Beyond Social Security and Toward Real Retirement Security

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Social Security was designed in 1935 as a program to keep the elderly out of poverty, and it has proven to be one of the most successful and wildly popular government programs ever created.

If not for Social Security, 37.8% of elderly Americans would be living below the federal poverty line today (compared to the less than one in ten Americans who actually do). The program has broad bipartisan support, as 96% of Americans say Social Security is an important government program, according to a 2019 AARP poll. It’s no surprise then, that both President Trump and his Democratic challenger Joe Biden, have promised to protect Social Security.

However, Social Security was never designed to be retirees’ main source of retirement funding. Yet, in 2017, roughly half of all retirees relied on Social Security as their primary source of retirement income, receiving an average benefit of just $1,503 a month or about $18,000 per year.

Even if Social Security’s precarious finances are shored up and benefits are increased in the near future — and there are several proposals pending in Congress to do it — the program still will not be equipped to meet the full retirement needs of most Americans in the years ahead.

That’s why the next president and Congress need to think more creatively about fixing (or replacing) the wobbly “three-legged” stool — of Social Security, employee pensions, and personal savings — that is simply no longer providing the support most Americans need.

Today, only half of all Americans are offered any form of retirement savings plan through their employer. And although the S&P 500 has more than quadrupled since the depths of the Great Recession in 2008, only 55% of Americans hold any stock.

So, one place to start in shoring up future retirements is to ensure more Americans own assets and can benefit from the long-term benefits of compound interest, which Albert Einstein reportedly once described as “the most powerful force in the universe.”

Senator Cory Booker (D-NJ) introduced a bill in Congress that would endow every child with $1,000 at birth. This so-called “baby bond,” that would be placed in an investment-bearing account that receives annual deposits based on family income.

A more ambitious version of this idea was proposed by hedge fund manager Bill Ackman, who suggested Washington should fund an investment account for every child born in America. Under Ackman’s plan, each child would receive $6,750 to be invested in a basket of index funds that could only be tapped at retirement. Assuming eight percent returns (the historic returns for a traditional 60/40 stock/bond portfolio) over 65 years from birth to retirement, the total would ultimately exceed $1 million, and it would cost the government about $26 billion a year. To put this in perspective, the federal government spent almost $910 billion on Social Security benefits in 2016.

Another idea would be for states to play more of a role in promoting retirement security.

It's expensive and difficult for some employers to set up retirement plans, so some states are taking on the administrative burden for them. These “automatic IRAs” are funded through direct employees’ payroll deposits to a low-cost, diversified retirement account, with deposits that continue automatically (an opportunity now limited mostly to 401(k)-eligible workers). Five states are now rolling out auto-IRAs for small businesses unless they choose to opt out, and more than 30 states are weighing plans in their legislatures.

Finally, America needs a nationwide commitment to expand financial literacy. One-third of millennials — those born between the early 1980s and the mid-1990s — report being “very unsatisfied” with their financial situation. And it’s no wonder young people are struggling to manage their financial situation when only 24% can demonstrate basic financial knowledge when tested. Across all age groups, only one in five Americans, when given a choice of answers, could correctly identify the way Social Security benefits are calculated.

The Bipartisan Policy Center (BPC), through its Commission on Retirement Security and Personal Savings, recommends incorporating personal finance courses into high school and college curriculums. One way to put this BPC solution into action could be through the passage of the bipartisan Consumer Financial Education and Empowerment Act (H.R. 6012) proposed by Representatives David Scott (D-GA), Steve Stivers (R-OH), Madeleine Dean (D-PA), Barry Loudermilk (R-GA), French Hill (R-AK), and Joyce Beatty (D-OH). The bill proposes for the Consumer Financial Protection Bureau to award grants to certain nonprofit organizations, state governments, and local governments for the establishment of financial literacy programs.

So should the next president and Congress act to shore up and fix Social Security? Absolutely. But all Americans need to understand that alone won’t fix the retirement security problem for millions of Americans.

Olive Morris is a policy analyst with The New Center. To read more policy proposals for improving retirement security, read The New Center’s latest issue brief, “Beyond Social Security and Toward Real Retirement Security.

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