One knitted item that never goes out of fashion is the furrowed brow with which Very Serious People ponder Americans’ retirement plans. Inchoate fear, dressed up with bogus statistics, has helped make it a cliche that Social Security is the “third rail of American politics” — cut it, and you’re dead.
That’s undoubtedly why, as The Wall Street Journal’s Richard Rubin says, House Democrats are preparing a plan to raise Social Security taxes and expand the federal government’s biggest and arguably most successful program ever. (About a quarter of the federal budget is spent on it.) For years, the Democrats’ role has been to stop Republicans from gutting or privatizing Social Security. Now they want to expand it, and that’s a bad idea too, though nowhere near as bad as shrinking it.
Not because the program has terrible fiscal problems that mean America can’t afford to secure a decent life for retirees — that’s a dumb Washington argument, stating a problem that’s easily fixed. But because America has much higher economic priorities than adding more to the pot for its richest age tier — the retirees are alright, as The Who almost said, and their grandkids need more to get going in life.
What retirement crisis?
The path to understanding the idea that retirees are in decent shape, bending conventional wisdom of both political parties, rests on a few numbers.
The first comes from the Investment Company Institute, a mutual fund industry trade group whose studies on retirement planning are a tonic, if not an antidote entirely, for pessimism.
The average U.S. retiree born in the 1960s can count on Social Security to replace 66% of their income if they retire at 67, ICI says. Workers who earned incomes in the bottom fifth of the population get about 98% of their inflation-adjusted lifetime earnings replaced by Social Security. That falls to 39% for workers in the top fifth.
Upper-income people, who have to replace more income, also have respectable amounts salted away, statistics from mutual fund giant Fidelity show. The average baby boomer with a Fidelity-managed 401(k) plan has $357,000 in it. And more than 340,000 Fidelity accounts, either 401(k) or IRA, have at least $1 million. (IRS data say 70% of older workers are in some form of such a plan, at Fidelity or elsewhere.)
Plus, Fidelity adds, this is only in their own plans — at Fidelity. What their spouses may have, and what may be in plans at other managers (say, in a 401(k) from a prior job), is on top of that.
Do these sound like people whose prospects are dire, or eroding? Let’s not forget that more than half of retirees don’t have a mortgage, according to AARP.
Warren’s wealth redistribution
One could be forgiven, early in this campaign, for thinking Democrats believe money to solve social woes is infinite. The House Social Security plan calls for raising the payroll tax to 7.4% from 6.2% over 25 years, and Sen. Elizabeth Warren’s presidential campaign is saying she would raise taxes on the rich to boost Social Security payments by $200 a month and make the program even more progressive. Separately, she would also pass a yearly wealth tax on people with $50 million or more in assets and raise top marginal income-tax rates, to pay for other proposals.
Now assume your high school teacher was right about economics being the science of allocating finite resources. Is more money for retirees how you’d go?
I’d look more at the $1.5 trillion pile of student debt, doubled since 2009. That’s the one meaningful financial bubble building up in this expansion.
While student loans are less crippling than many assert, they’re financial cholesterol clogging prospects for millions of households just starting out. And the rising cost of college itself — which Pell grants to working-class families have utterly failed to keep up with, making schools select richer, often-lazier kids who don’t need aid — must be addressed.
Both complicate life for millions selling homes, cars and furniture to emerging families.
The next president’s economic agenda should also focus on immigration, child care, health care and energy. Immigration, because the economy’s (and Social Security’s) biggest secular problem is a shortage of younger workers as boomers age. Child care because, as Warren has argued, it’s a giant financial barrier to young families that constrains fundamental choices like how many kids to have.
Energy, because climate change threatens trillions of dollars of assets. It’s not encouraging that Warren’s big idea last week was banning fracking for natural gas — a technology that’s eliminating usage of coal, by far Earth’s most pernicious fossil fuel. Along the way, fracking’s reducing Saudi Arabia and Iran to strategic irrelevance and creating millions of U.S. jobs. But, details.
Social Security’s fine — like Medicare, an ongoing testament to government’s ability to do a clearly defined job well. The better path now is to get education, energy and immigration economics even half as right.
Tim Mullaney is a MarketWatch columnist.