Retirement experts, economists and academics talk about retirement in the United States as a stool with three legs — Social Security, employer-sponsored pension plans and personal savings.
Some of these experts lump savings built up in defined contribution programs with personal savings, while others classify savings as including assets in individual retirement accounts and annuities as well as equity built up in home ownership.
President Franklin D. Roosevelt signed the Social Security Act in 1935 as a cornerstone of the New Deal to provide "social insurance" for both the unemployed and retirees. The system was set up as a pay-as-you-go program, and a payroll tax on workers was instituted in 1937 to fund what was then called the old-age and survivors' pension program.
In 1940, retired workers began receiving monthly "Social Security" checks from the government. Today, 47 million people get a check every month. Benefits have been expanded to include income for disabled workers, family members and survivors.
Since more workers pay into the system than collect benefits, Social Security has been able to run a surplus most years; it has run a deficit 11 times since 1970. At the end of 2004, the system had roughly $1.7 trillion in U.S. Treasury securities in its "trust fund," which is funded by the annual surpluses.
Much of the current debate about Social Security — and its health — involves how long the system will continue to run a surplus and what happens when the surplus finally runs out.
According to the 2005 report of the trustees of the Social Security program, the cost of the program will exceed tax revenue in 2017. But interest income plus tax receipts will produce enough revenue to cover benefit payments until 2027, after which income will fall short of revenue and the system will begin to draw on the trust fund. The trust fund is expected to run dry in 2041. After that date, because of continued tax revenue, the trustees estimate the system will be able to pay 70% of currently legislated benefits.
American Express Co., New York, offered the first private pension plan in the United States in 1875. Banks, manufacturers and utilities followed suit. These plans, funded entirely by the sponsoring companies, were defined benefit plans — they paid retired workers a specific benefit every month. In the 1950s and 1960s, many more companies began establishing defined benefit pension plans, in part to attract and retain workers.
The problem was that these plans weren't guaranteed or protected, and some financially troubled companies were forced to terminate their plans, leaving workers with sharply reduced pension benefits, or none at all.
But in 1974, President Gerald R. Ford signed the Employee Retirement Income Security Act, which, among other things, established the Pension Benefit Guaranty Corp., a quasi-governmental agency designed to insure the pension funds of the nation's companies. ERISA also set funding rules and other guidelines for companies with defined benefit plans.
According to the PBGC, it issued its first pension check in February 1975 to a member of the International City Bank of New Orleans Employees Retirement Plan. Last year, the organization covered the pensions of 44.4 million workers and retirees in 31,200 private defined benefit pension plans.
Employers, faced with strict defined benefit funding rules under ERISA and the twin costs of managing the retirement program and the investments, began looking for lower-cost options. They found one in the Revenue Act of 1978, which added Section 401(k) to the Internal Revenue Code.
Regulations issued in 1981 set the groundwork for companies to offer 401(k) retirement plans, which transfer the investment risk of the retirement portfolio onto the employee. In addition, these plans are not entirely funded by companies; employees contribute up to a set limit of their wages to the plan and most companies match part of those contributions.
Today, the number of private defined benefit plans has shrunk as companies close them to new employees. Some companies switched to so-called cash balance plans that attempt to capture the best characteristics of defined benefit and defined contribution plans, but that trend has stopped because the legality of cash balance plans has not been definitively determined by legislators.
Depending on how it is measured, personal savings in the United States is hovering at just more than 1% — or as high as 8% to 9% when defined contribution plans individual retirement accounts or other similar savings vehicles are included — but most economists agree that personal savings in America are at historic lows.
The 2005 edition of the annual Retirement Confidence Survey, issued April 5 by the Employee Benefit Research Institute, Washington, found that 69% of Americans said they have saved money for retirement — a percentage that has held fairly constant for five years — and 62% percent said they are saving for retirement.
Even so, the EBRI survey found that 52% of workers have no more than $25,000 saved. Thirteen percent have $25,000 to $49,000; 9% have $50,000 to $99,999; 12% have $100,000 to $249,999; and 11% have more than $250,000.
Economists agree that regardless of how savings is measured, Americans neither have enough money saved for their later years nor save enough to improve their future.
"What I've been stressing in my research for 25 years or so is that you can't think about saving and saving for retirement without thinking about self-control problems," explained behavioral economist Richard Thaler.
"Any realistic look at America has to acknowledge that there's a substantial percentage of Americans who don't save enough, and they admit it," said Mr. Thaler, a professor at the Graduate School of Business at the University of Chicago. "Where does that leave me? That leaves me to say that whatever we do should make it easier to save more and to save smarter."
With President Bush traveling the country to promote his plan to allow individuals to direct some of their Social Security taxes into private accounts, some economists suggest the government is avoiding a bigger financial problem: health care.
In fact, the percentage of the nation's gross domestic product spent on health care has been increasing steadily.
According to the 2005 reports from Medicare and Social Security trustees, Social Security today accounts for 4.3% of GDP and Medicare accounts for 2.6%. In 2024, Medicare's share of the economy is forecast to overtake that of Social Security and continue growing. The trustees estimate that by 2079, Social Security will account for 6.4% of GDP, and Medicare will account for nearly 14%.
Social Security's beneficiaries will feel this growth as well. Currently, 6% of an individual's Social Security benefit goes to pay Medicare; by 2030, that will be up to 9.1%.
"The real issue facing the baby boomers is not the financing of retirement income, it is in fact the financing of health-care costs," said Stephen P. Utkus, a principal at the Vanguard Center for Retirement Research in Valley Forge, Pa.
On a present-value basis, health-care costs are four times Social Security, he said.
"The point I make, and one that is obvious, is that the bigger problem is Medicare," concurred Milton Ezrati, senior economic strategist at Lord, Abbett & Co. LLC, Jersey City, N.J. "When we talk about solving Social Security, especially when we talk about solving it within the existing system, we're looking for revenue sources.
"Our attitude has been that those revenue sources better be available for Medicare."
Beyond the funding problems of Medicare, many companies have also axed retiree health care. "Everybody needs to wake up and see the reality," said Sylvester J. Schieber, director of research at employee benefits consultant Watson Wyatt Worldwide, Washington. "We can't rely on organizations to provide unfunded benefits for people who no longer work for them."
He said many workers use health-care coverage as their retirement date gauge — if their company offers retiree health care, they are inclined to retire earlier; if not, they wait until Medicare kicks in.
Regardless of how many legs the retirement stool has, one of the debates among legislators, academics, economists and other industry experts is whether the entire retirement system needs reform or whether individual pieces need fixing.
"I think we need a thorough examination of the whole retirement system of our country — public, private, federal, individual, the works," said John Bogle, founder and former chairman of Vanguard Group, Valley Forge, Pa.
"That's because the killer in the long run, over a 65-year investment lifetime ... 79% of the accumulation in that period goes to intermediaries. You get 21%.
"We've got to take a whole lot of cost out of the system."
Mr. Utkus, of the Vanguard Center for Retirement Research, said the United States really has two retirement systems: one with people who are covered by some kind of corporate-sponsored plan, and one that's just Social Security. "It's a separate question for people who are not covered and a different tack on what you do," he said.
