Editor’s Note: Two articles on retirement plans and Social Security in our January 2008 issue (Pensions, Promises And Lies by Larry M. Elkin and Retiring On The Backs Of Young Workers by Anna K. Pfaehler) drew several responses from readers. We welcome the opportunity to present other viewpoints. All submissions are published at the editor’s discretion.
To The Editor:
Although many of Anna Pfaehler’s points are well taken, she made a significant error in her discussion of the changes in life expectancy. The numbers she used were life expectancy at birth. However, the key statistic for Social Security old age benefits is life expectancy at the age that individuals begin getting Social Security checks. Thus, life expectancy in 1950 for someone age 65 was an additional 13.9 years, while today it is about 18.7 additional years.
Her statement that a person in 1950 was supposed to work 94 percent of his or her adult years, based on the 68 years life expectancy at birth, is not correct. Had Ms. Pfaehler gone back to 1938, the time the Social Security Act was implemented, she would have found that life expectancy at birth was 62 years, and therefore by her reckoning, workers would be part of the work force for 106 percent of their working lives, a rather unusual statistic.
There was very little change in life expectancy at 65 until recently, but the five-year increase in the last half-century is remarkable. Ms. Pfaehler’s point that demography is different today from what it was when Social Security was enacted is true. It is certainly reasonable to consider further increases in the age at which full Social Security benefits are received beyond the two years, to age 67, already enacted into law as part of the 1983 reforms (perhaps another year starting gradually in 2030). One of the authors of this letter, Marc Robinson, also would favor minor increases in the Social Security tax rate and an adjustment to the cost of living formula to have benefits grow at the Consumer Price Index minus 0.5 percent. (The Boskin Commission estimated in 1996 that the overstatement of inflation by the CPI was about 1 percent; since then the measurement of inflation has improved, but there is still a bias.) Although Marc has not done detailed calculations, he believes that this combination of modest measures, if enacted soon, would guarantee the solvency of Social Security through Ms. Pfaehler’s retirement.
Ms. Pfaehler’s alarm at the change in the dependency ratio is overstated, but there is some cause for concern. The ratio of dependents to workers dropped during the 1970s and 1980s as the baby boom entered the work force and as women’s labor force participation increased dramatically. That drop could not and has not been sustained. It is true that the slowing growth of the labor force would mean lower growth in per capita gross domestic product. Well-being, however, might keep growing as people continue to substitute leisure for work. The labor force participation of men over 50 has dropped and stayed low.
Social Security does not determine the age at which people retire. Many auto workers retire in their early 50s. Social Security contains an imperfect actuarial adjustment between ages 62 and 70, so there is little disincentive to working at least until 70. Most people retire sooner by choice, not because Social Security rewards it.
America’s overall saving rate is far too low. This is due to inadequate savings by both private and public sectors. There does not seem to be the political will to raise taxes to an adequate level to move the federal and state budgets, including pension commitments, from deficit to the surplus appropriate to the demographic challenge. Indeed, when President Clinton’s fiscal discipline and an economic boom generated what seemed to be a sustainable surplus, President Bush promptly squandered it. Our low saving rate eventually will reduce our standard of living, which is sad but not apocalyptic.
The major financial crisis facing the baby boom and later generations is not retirement but health care. The Independent Trust recently agreed to in the auto industry is a major sign of the inadequacy of retirement savings plans that assume that health care will be covered throughout old age. That is something that should keep Ms. Pfaehler up nights, not whether Social Security will pay her any benefits.
Larry Elkin believes that the Social Security “Trust Fund” (his quotation marks) is an accounting fiction consisting of unsecured IOUs. In David Robinson’s view, any investments other than Treasuries of the excess Social Security retirement funds collected (for example stocks, corporate bonds, or foreign sovereign debt), at least on the trillion-dollar scale of the Trust Fund, bring serious problems of their own. In addition, an IOU is commonly understood to refer to informal acknowledgments of debt. This hardly applies to Treasury bonds backed by the full faith and credit of the United States. While all bonds may be indeed promises to pay, we have never heard an investment adviser say, “You should have 60% of your assets in equities and 40% in IOUs.”
Social Security, which pays a fixed income indexed for inflation, is a crucial floor for retirement income that has greatly reduced poverty among our elderly. Additional retirement savings also are needed. For example, 401(k) plans should be opt-out, rather than opt-in. These plans, and other defined contribution plans, transfer the risk from the employer to the employee, which is fine as long as the Social Security floor is there. The fact that income taxes are not paid on the money put in means, in effect, that the U.S. Treasury is giving the payer an interest-free loan. This should be a major incentive to contribute.
We also would add that Social Security partially supports spouses and young children of wage earners who die young, as well as the disabled. Its critics often overlook this contribution.
David Z. Robinson, Ph.D. (Chemical Physics)
Marc S. Robinson, Ph.D. (Economics)
Dr. David Robinson is a former executive vice president and treasurer of, and current consultant to, the Carnegie Corporation, an educational foundation. He also is a trustee of the Santa Fe Institute, the Institute of Current World Affairs, and The Actors’ Center. Dr. Marc Robinson, his son, served on the staff of President George H. W. Bush’s Council of Economic Advisers in 1989-90, and presently is a strategic planner at General Motors Corp. He has written papers on Social Security and was involved in the negotiations on the recent United Auto Workers contract that established an independent health care trust for retirees.
To The Editor: I and my wife, Rose, established our careers in public education knowing full well that our wages would not compare to those we might earn in industry, but also realizing that we would later in life appreciate some of the more liberal benefits (like lifetime pensions and lifetime medical benefits) that we might reap. An interesting aspect, though, is the lack of control that we and, perhaps more important, the federal government have over the funds in those public pension plans. New York has been quite responsible. The New York State Teachers’ Retirement System has funded its plan as though each and every worker would retire and live out their actuarial life expectancy. The system also provides regular updates as to the instruments and vehicles in which the fund balances are invested.
New Jersey, the state from which I am retired, is another story. The Teachers’ Pension and Annuity Fund (TPAF) was flush with funds when former Gov. Christine Whitman took office with her promises to reduce taxes. She raided the TPAF and established a “pay-as-you-go” system in which each year the TPAF would present its “bill” to the Legislature, whose problem it was then to find the money. Soon thereafter, in 1997, Whitman understood the folly of her ways and had to float a multi-billion-dollar bond issue to cover her losses.
Which agency should step in to prevent politicians from playing with promised funds? How can our public pension plans be protected from political chicanery, vicissitudes and expediencies? I fully agree that the presumption of a 65-year retirement age is not consistent with current life expectancies and demographics. Raising the retirement age makes sense! I do not agree with Anna Pfaehler’s suggestion that we need additional population to fuel the work force, as this might cause concomitant environmental and natural resource pressures that might outweigh the benefits.
It does seem reasonable that the members of the current work force will have to plan for their own retirements (with vigorous matches from their employers), and this is clearly the trend of the future. But this raises another question that you touched upon: Whose responsibility should it be to protect workers who might be tempted to invade their reserves prior to retirement as such premature distributions are permitted under an ever more liberal set of circumstances? Should the federal government tighten these restrictions? I think so.
Thank you for bringing to the forefront such an important and timely issue. Perhaps the situation can be fixed, but only when politicians truly understand the hard choices that have to be made and have the moral fiber to initiate policies that, while unpopular today, may save us from ourselves in the future.
Abby Bergman, Ph.D.
Dr. Bergman is a science educator, author and school administrator. He retired from the school system in Tenafly, N.J., and currently serves as regional science coordinator for a consortium of school districts in New York state. Rose Bergman is a retired teacher in the Yonkers, N.Y., school system. Their son Jonathan is vice president and chief investment officer of Palisades Hudson Financial Group LLC.