Three-quarters of our fellow Americans have just said in a poll that they believe everyone should have a defined benefit (or “final salary”) pension plan.
Phooey.
Talking is cheap.
How many of them are willing to fight for the final salary pension plan we already have?
I’m talking about Social Security. And the answer is: there probably aren’t many, depending on how everyone speaks, acts, and votes.
Some 242 million U.S. workers and retirees depend on Social Security today or will in the future. But, as regular readers know, the program now has $ 16.8 trillion in the hole. Without a drastic solution, in about a decade you will have to reduce profits by about 20%.
Still, you would hardly know it from the last eleven U.S. elections.
If we get to the point where Social Security really needs to be cut, it will be interesting to go back and look at the major newspaper headlines during the last five or six U.S. presidential elections.
To put the Social Security funding gap in context, there are 154 million contributing households in that country, according to the IRS. So filling the Social Security gap would mean an average one-year hike … $ 110,000 per household.
In the words of Alec Baldwin to Glengarry Glen Ross, “Oh, now I’ve caught your eye?”
(Maybe at Social Security we all need a moment of calm).
President Biden’s proposals include giving an additional 12.4% tax to those earning more than $ 400,000. (By the way, this would raise the higher effective marginal rate of federal income tax to almost 50%.) It also wants to expand the benefits for those at the lower end of the scale.
As MarketWatch’s Alicia Munnell herself says in an interview with Think Advisor, tax hikes aren’t enough and the extra benefits make the hole bigger, or smaller. Wharton says this plan would close less than half of the long-term funding gap.
As a nation, we have accumulated a national debt of more than $ 17 trillion extra since 2000, paying for wars, rescues, rescue packages, tax cuts, and protections (choose your order). So, at a time when we have to get our hands on $ 17 trillion for the country’s main pension fund, we find that we have managed to borrow $ 17 trillion … and spend it on the rest of the main fund of the country’s pensions.
Good job.
How ironic that 21 years ago, when the federal budget was balanced, President Clinton said budget number one priority should be to “save Social Security first.” If only.
Meanwhile, a viable plan to square the circle, investing Social Security funds in stocks like any other pension fund, is not even on the agenda.
Why not? I don’t like to sound cynical, though: Many of the people who make the rules don’t trust themselves in social security. So are they really going to sweat bullets to find ways to save them?
In 2005, then-President George W. Bush came up with a plan to half-bak, or possibly bake, to “privatize” Social Security. Most of his plan was unfeasible or worse. But buried within it was a good principle: that some (or even all) of our Social Security money should be invested in stocks.
There was, and is not, any reason why the trust fund should not be empowered by law to do so.
But this idea is so out of the “Overton window” of acceptable solutions that people won’t even discuss it.
If it’s so crazy, why do other pension funds invest in stocks?
If impossible, how can even Norwegians do it with their massive state pension fund?
Based on some basic math — and with advice for Michael Kitces at Buckingham Wealth Partners, though I’ve updated the figures — we can estimate that current Social Security has a capital value of about $ 320,000 for the ‘average man retiring at age 67. and $ 380,000 for the average woman.
This is what you would have to pay to buy an inflation-adjusted equivalent life annuity from a private insurer.
Thus, a 20% reduction would make the average man $ 64,000 poorer and the average woman $ 76,000.
Meanwhile, the new survey which suggests that 77% of people support “pensions for all” turns out to be lower than it seems. It has been published by the National Research Institute on Retirement, a reputable think tank. But among its original creators were the National Association of State Retirement Administrators and the National Council for Teacher Retirement. And the survey appears as part of a document that claims broad public support for state and local retirement plans.
An earlier version of this column had an erroneous statement of household net worth. It has been fixed.