Congress seems to be on the verge of passing legislation that further tinkers with the private retirement system. Both houses of Congress seem likely to pass bills — with the House passing a bill May 23 — designed to encourage more workers to save for retirement as the bills have bipartisan support. The bills are not perfect, as we have argued in previous editorials, but they are headed in the right direction.
However, both parties shy away from tackling the elephant in the room — the Social Security system, which the system's actuaries continually warn will exhaust its trust fund's assets in the mid-2030s.
Congress must be pressured to take action to correct the imbalances, which will see the average benefit cut by more than 20% when the trust funds are exhausted, possibly as soon as 2035. That cut would be a very big deal for all workers and retirees covered by Social Security.
More than half of Social Security retirees — mostly private-sector workers — get more than half of their retirement income from Social Security, and the average annual benefit per individual in 2018 was $16,848. A 20% cut would drop that to $13,478, devastating for those relying solely on that for income.
It's time for business, especially the financial services industry, to pressure Congress — both houses and both parties — to get together to fix Social Security. They should use some of their lobbying dollars and leverage personal contacts in Congress to push for reform now. The longer members of Congress take a "not on my watch" attitude because they hesitate to touch Social Security, which has been called the "third rail of American politics," the more painful any changes will be.
Social Security was not designed to be the sole source of retirement income for workers. The concept of retirement income provision was a three-legged stool. Social Security was one leg, an employer-sponsored retirement plan was the second leg and employee savings was the third leg.
However, economic, demographic and societal changes have made the concept obsolete. Two of the three legs have, in effect, been merged as employers have moved away from defined benefit pension plans and replaced them with defined contribution plans to which employees and employers (usually) contribute.
For many employees, their contribution to the employer's defined contribution plan is their retirement savings. Because of relatively stagnant wages in the past 15 years, they have little additional capacity for saving. Millions of workers do not have access to an employer-sponsored retirement plan and will rely entirely on Social Security. The now two-legged stool is unstable, and something must be done to stabilize it.
Social Security has become even more important and must be stabilized. In fact, given the way employers have become less generous with their retirement programs, Social Security benefits should be improved for lower-income employees.
Even more important, steps must be taken to repair its financial condition.
Eugene Steuerle, co-founder of the Urban-Brookings Tax Policy Center, and Allan Sloan, a noted financial columnist, have proposed Social Security changes that would provide a stronger base of protection for all workers and slow the growth rate of benefits relative to its revenues to improve its financial condition.
They concede that at some point tax increases will become necessary, but that will have to be done carefully. Simply raising the cap on earnings subject to the Social Security tax brings complications because of the way benefits are calculated.
The key suggestions are that the rate of benefit growth for higher-income retirees should be slowed to offset part of the cost of increasing the minimum benefits. They would also slow the rise in benefits for future retirees with high lifetime earnings by indexing their benefits to inflation rather than to wage growth.
They also suggest indexing the retirement age to average life expectancy. If on average people are living a year longer then they should work a year longer to get retirement benefits. The additional year of work would supply Social Security with additional revenue. They also would phase out the early retirement age.
Messrs. Steuerle and Sloan suggest several other improvements to parts of Social Security, for example, in the distribution of spousal and survivor benefits, some of which could be adjusted more easily than raising taxes or the retirement age.
Others may have viable ideas for tackling the looming crisis in the Social Security system, but Congress will take no action until getting heavy pressure from business, the financial services industry and groups such as AARP.
If the worst should happen and a 20% cut in benefits is imposed, companies face the probability that many older workers, including higher paid ones, will hang in to their jobs for a few more years, increasing company retirement plan costs.
That's not even considering the additional health care and disability costs that could be associated with an older workforce. And really, when all is said and done, what reasonable employer wants to retain workers who are staying on the job because they can't afford to retire? Ideally, workers should be able to take their retirement as their finances and career desires dictate. If an older worker is itching to start a new chapter in life, a solid benefit from Social Security could give that individual the confidence to step away from the job. And that employment change, in turn, could free up jobs for the millennial crowd to move ahead or give an employer more flexibility in configuring its workforce. In our opinion, that would be a win for everyone.
But as the statistics make painfully clear, time for such pressure, and congressional action, is running low. To the employers and everyone else with a stake in outcome, make your influential voices heard — now.