Senators Sherrod Brown (D.-Ohio) and Patrick J. Toomey (R.-Pa.) just held the first of a series of hearings asking experts how to improve retirement security, and their prescriptions are to expand Social Security benefits for the poor and direct middle and upper income folks to ramp up private savings.
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“All those who want to live on $14,500 a year, raise their hand!” That’s the proposition Robert Romasco, president of the AARP, used to illustrate the average Social Security benefit, and push for strengthening the system at the low end.
Sen. Brown echoed that idea: “Maintaining or expanding Social Security is the single most effective thing we can do to prevent poverty and economic ruin for millions of senior citizens, while promoting economic mobility for their children and grandchildren.” Dean Baker, co-director of the Center for Economic and Policy Research, said that benefits for those at the bottom could be bumped up at a low cost.
Andrew Biggs, a scholar at the American Enterprise Institute, suggested more far reaching reforms to make Social Security more efficient—every retiree would get a flat benefit at poverty level. (That’s currently $11,490 for a household of one.) That would address the following problems: the complexity of the current benefit formula that makes Social Security a risky benefit for low-income people, and the variation in benefits for individuals with the same lifetime earnings.
Some sobering statistics were put forth. One third of all Americans aged 45 to 64 have nothing saved for retirement. Three-quarters of Americans nearing retirement age had less than $30,000 in their retirement accounts. Sen. Toomey applauded the existing diversity of savings options available now, and criticized attempts to reduce the amount Americans can save in these tax-favored accounts as a “bad idea.” (The Obama administration has proposed setting a $3 million cap on money accumulated in retirement accounts.)
There’s no doubt Americans can all do a better job at saving, says Romasco of AARP. John Sweeney, executive vice president of Fidelity Investments, gave some concrete suggestions to that end. Policymakers should double the default savings rate in employer-sponsored retirement accounts from 3% to 6%, and encourage more employers to add an automatic escalation feature that increases the percentage saved to 10% over time.
If you’re young and balk at a 10% savings rate, Sweeney says to consider whether you would take the same job at 90 cents on the dollar. “That’s the decision we’re asking each investor to make,” he says. “There’s an opportunity at all income levels to put money away for retirement.”
Sweeney shared advice for pre-retirees too. He gave the example of a client who retired from a university medical system at 62 with 15 years left on his mortgage who wanted to take Social Security at 65. Drawing down a significant portion of his assets for three years would put the client in risk of running out of money in his 80s. “You need to have the conversation before you retire,” Sweeney says, adding that that client could have benefitted by downsizing and paying off his mortgage.
Just because you’ve save some doesn’t mean it’s enough. A lot of people should and can retire later, says Biggs. In the 1950s the average age for claiming Social Security was 68, and now it’s 63.
A link to the hearing, The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis, held by The Senate Finance Committee’s subcommittee on Social Security, Pensions and Family Policy, is available here.
For a look at various plans to reform Social Security, see The Committee for a Responsible Federal Budget’s Setting the Record Straight On Social Security.
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