On November 14, 2014, Michael Hiltzik writes in the Los Angeles Times:
Alicia H. Munnell has some gloomy words for Americans about retirement.
“There are only three options,” she writes in her new book, “Falling Short: The Coming Retirement Crisis and What to Do About It.” “The first is to simply accept that we are going to be poor in retirement. The second is to save more while working, which means spending less today. The third is to work longer, which means fewer years in retirement. Those are our only options.”
Munnell should be heeded, for as director of the Center for Retirement Research at Boston College she is one of our leading scholars of retirement economics. “Falling Short,” she told me in an interview, “brings together everything I’ve been writing about for 15 years.” The book, co-written with her BC colleague Andrew D. Eschtruth and investment consultant Charles D. Ellis, is aimed at the general public and fashioned as an assemblage of home truths.
The most important is that our traditional retirement sources aren’t up to the task of providing for an adequate post-career lifestyle.
“Social Security replacement rates (the portion of pre-retirement income it provides) are being gradually reduced,” she writes. “On the private employer side, traditional pensions are rapidly disappearing, replaced by 401(k) plans.” These “shift all risks and responsibilities from the employer to the individual, and most of us are not well prepared for this burden.”
So what are the solutions? One is to make the most of the 401(k), despite its rotten design. Munnell observes that 401(k)s originally were viewed as supplements to employer defined-benefit pensions. Workers were given broad discretion over whether to contribute and how to invest.
But they’ve taken over as the main pension offering. In 1983, 62% of workers had defined benefit pensions, 12% had 401(k)-type plans, and 26% had both; now only 17% have traditional pensions, 71% have 401(k)s, and only 13% have both. Workers who reject the option are seriously jeopardizing their retirements. Munnell lauds the 2006 federal law that encouraged employers to make 401(k)s an automatic choice unless a worker opted out. But participation is still poor, as only 80% of eligible workers have 401(k)s and only 10% contribute the maximum permitted (up to $17,500 this year, or $23,000 for those 50 or older).
Munnell advocates shoring up Social Security, but not by cutting benefits. “It always sounds ‘fair’ that you’re going to solve the problem half with revenue increases and half with benefit cuts,” she told me. But given how strained Americans’ retirement resources will be, “no cuts is absolutely the way to go.” She calculates that a payroll tax increase of 2.88 percentage points, split between employers and employees, would make the program solvent for the next 75 years. She also says that allowing the system to invest some of its surpluses in equities — by law, they can be invested only in Treasury securities — is “worthy of a thoughtful conversation.”
One of Munnell’s most interesting ideas concerns Social Security’s “legacy debt,” which is perhaps the least-understood but weightiest factor in the program’s long-term financing. This is the debt the system incurred by paying the first generations of covered workers more in benefits than they had earned by their contributions. It still exists, and every subsequent generation has been paying it down, resulting in a slightly poorer return on their contributions.
Congress made the deliberate choice in 1935 to cover a reasonable retirement for those first generations. They had fought in World War I and been ruined by the Depression (and would shoulder the burdens of World War II). Based on their meager contributions, workers earning the median family wage of about $100 a month would be entitled to a risible pension of 48 cents a month, Edwin Witte, the Social Security Act’s drafter, advised Congress. Instead, the act provided for pensions worth 15% of their annual wage.
We’re still paying the bill — but not all of us at a fair level. Wealthier workers get a pass to the extent their wages surpass the payroll tax cap ($117,000 this year). But there’s no reason they shouldn’t pay their fair share of a debt to America’s parents and grandparents. Munnell advocates transferring the legacy debt cost to the federal income tax. That would “shift the burden to the general population in proportion to the ability to pay.” The shift would require an increase in the average income tax rate from 19% to about 23.6%, which she acknowledges would be “extremely difficult in today’s political environment.” But the debt has to be paid somehow.
In a couple of respects, “Falling Short” may be too narrow a treatment of the retirement crisis. I would have liked a serious discussion of the most visionary idea for Social Security being advocated in Washington, which is to expand benefits, not merely keep them stable.
Nor does the book focus on the macroeconomic factors that have made it so hard for the working class to keep up, mainly the stagnant or declining share of economic growth for middle- and lower-income workers. Income inequality not only deprives them of the resources to save, but cheats Social Security of a fair share of the national income. (In 1983, fully 90% of all wages was subject to the Social Security payroll tax; by 2012, the sharp rise in income collected by the wealthy had reduced that ratio to about 83%.)Plainly, rising wages during their working years would alleviate at least some of the threat of a poverty-stricken retirement.
In reality, many workers’ retirement choices are dictated by employers. Munnell advocates, properly, that those who can work longer do so, but she doesn’t pay enough heed to the fact that not even the able-bodied and mentally fit can make this choice unilaterally: It requires willing employers and an accommodating economy.
It’s right to advise that we “keep our skills up to date and be responsive to the needs of our employer.” But many businesses large and small don’t value the skills and experience of mature workers as much as they detest the wages and benefits they shell out to keep them on the job. Age discrimination and the experienced and knowledgeable worker forced into retirement by a cheeseparing corporation aren’t myths.
Still, “Falling Short” is a primer on the choices confronting Americans in today’s world rather than an economic tome. Americans have not been facing up honestly to their prospects in retirement. “Falling Short” will help them do so.
http://www.latimes.com/business/hiltzik/la-fi-hiltzik-20141114-column.html#page=1
Neither Alicia Munnell or Michael Hiltzik offer any concrete solutions to the train wreck that is ahead of us as a society.
I’ve said it before and I’ll say it again: It’s great to be unemployed and retired if you can afford it!
There have been numerous proposals, including President Obama’s MyRA program and senator Tom Harkin’s proposal for the Universal, Secure and Adaptable (USA) Retirement Funds Act of 2014, to address eroding retirement security.
Both proposals are yet more attempts to address the fact that Americans are not saving enough for retirement. But the proposals fall far shot by “trillions” of dollars.
The plain truth is that more than four in five older Americans expect to keep working during their latter years, a sign that traditional retirement is out of reach for vast swaths of society. According to a new survey poll conducted by the Associated Press-NORC Center for Public Affairs Research, among Americans ages 50 and older who currently have jobs, 82 percent expect to work in some form during retirement.
In other words, “retirement” is increasingly becoming a misnomer.
For those who have been dependent on employment and/or welfare, the problem is that financially sustainable retirement is and will no longer be a reality. Even with Social Security, which is funded through payroll taxes called the Federal Insurance Contributions Act tax (FICA) and/or Self Employed Contributions Act Tax, (SECA), one must have had a job to be eligible for the entitlement––and the amount of Social Security is based on the income level generated from one’s employment record of payroll tax contributions.
Employer-provided pensions continue to decrease and personal savings is not the norm among the vast majority of American households who must spend virtually every earned dollar on living expenses. While increasingly individuals are finding it necessary to continue working in retirement to supplement their income, most older Americans discontinue full-time career work and struggle to meet obligations with minimum-pay part- and full-time jobs. A proportion of retirees also receive income from welfare programs, such as Supplemental Security Income and other life-support services funded through tax extraction and government debt.
This perspective should serve as the “reality” from which to explore prospects for effectively dealing with eroding retirement security.
Senator Harkin’s proposal has all the downsides of the “MyRA” and nothing to recommend it. It claims it offers lifetime income security funded out of current savings, meaning further reductions in consumption out of already inadequate incomes. It also aggregates everything into a “private sector” institution that is custom designed to be “too big too fail.”
As with President Obama’s MyRA proposal, Senator Harkin’s proposed Universal, Secure and Adaptable (USA) Retirement Funds Act of 2014 will not succeed in providing any real, substantial retirement security for the majority of Americans whose jobs do not earn more than substance week-to-week and month-to-month wages. Both plans are designed to encourage Americans to save for retirement and require personal savings and denial of consumption. This is unrealistic given that the Americans with the least opportunity must reduce what is inadequate consumption income in order to accumulate savings for retirement, which for most Americans will be inadequate.
Does anyone really believe that the interest rate to be paid under these programs will be sufficient and able to avert the decline in the value of the money as the government continues to flood the economy with increasingly non-asset-based debt?
Both proposals rely on the requirement to reduce consumption in the economy at a time when what is needed is expansion of the economy supported by increased consumption.
As my colleague Michael Greaney at the Center for Economic and Social Justice (www.cesj.org) states, “under the prevailing Keynesian paradigm, of course, ‘saving’ is always defined as the excess of income over consumption. If you want to save, then, the iron assumption of Keynesian economics is that you must consume less.”
The American consumer is being put into an impossible situation of being asked to consume more to drive the economy and reduce saving, and at the same time are being told they must reduce consumption dramatically in order to accumulate sufficient savings for retirement.
Of course, the whole problem would go away if we financed both retirement and wealth-creating, income-producing physical productive capital needs out of “future savings,” thereby increasing the capacity to consume and support the economy while simultaneously building financial security for every American citizen.
A far better and productive approach would be to create a new way for working and non-working Americans to start their own retirement savings: MyCHA. CHA stands for Capital Homestead Account. It would be a super-IRA or asset tax shelter for citizens. The Treasury should start creating an asset-backed currency that will enable every child, woman and man to establish a CHA at their local bank to acquire a growing dividend-bearing stock portfolio comprised of newly-issued stock representative of viable American growth corporations to supplement their incomes from work and all other sources of income.
We can create new asset-backed money for investment through the existing but dormant Section 13(2) rediscount mechanism of each of the 12 regional Federal Reserve banks that would be backed by “future savings” (that is, future profits from higher levels of marketable goods, products, and services).
The CHA would function as a savings and income account that effectively would build a nest egg over time, using interest-free, insured capital credit loans. A CHA would be offered to EVERY American, whether employed or not. Of course, those employed may also have additional opportunities to acquire personal ownership in their companies using an Employee Stock Ownership Plan (ESOP) trust financial mechanism.
The CHA would process an equal allocation of productive credit to EVERY citizen exclusively for purchasing full-dividend payout shares in companies needing funds for growing the economy and private sector jobs for local, national and global markets. The shares would be purchased on credit wholly backed by projected “future savings” in the form of new productive capital assets as well as the future marketable products and services produced by the newly added technology, renewable energy systems, plant, rentable space and infrastructure added to the economy. Risk of default on each stock acquisition interest-free loan would be covered by private sector capital credit risk insurance and reinsurance, but would not require citizens to reduce their funds for consumption to purchase shares. There would be no prerequisite requirement to qualify for an annual set capital credit loan other than American citizenship.
This idea to stimulate economic growth and provide retirement security for EVERY American is based on the premise that what is needed is for the system to facilitate spreading the ownership of productive capital more broadly as the economy grows with full payout of dividend earnings, without taking anything away from the 1 to 10 percent who now own 50 to 90 percent of the corporate productive capital wealth assets. In doing so, the ownership pie would desirably get much bigger and their percentage of the total ownership would decrease, as ownership gets broader and broader.
This would benefit the traditionally disenfranchised poor and working and middle class, who are propertyless in terms of owning productive capital assets. It would also result is tremendous economic growth, which would benefit everyone including the already wealthy ownership class, and create opportunities for real jobs, not make-work as an expanded economy is built that can support general affluence for EVERY American citizen. Thus, as productive capital income is distributed more broadly and the demand for products and services is distributed more broadly from the earnings of capital, the result would be the sustentation of consumer demand, which will promote economic growth. That also means that over time, EVERY child, woman and man could accumulate a diversified portfolio of wealth-creating, income-producing productive capital assets to provide economic security in retirement and not be dependent on having to work during retirement or rely on government-assisted welfare.
One might ask how we failed to grasp the significance of productive capital’s input and the necessity for broad private sector individual ownership? Unfortunately, ever since the 1946 passage of the Full Employment Act, economists and politicians formulating national economic policy have beguiled us into believing that economic power is democratically distributed if we have full employment––thus the political focus on job creation and redistribution of wealth rather than on full production and broader productive capital ownership accumulation. This is manifested in the belief that labor work is the ONLY way to participate in production and earn income. Yet, the wealthy ownership class knows that this notion is idiotic.
In real productive terms, productivity gains are the result of tectonic shifts in the technologies of production, which consequently eliminates the need for human labor, destroys jobs, and devalues the worth of labor.
One should ask what form would the structural reforms take. Employment in this new enlightened age would start at the time one enters the economic world as a labor worker, to become increasingly a productive capital owner, and at some point to retire as a labor worker and continue to participate in production and to earn income as a productive capital asset owner until the day you die. As a substitute for inheritance and gift taxes, a transfer tax would be imposed on the recipients whose asset holdings exceeded $1 million. This would encourage those owning concentrations of productive capital assets (effectively the 1 to 10 percent) to spread out their monopoly-sized estates to all members of their family, friends, servants and workers who helped create their fortunes, teachers, health workers, police, other public servants, military veterans, artists, the poor and the disabled.
Other stipulations for the structural reform would entail tax policy reform to incentivize corporations to pay out all profits to their owners as taxable personal incomes to avoid paying stiff corporate income taxes and to finance their growth by issuing new full-dividend payout shares for broad-based individualized employee and citizen ownership with full-voting rights.
We need to encourage the insurance industry to expand their product lines to market Capital Credit Insurance to cover the risk of default for banks making loans to Capital Homesteaders under the proposed Capital Homestead Act. Under the provisions of the Act, risk of default on each stock acquisition loan would be covered by private sector capital credit risk insurance and reinsurance issued by a new government agency (ala the Federal Housing Administration concept), but would not require citizens to reduce their funds for consumption to purchase shares.
The end result is that ALL American citizens would become empowered as owners to meet their own consumption needs and government would become more dependent on economically independent citizens, thus reversing our country’s trend where all citizens are becoming more dependent for their economic well-being on the “state,” our only legitimate social monopoly.
Implementing the Capital Homestead Act would significantly empower ALL Americans to accumulate over time a viable, diversified ownership portfolio in our nation’s growth companies and create a truly unique, global-leading just and environmentally responsible Ownership Society that fosters personalism, creativity and innovation. Embarking on a new path to prosperity, opportunity and economic justice will expand growth of our market economy in ways that democratize future ownership opportunities, while building a future economy that can support general affluence for EVERY American.
In conclusion, both President Obama’s MyRA and Senator Harkin’s USA programs would be completely unnecessary if we had Capital Homesteading. President Obama, Senator Harkin and other elected representatives should instead advocate for the passage of the Capital Homestead Act.
See two references to the proposed Capital Homestead Act at http://www.cesj.org/homestead/index.htm and http://www.cesj.org/homestead/summary-cha.htm.
For more on how to accomplish such structural reform, see “Financing Economic Growth With ‘FUTURE SAVINGS’: Solutions To Protect America From Economic Decline” at NationOfChange.org http://www.nationofchange.org/financing-future-economic-growth-future-savings-solutions-protect-america-economic-decline-137450624 and “The Income Solution To Slow Private Sector Job Growth” at http://www.nationofchange.org/income-solution-slow-private-sector-job-growth-1378041490.
