Our Sinking Retirement System

Posted: Sep 08, 2013 12:00 AM

Most Americans are worried about whether their pension money will be available for them when they retire. The 80% of workers who are reliant on Social Security doubt its long-term viability. This fear is validated by Congressional squabbling. Government workers look at what is going on in cities like San Bernardino, Stockton and Detroit and wonder whether they will receive the retirement money they were expecting. To get some clarity, we discussed the future of our retirement system with Sylvester J. Schieber, a former Chairman of the Social Security Advisory Board and author of The Predicable Surprise – The Unraveling of the U.S. Retirement System.

Mr. Schieber’s book serves not only as a primer on the Social Security/retirement system in the United States, but as a blue print for where we are heading and what we can do to change things. It is a very readable book, but at the same time you must bring your thinking brain with you --- this is not light reading. Schieber told me he wrote this book because he thinks the misinformation people are given and misconceptions they derive needed some clarity.

For example, one of the biggest debates we have about the social security system remains the pay-as-you-go-method. Many argue (including this column’s author) that the system really has no assets and that all that exists in the Social Security Trust Fund are pieces of paper that promise future payments – in effect IOUs. Schieber makes clear that, from the inception of the program, there was a debate about pay as you go. Apparently, President Roosevelt (FDR) was highly concerned about a pay-as-you-go system. He felt it would lead to future struggles for the Congress to cover the planned necessary payments to program participants. It seems FDR was clairvoyant as our Presidents and Congress have been discussing (or avoiding discussion) of overhauling the system for more than a decade. We all know President (George W.) Bush made it a priority of his second term and got nowhere.

The people who ran the system in the 1930’s were also pretty good at predicting the future. The actuaries who calculated the rates projected that in 1980 the combined employer and employee contribution rate would be 10.68%. The rate was 10.772%, The actuaries in 1939 fairly well projected the aging of the population that continues today. What they did not predict was the inflationary period we went through in the 1970’s and that benefits would be tied to the inflation rate. Thus, benefits and costs soared much more rapidly than could have been anticipated.

The plan adopted in 1983 to address the shortcomings of the system has proved to be significantly inadequate. The first updating of the retirement age after almost fifty years of social security was a move forward, but not enough. The regular retirement age increased by a year to 66 in 2009, but it will be another 18 years (2027) until the retirement age becomes 67. Schieber stated that life expectancy is going up about a year every decade. That means in 2013, the retirement age should be 68 years old just for the social security system to have an opportunity to maintain benefits.

Almost 20% of American workers are covered by government pensions, and that is where the main concern rests for future funding. In 1974 Congress passed an act known as ERISA, which still controls the rules for pensions. Unfortunately, Congress exempted public pension plans from the act. Schieber sees two problems coming from that exemption. The first and most obvious is the statement to private industry that “we want you to follow rules, but they are not going to apply to us.” This is similar to the current fight over the IRS and Congress being exempt from the rules of Obamacare. Schieber expressed that the double standard creates ill-feelings between private industry and the governmental entities that create laws. He thinks the laws should be applicable to all. Second, he thinks that if public pension plans were covered by ERISA we would not have most of the problems we have today. Certainly, the people receiving high annual pension payouts would not exist because they would be restricted like private plans are today.

The problems that exist with public pensions are because elected leaders make commitments and then don’t provide adequate funding for the pensions. Of course, then there is the morality of public employees retiring earlier and receiving much higher pension benefits than the taxpayers who are funding those pensions. Plenty of Americans will not be crying for the people who have their excessive retirement benefits restructured in the event of a municipal bankruptcy.

Interestingly Schieber thinks the current private pension system, which is mostly dependent on individual contributions and participation in programs like 401 (k) plans, puts the private sector in much better shape than if they had the old defined-benefits plans where the company made all the contributions. He stated as a compliment to social security, the current system is providing Americans a far safer retirement.

With the future of retirement programs in question throughout the country, it is always beneficial to get the viewpoint of someone who has written a dozen books on the subject and been chairman of the largest retirement program in the country. To delve even deeper, read his book and prepare yourself even more for the prodigious challenge facing this country.