As far as partisan spats, it doesn’t get more partisaner(?) than spending and solvency arguments over the fate of Social Security. Despite doom-and-gloom predictions from some about its eventual demise, the program remains overwhelming popular—something rarely said about anything government.
Once largely reduced to stereotypical caricature of a senior citizen on a fixed income clipping coupons and waiting on a monthly check, today the agency is high-tech, with tens-of-thousands of possible claiming strategies and eight separate benefits for which recipients can potentially qualify. It’s one reason it’s the “third rail of American politics.” Touch it and get zapped, something critics understand, and therefore tread lightly.
Continuing to strike while the iron is hot, every Democrat running for president has pledged to increase Social Security benefits. The reason? Inadequate retirement saving by Americans.
Republicans instead focus on Social Security solvency forecasts, and suggest reducing benefits for high earners or raising the retirement age.
Now The Wall Street Journal reports on little-noticed data released last month by the Congressional Budget Office, which suggests that the Republican approach is better grounded.
Andrew Biggs, former principal deputy commissioner of the Social Security Administration and author of the piece, begins by discounting the premise of the widely-claimed “retirement crisis” in America and immediately drops some big names to back his argument.
“The bipartisan Social Security Advisory Board appointed an expert panel, headed by Boston College economist Alicia Munnell, to look into the issue,” Biggs writes. “After almost a year of deliberations, the panel recommended in September that replacement rates be calculated relative to an average of several years of late-in-life earnings. Years of very low earnings should not be counted, it said, since many people shift to part-time work before retirement. The panel also said the focus should be on individuals with reasonably full working careers, since replacement rates aren’t very meaningful for individuals with short careers.”
Following the panel’s recommendations, he continues, economists at the CBO compared retirees’ Social Security benefits to the inflation-indexed average of their last five years of substantial earnings, defined as annual earnings equal to at least half the individual’s career-long average. The calculations were restricted to retirees who had earned at least 10% of the national average wage over at least 20 years of work.
The results, he says, are striking.
“The CBO projects that a typical middle-income individual born in the 1960s and retiring in the 2020s will be eligible for a Social Security benefit equal to 56% of his late-in-life earnings. For individuals in the bottom fifth of lifetime earnings, Social Security replaces about 95% of their substantial late-in-life earnings.
“Add in 401(k) and other plans, and it should not be difficult for a typical worker to achieve a total replacement rate of 70% or even 80% through individual savings and Social Security benefits,” Biggs concludes. “Total retirement savings measured by the Federal Reserve are at record levels relative to personal incomes, additional evidence that this goal can be reached.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
