savings Account), on blogspot.

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[1] US Airways received permission from a bankruptcy court to terminate its pension plan in January 2005. UAL Corp (United Airlines) received permission to terminate its pension plan from bankruptcy judge (Eugene Wedoff) on May 10, 2005, leading to the largest PGBC bailout in history ($9.8 billion, of which $5 billion is protected, leaving retirees with cuts of up to 50%. The largest earlier bailout was $3.6 billion for Bethlehem Steel. Delta could be next. There is naturally a concern of copycat actions by other companies in danger of bankruptcy. But since the late 1990s many companies have been freezing defined benefit plans and replacing them with matching 401K contributions.

[2] Donalt Barlett and James B. Steele, “The Broken Promise: It was part of the American Dream, a pledge made by corporations to their workers: for your decades of toil, you will be assured of retirement benefits like a pension and health care. Now more and more companies are walking away from that promise, leaving millions of Americans at risk of an impoverished retirement. How can that be legal?” Time, Oct. 31, 2005

[3] Roger Lowenstein, “The End of Pensions? Corporations were happy to offer rich retirement plans to their workers as long as accounting tricks and federal insurance made it easy to delay the day of reckoning. But now the game is up.” Cover title, “We regret to inform you that you no longer have a pension: America’s next financial debacle.” The New York Times Magazine, Oct. 30, 2005.