Explore Harvard's Nieman network Nieman Fellowships Nieman Lab Nieman Reports Nieman Storyboard

The U.S. is facing a retirement security crisis -- and Washington wants to make it worse

COMMENTARY | December 08, 2011

More and more older people will be living in poverty as it is, writes a scholar at the Claude Pepper Foundation. So why are even Democrats talking about cutting their lifelines?

By Larry Polivka

The same political and corporate elites who are largely responsible for the erosion of retirement security now seem dead set on making the problem even worse.

Today's workers -- many of them trapped in low wage jobs with declining benefits -- are already facing a grim future in which the kind of retirement their parents were able to take for granted is out of reach. Unemployment and stagnant or declining wages have drained American families of the capacity to save for retirement. Likewise, the replacement of defined benefits (for the half of the U.S. labor force with a pension of any kind) by defined contributions plans, which depend on the variable performance of markets, have made income from private pensions generally smaller and less reliable. Increasing health care costs have also eroded the retirement security of most workers.

That's the real retirement security crisis. But instead of talking about reversing the 30 years of conservative, pro-corporate policies that have so thoroughly undermined modern American retirement security, Washington continues to focus on austerity economics and the need to cut Social Security, Medicare, and Medicaid -- the only remaining reliable sources of economic security for many current retirees and most future retirees.

Austerity driven cuts to these public sector pillars of our tottering retirement system will increase the number of older people living in poverty, which, according to the latest figures from the Census Bureau, November 2011, is already at 15.9%. Access to appropriate health care will decline as out-of-pocket costs for beneficiaries, which are already 16% of income for those over 65, rise with cuts to Medicare and Medicaid. Even under current law, out-of-pocket costs are projected to reach 30% of the average beneficiary’s income by 2030, as rising Medicare premiums and deductibles are subtracted from Social Security checks. This is a major reason the Center for Retirement Research at Boston College estimates that over 50% of the baby boomers will not achieve economic security in retirement, which is generally defined as income equaling 70 to 80% of the retirees’ wage while working.

The level of economic risk facing retirees has risen steadily over the last 30 years. According to an analysis conducted by the Demos Institute on Assets and Social Policy, 78% of all senior households are financially vulnerable and do not have enough economic security to sustain them for the rest of their lives. Eighty four percent of single senior households, which are mostly single women, are financially vulnerable, and 36% are at serious financial risk. Most of this risk is generated by the lack of assets (low financial net worth) largely caused by the inability to save while working, small or no private pensions, high housing costs (even though seniors have higher home ownership rates than younger cohorts), high and rising out-of-pocket medical costs, and insufficient monthly income to absorb unexpected expenses. The Great Recession has increased the level of financial risk by reducing retirement investment accounts and the value of equity in homes.

As a Reuters article recently pointed out, three top experts on retirement security agree that as Baby Boomers approach retirement they are facing a more difficult economic future than their parents. Theresa Ghilarducci, a retirement specialist and economics professor at the New School of Social Research in New York told the news agency that “middle-class workers, not just low-income workers, but most middle class workers, will be living at or near the poverty level in their old age.” Jack VanDerhei, research director of the Employee Benefit Research Institute, said he fears that huge numbers of older Americans will fall into poverty in the coming years, justifying the perception that we are on the cusp of a crisis in retirement security. And Alicia Munnell, Director of the Center for Retirement Research at Boston College, noted that “rapidly rising health care costs are gobbling up everything,” putting Boomers at an increasing risk of not having enough money to maintain a middle class standard of living in retirement.

It is not as if the Boomers and their children are unaware of these trends. In a recent Gallup poll, 66% of Americans ranked not having enough money in retirement as their top financial concern. This is consistent with the loss of housing value (equity) and low savings in retirement accounts.

And yet, instead of preventing the growing crisis from sweeping millions into old age impoverishment our policymakers -- including President Obama and the leaders of both parties in Congress -- seem ready to weaken the remaining pillars of retirement security by cutting Social Security, Medicare, and Medicaid according to one version or another of the Bowles-Simpson deficit reduction plan.

Cutting these programs has long been a priority of the Republicans whose overarching policy goal is to strip the government of virtually all public welfare functions, including environmental and financial regulation. It is not all clear, however, why President Obama and other Democratic leaders would be willing to support policies that would only deepen and broaden the retirement security crisis, and run counter to the overwhelming public support for these programs, and the deep opposition to cutting them.

For over 30 years, Federal policy has encouraged the conversion of defined benefits pension into defined contribution plans, and allowed corporate executives to underfund pension benefits, and use them for their own benefit as described by Ellen Schutz in her recent book Retirement Heist. Policymakers under corporate influence also did little for decades to prevent the unprecedented growth in economic inequality, and the hollowing out of our productive real economy. Growing inequality and the loss of good jobs undermined the income and asset wealth of working families.

But retirement security is one of the great public policy successes of the 20th Century, and one of the major reasons for the growth of the middle class since the 1940s. Preserving retirement security should be a top priority for the Democratic Party alongside the related priority of strong, equitable economic growth. Instead, the party seems dangerously close to embracing policy compromises that will increase already high out of pocket costs for Medicare beneficiaries and reduce the annual cost of living adjustments for Social Security recipients.

Strengthening our shaky retirement security system by increasing Social Security benefits for low income beneficiaries under or close to the poverty line, making long-term care a Medicare benefit, and containing Medicare cost increases by addressing their sources in our out of control health care economy would be a far better strategy for the Democrats both politically and in terms of substantive policy.

An explicit commitment to reversing the erosion of retirement security would align the Democratic Party with the policy preferences of the American people rather than the corporate and political elites for whom the economic security of the middle class and the poor has not been a priority for decades. It would also be far more effective economic policy than the current elite obsession with an austerity agenda that will undermine growth for years to come. Strengthening retirement security will help maintain the purchasing power of older consumers and their families, and ensure that aggregate demand remains at levels needed to sustain a strong U.S. economy. Resolving the retirement security crisis before it worsens is nothing less than an opportunity for the Democratic Party to resolve its own identity crisis and clearly demonstrate whose side it is on.

Posted by taikan
12/13/2011, 10:05 PM

Although the author correctly (in my view) points out that a "commitment to reversing the erosion of retirement security" would be consistent with the desires of a majority of the voting populace, he fails to address the primary reasons why the Democratic Party has not made such a commitment. Among those reasons are the Democrats' failure to counter the incessant claims by Republicans (which also have not been challenged by the press to any great degree) that the U.S. government has a financial crisis that can only be solved by cutting (or gutting) the programs that provide most Americans with a modicum of retirement security.

Indeed, the author's own reference to "the need to cut Social Security, Medicare, and Medicaid," rather than "the supposed need" or some similar terms, is an example of how well the constant claims that there is such a need have worked to frame the debate.

Posted by Farrah Zeman
07/12/2012, 06:37 AM

Did you know that factors like your age, gender, and marital status will impact your buyout from GM in their lump sum pension buyout plan? Understanding the factors involved and the impact they have on your options are crucial to making the right choice for your family. The best way to ensure you make an educated choice is to consult with a qualified financial planner. The offices of LJPR, LLC out of Troy Michigan are experienced in helping retirees navigate pension buyout options. They have put together an online video to help GM retirees understand this decision process, which you can watch by clicking http://youtu.be/32ZRne7AoTQ. ...There are less than two weeks remaining before the decision deadline of July 20, 2012. Schedule your appointment with a financial planner today.

The NiemanWatchdog.org website is no longer being updated. Watchdog stories have a new home in Nieman Reports.