(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Mark Miller
CHICAGO, March 1 President Donald Trump outlined
a budget plan this week that steers clear of cuts to Social
Security and Medicare. That will not sit well with congressional
Republicans and some Trump Cabinet members, who think both
programs are pushing the government toward financial collapse
and want to shrink them.
Deficit hawks likely will pressure the White House to accept
cuts in Social Security and Medicare for future retirees,
protecting those already retired or close to it. Their political
goal will be to defang public opposition, since younger workers
tend not to focus much on retirement when it is several decades
But that approach is not going to work. Retirees and their
advocacy groups will fiercely resist cutting benefits down the
road, because they understand the critical importance of Social
Security and Medicare benefits. They also care about the future
retirement of their own children. And numerous polls show that
the public opposes benefit cuts - a view that is common across
all demographic groups and political affiliations.
Politics aside, cutting future benefits would be bad policy.
As I noted last week, Medicare’s financial challenges stem from
demographics and rising healthcare utilization - not the program
itself. (reut.rs/2lEyx7o) And while
per-enrollee spending is rising as a share of gross domestic
product, that growth is somewhat smaller than spending growth in
the private health insurance market.
Social Security, meanwhile, faces a long-term imbalance in
cost and revenue, but the gap is manageable. More importantly,
future retirees will need Social Security more, not less, than
their parents did.
First, consider that longevity is rising. In 2015, a woman
turning 65 could expect, on average, to live to 86.6 years of
age, according to the Social Security Administration trustees.
That average is expected to increase by more than a year by
2035, and by almost two years in 2045. (Men can expect similar
Rising longevity often is cited as a reason to cut benefits,
but the opposite is true. Savings alone cannot hedge against
longevity risk - the uncertain prospect of exhausting resources
before the end of life. Simply put, no one can predict their
lifespan with accuracy. The only way to guarantee income for
those lucky enough to live very long lives is with annuity-style
benefits like Social Security and pensions.
But far fewer of today’s younger workers will be covered by
pensions than in the past. Today, 57 percent of near-retirement
households (age 55-64) that participate in workplace retirement
plans are covered by a traditional pension, according to the
National Institute on Retirement Security; just 30 percent for
age 35-44 are covered.
Social Security already is on track to provide less support
to retired Americans than in the past, the result of changes to
the program during the last round of reforms in 1983. In 1985,
Social Security replaced 40 percent of pre-retirement income; by
2030, the rate will be just 30 percent, according to the Center
for Retirement Research at Boston College. The falling
replacement ratios stem from the impact of higher retirement
ages, rising Medicare premiums and a rising share of benefits
subject to income taxes.
Retirement saving will not close the gaps. The share of
workers offered workplace 401(k) plans actually has fallen in
recent years, and savings accumulation has not been strong. Just
26 percent of workers said last year that they have managed to
save more than $100,000, according to the Employee Benefit
Research Institute; 42 percent have saved less than $10,000.
PROTECT AND EXPAND
Meanwhile, the overall cost of building a secure retirement
is rising sharply - as measured by the amounts workers need to
sock away. Recent research by three top retirement researchers
concludes that a low-return outlook - along with the
aforementioned rising longevity - will require today’s workers
to boost their savings by 40 percent or more to maintain their
lifestyles in retirement.
The research comes from David Blanchett, Morningstar’s head
of retirement research, and Michael Finke and Wade Pfau, who
both teach at the American College of Financial Services. They
begin with the assumption that returns will be lower in the
future than they have been historically. Noting today’s negative
bond returns (net of asset management fees) and inflation, they
suggest that today’s workers will need to adjust their plans
accordingly on how much to save.
Social Security does face a long-term imbalance between
costs and revenue. By law, the program cannot deficit-spend, so
legislative reform will be needed by 2034 in order to avoid an
immediate 21 percent cut in benefits. The reforms could include
new revenue to the system, benefit cuts or a combination of
But the dim retirement outlook for today’s young people
means the smart play is to expand benefits. That can be achieved
easily by lifting the cap on wages subject to payroll taxes, or
raising payroll tax rates very gradually. We could also permit
Social Security to invest a small portion of the trust fund in
the equity market.
U.S. House Speaker Paul Ryan likes to talk about Social
Security and Medicare as programs in crisis. “Medicare and
Social Security are going bankrupt. These are indisputable
facts,” he said in a 2012 vice-presidential debate. Really,
those are alt-facts.
The job now is to hammer home the importance of our two most
important retirement programs. We must protect, preserve - and
yes - expand them.
(Editing by Matthew Lewis)