New studies show that retirees are among the richest Americans.
New studies show that retirees are among the richest Americans.
F ew issues better illustrate the leftward shift of American economic policy than Social Security. In the late 1990s, moderate Democrats such as Senators Daniel Patrick Moynihan and John Breaux proposed fixing Social Security’s finances through a combination of tax increases and benefit cuts, including lower cost-of-living adjustments and an increased retirement age. Republicans favored fixing the Social Security deficit using benefit cuts alone. Today, President Trump’s no-cuts position is to the left of those Democrats. And even the most moderate Democratic candidate for president, former vice president Joe Biden, speaking at an AARP Iowa forum in July, insisted that “we should be increasing, not decreasing, Social Security.” In reality, expanding Social Security is a multi-trillion-dollar solution to a problem that doesn’t exist.
The shift in sentiment on Social Security reflects a shift in priorities. In the 1990s, policymakers largely saw Social Security as a budgetary challenge, with rising retirement costs pushing up taxes or squeezing out other government programs. Today, Americans are increasingly concerned that Social Security will fail to provide income stability for retirees. Seventy-five percent of Americans agree that the nation faces a “retirement crisis,” according to a National Institute for Retirement Security survey. Politicians have responded to these fears, with President Trump pledging to maintain full Social Security benefits despite the program’s looming insolvency. Progressives such as Senators Elizabeth Warren and Bernie Sanders promise benefit increases to rich and poor alike, financed by dramatically higher taxes on high earners.
Almost no one is asking whether these fears of a retirement crisis are justified and whether expanding Social Security benefits outweighs all the other competing uses for federal dollars. But new data from three trusted government agencies say that the answer to both questions is almost certainly no. While Social Security requires changes to ensure solvency and to better protect against poverty in old age, Americans’ retirement incomes and retirement savings have never been stronger.
Last summer, the Congressional Budget Office released new data based on IRS tax returns that provide a more accurate view of changing household incomes. From 1979 through 2016, the salaries of working-age households grew by 39 percent above inflation. But over that same period, incomes for households whose members are 65 and older grew by 90 percent, over twice as fast. Over the past three decades, seniors have gone from being a disproportionately poor segment of the population to a rich one. By itself, this undercuts the case for across-the-board Social Security benefit increases.
But working-age Americans aren’t saving enough for retirement, right? Not according to the Federal Reserve’s new Distributional Financial Accounts, which calculate households’ total retirement savings including both money saved in retirement accounts and any benefits owed from a traditional pension. Across all age groups, retirement savings have at least doubled relative to the salaries those savings must replace once Americans retire. Among households age 55 to 69, retirement savings grew from 232 percent of annual earnings in 1989 to 471 percent in 2016. For households age 40 to 54, pension entitlements rose from 88 percent to 212 percent of average annual earnings, and from 30 percent to 80 percent of earnings for households aged 40 and under.
Finally, new figures generated by the Social Security Administration confirm that no retirement crisis is in the offing. At my request, the SSA used a detailed computer model to project “replacement rates” for current and future retirees, which represent retirement income as a percentage of pre-retirement earnings. The SSA model finds that Americans born between 1926 and 1935 had a median retirement income equal to 111 percent of their inflation-adjusted career-average earnings. Only 25 percent of those retirees had replacement rates below 75 percent. Now fast-forward to the GenXers, born between 1966 and 1974. The SSA model projects that the median GenXer will have a retirement income replacement rate of 115 percent, with only 23 percent of retirees falling below a 75 percent replacement rate. These are the best projections available to the federal government, developed over two decades at a cost in the millions of dollars. They do not indicate anything like the retirement crisis that Americans are being told they face.
The retirement-savings debate is skewed by the fact that almost no one has the incentive to tell the straight truth. Progressives dislike America’s decentralized, personal-savings-based retirement system, so the good news is ignored. The financial industry is in the business of selling Americans investments, so it is not likely to say Americans are saving enough already. Groups such as the National Institute for Retirement Security, which is the research arm of the public-sector pensions industry, fight changes to public-employee pensions by arguing that everyone else’s retirement benefits are inadequate. And even many researchers who understand that there’s no retirement crisis may be reluctant to say so, for fears of weakening incremental reforms to plug holes in 401(k) participation or to boost employees’ contribution rates.
But an ill-considered pledge to expand Social Security can lead to no good. Either Social Security is expanded, at great cost to the federal budget and a loss to other competing priorities such as health and education. Or the pledge is tossed aside once the election is past and Americans become even more cynical about the political process, pushing voters toward increasingly radical candidates in the future. Neither speaks well of how we undertake public policy the United States today.