The other day, I received an invitation to an event at the Brookings Institution called “The new American dream: Retirement security.” This seemed right up my alley, so I clicked through to see the event details. The description starts off with some generic language:
“The American dream has drawn millions to the ‘land of opportunity’ and long encapsulated the idea that every citizen has the right to improve their lives. Yet, the current state of the U.S. retirement system may threaten the ability of some to fully achieve the American dream by ensuring their health and quality of life in retirement.”
I naturally found myself nodding along, since the inadequacy of our old age insurance programs is a subject near to my heart. The description continued:
“The traditional three-legged stool of retirement—social security, pension, and retirement savings—is transforming into a wobbly one-legged stool,”
so far, so good,
“with personal savings and investment providing the only retirement security.”
Social Security is the only source of income security in retirement
It’s been a while since I’ve written about Social Security, so let’s do a quick refresher on how the program works:
- any time between age 62 and age 70, you can claim an old age benefit based on your income in the highest 35 wage-inflation-adjusted years for which you reported earnings;
- the longer you wait after turning 62, the higher your benefit is;
- your benefit will never fall;
- and your benefit is adjusted upward for inflation each year.
Because the benefit is paid in US dollars by the United States federal government, the system can never go bankrupt. This is retirement security.
Personal savings and investment provide income, not security
What is the difference between income and security?
First, income fluctuates. If your savings are in a savings account then the interest rate might fluctuate monthly or quarterly. If they’re in a CD ladder, then each time a CD matures you’re forced to reinvest the principle at the currently prevailing interest rate. If they’re in stocks, bonds, or mutual funds, then the dividends and coupon payments you receive will likewise fluctuate along with interest rates and economic conditions.
Second, income is risky. If you don’t have control over when you sell your investments, you risk selling them at depressed prices, permanently impairing your ability to generate additional income in the future.
Finally, income is vulnerable to inflation. The very safest federally insured deposits may pay little or nothing in excess of inflation, meaning to generate real income you need to draw down your principal or invest in riskier assets.
No one in their right mind should confuse personal savings and investment for retirement security. So why did the Brookings Institution?
The risks of specialized knowledge
If you said to me, “Social Security succeeded in lowering the elder poverty rate from 35% in 1965 to 10% in 1995, but some elderly people are still in poverty,” I would say, “that’s because Social Security benefits are too low and the minimum benefit needs to be raised so no seniors live in poverty.”
If you said to me, “many children in the United States live in poverty,” I would say, “that’s because children don’t earn income, while requiring adult supervision, and we need a universal child allowance that reflects that fact.”
Specialized knowledge, the kind of knowledge possessed by scholars at the Brookings Institution, makes it very difficult for people to identify problems and propose solutions that address them directly. Once you know that 401(k) accounts exist, but that most people don’t have access to them, and most people who do have access to them don’t participate in them, then it’s the most natural thing in the world to find yourself talking about how to expand access to 401(k) plans, how to increase participation, how to increase the quality of the investment options, how to ensure people are getting unbiased investment advice, etc, and calling that a set of solutions to “retirement security.”
But those questions are all downstream from, “how do we provide retirement security to elderly Americans?” That’s a question we already know the answer to: bigger Social Security checks.
Likewise, once you know the Social Security Administration collects more money than it spends and saves that money in a “trust fund” that will be used to pay benefits once outlays begin to exceed FICA tax revenue, and that the “trust fund” will be “exhausted” in 2034, then it’s natural to start frantically wondering what combination of benefit cuts and payroll tax increases will be necessary to make the program “solvent.”
But if all you want to know is “how will the federal government pay for Social Security benefits in the future?” then the answer is obvious: the same way it pays all its other bills, a combination of corporate and individual taxes, estate taxes, licensing fees, seignorage, and debt. My preference would be fewer wars, higher taxes, and less debt, while if you’re a Republican your preference might be for more wars, lower taxes, and more debt, but there’s no use pretending Social Security benefits pose some unique threat to the Republic. That is the risk of specialized knowledge.