Autopsy of a Retirement Plan

May 24, 2018

AAUP Academe
May-June 2018

As I approached age sixty-five after thirty-seven years of university teaching, I took stock of what my retirement income would look like. Many retirement experts claim that at least 70 percent of preretirement income is necessary to maintain one’s standard of living. For example, someone whose final annual income will be $100,000 should have as a goal an income of $70,000 in retirement.

I ran the numbers for my Social Security and my employer’s defined-contribution plan, in which I had participated for thirty-one years. This 401(a) plan, which functions in the same way as a 401(k), had been administered at various times by TIAA, ING, and Prudential.

Together, my projected Social Security and employee retirement plan would amount to just 43.5 percent of my final income. The monthly Social Security check accounted for 19.5 percent; the annuity income option for my defined-contribution plan, 24 percent.

Something had gone terribly wrong. Despite having accumulated almost a half-million dollars, which is much more than the $125,000 average for people approaching retirement, I did not have enough to finance a retirement that would allow me and my family to maintain the middle-class standard of living that my $117,615 final salary as a university professor afforded.

Click to continue reading “Autopsy of a Retirement Plan.”


Retirement Savings Plan for Private Workers Only Partial Solution

May 6, 2016

Hartford Courant
April 30, 2016

The Connecticut House just passed a bill to mandate that employers who don’t have retirement plans for their workers participate in a new state-sponsored plan, essentially a public IRA, which gives workers the option of saving for retirement. The Senate should pass the bill and Gov. Dannel P. Malloy should sign it, but without illusions about what it will accomplish.

Opponents of the bill, including the Connecticut Business & Industry Association, say that the private sector provides sufficient retirement savings plans. The bill’s proponents counter with the undeniable statistic that half of Connecticut workers have no retirement plan and will be completely dependent on Social Security, which provides only a fraction of necessary retirement income. They imply that the new plan would make up the gap, solving the retirement crisis.

Neither side is right. We wouldn’t have a growing retirement crisis if private plans had been sufficient, and the public approach under this bill, HB 5591, while useful, will not be nearly enough to allow participants to retire with sufficient income.
Continue reading “Retirement Savings Plan for Private Workers Only Partial Solution”

The New State Retirement Savings Plans: Public Options vs. Corporate Business Development

October 16, 2015

Huffington Post (October 15, 2015)

A key source of the growing retirement crisis is that employers of over half of private sector workers do not provide retirement plans beyond mandatory Social Security, which was not designed to proved full retirement security. In response, twenty-five states are developing retirement savings plans to which the affected workers could contribute.

Those plans, even in combination with Social Security, will not be enough to resolve the retirement crisis, but they could be helpful if designed as true public options to the retirement savings vehicles available from the private financial services industry.

Private retirement savings plans do a good job of providing profitable revenue for the financial services industry but at the expense of future retirement income for participants.

Public option plans, on the other hand, without profit needs could be designed to maximize retirement income for participants. Doing so would require patching the two major sources of profit leakage: corporate profiting from administration and investment of retirement savings plans; and profiting from the sale, administration, and control of retirement annuities.

To read more, click here

Obama State of the Union 2012 and Social Security

January 25, 2012

“As I told the Speaker this summer, I’m prepared to make more reforms that rein in the long term costs of Medicare and Medicaid, and strengthen Social Security, so long as those programs remain a guarantee of security for seniors.”  Obama is leaving the door open to cuts to Social Security.  Once again, those of us who defend Social Security will have to keep our guard up, even with a Democrat president.

Social Security Survives Elite Attempts to Weaken It in 2011

December 31, 2011

The Republican attempts in 2011 to weaken Social Security in the name of deficit reduction were to be expected; the mixed signals of the Democrats in terms of defending it were concerning.  What saved Social Security from cuts was mobilization by organizations such as Strengthen Social Security of the public which overwhelmingly supports the program in the face of backroom Washington attempts by elites to weaken it.

For an excellent summary of the political battle to defend Social Security during 2011, go to Scott Hochberg’s article at Strengthen Social Security.

Don’t Go After Military Pensions

December 27, 2011


New York Times

December 27, 2011


AS the nation’s budget pressures prompt officials to scour the Defense Department for cuts, one tantalizing target is the military retirement system. The Pentagon has reportedly been considering replacing the guaranteed pension that, for more than a century, has been a fundamental compact between the United States and its soldiers, in favor of a market-based 401(k) approach. But this would be a grave mistake, a disincentive to future volunteers and a threat to national security.

Needless to say, there are critical differences between the civilian and military work forces. Soldiers who have risked their lives for our nation should not also have to risk their retirement savings in stocks. But there are many more mundane sacrifices required of career service members that also make it hard for them to build up the kind of wealth — whether in their houses, their careers or the careers of their spouses — that cushions civilian retirees from the whims of the market.

Service members are often required to move, for example, which hinders their ability to build home equity. Many have to put off purchasing homes, and those who do buy do not have the option of choosing not to move if their mortgages become underwater. For this reason, the housing crash of recent years has hit service families especially hard.

Frequent moves also make it hard for service members’ spouses to find work and progress in their own careers. This is most likely a primary reason that median household incomes for military families are lower than those of their civilian counterparts.

Most important, the unique skills people learn on the battlefield do not easily translate into private sector employment, and many military retirees struggle to find new work. While the officer who managed a military transportation hub might anticipate an equivalent job from a civilian firm, and while a young private who served one deployment could relatively easily return to school or an entry-level job, an infantry sergeant first class who has spent a decade or more on multiple deployments to the world’s most dangerous places would not find the same ready options.

For these individuals, there can be a significant financial cost to agreeing to remain in military service beyond the years when it would be easiest to make the transition to more marketable civilian jobs. But these are the people the military needs, and needs to retain.

The military pension helps compensate for their sacrifices. Soldiers and their families are more willing to put off other careers, and to accept frequent displacement, lower earnings and even the risk of being ordered back to active duty after beginning new careers, because of the promise of future compensation. The guaranteed pension is one of the biggest incentives keeping talented people in the military.

No one knows for sure how a shift to a 401(k) model would affect these families and their decisions to remain in military service. But we do know that there is a spike in retirements once soldiers complete the 20-year minimum to qualify for full pensions, and we can only assume that these people would retire far sooner without them. And it’s likely that many would not join up at all.

As policy makers continue their deliberations on military spending cuts — which are scheduled to begin again next month — they must keep the unique nature of military service in mind when they look to the costs and benefits of the retirement plan. And they should remember that no one imagined, back in the 1970s, that our all-volunteer force would last this long. Most believed that conscription would again be needed if the nation ever engaged in a significant conflict. The United States military has proved them wrong so far, but we should not underestimate the role the guaranteed pension has played in its resilience.

Darrell Driver, Jin Pak and Kyle Jette are lieutenant colonels in the United States Army.

How Payroll Tax Cut Affects Social Security’s Future

December 7, 2011

by David Welna

National Public Radio, December 7, 2011

President Obama put Congress on notice Tuesday in a speech in Osawatomie, Kan.

He said that unless a temporary payroll tax  cut is extended this month, 160 million Americans would see their taxes go up next year by an average of $1,000. But there’s concern on both sides of the  political aisle that the payroll tax holiday might be undermining the solvency  of Social Security.

Fact No. 1: Last year, for the first time  in its 75-year history, Social Security took in less money than it paid out.  Fact No. 2: This year, the first of the baby boomers reached retirement age and  began collecting Social Security benefits. Fact No. 3: The payroll tax holiday  that Congress approved a year ago reduced Social Security’s revenues this year  by $145 billion.

Obama showed no sign of being troubled by  those facts when he popped into the White House briefing room earlier this week  and called on Congress to extend the payroll tax cut for another year.

“It will help families pay their  bills, it will spur spending, it will spur hiring and it’s the right thing to  do,” Obama said.

Republicans on Capitol Hill might disagree.  Although they do not think other tax cuts should be paid for, they make an  exception when it comes to Social Security.

“Getting rid of the way we fund Social  Security through the payroll tax is a dangerous idea,” says Lamar  Alexander, the Senate’s No. 3 Republican. “Taking money from Social  Security funding is a long-term raid on solvency of Social Security.”

It’s not just Republicans raising red flags  about Social Security, either. Bernie Sanders, the Vermont Independent who  caucuses with Senate Democrats, says he agrees with Obama that middle class  families and the working poor need tax relief to weather tough economic times.

“My concern is diverting hundreds of  billions of dollars from the Social Security trust fund into that immediate tax  relief,” Sanders says. “So I would love to see tax relief, but done
in a different way.”

Charles Blahous, whom Obama appointed last  year to be one of the six trustees of Social Security and Medicare, thinks it’s  a far greater danger than most people anticipate. He too says the payroll tax  break might be harming Social Security’s long-term solvency.

“I mean, I’m a Republican and I’m a  conservative, and if you were to ask me at a first approximation, do I want  lower taxes or higher taxes, then obviously I want lower taxes,” Blahous
says. “The problem here is that I’m also a public Social Security trustee  and so I’m honor-bound to identify when this causes a change or a difficulty  for the Social Security program, which it does.”

That’s because Social Security has long been considered self-financing and thus politically immune from budget cuts.  But that could change, Blahous says, now that employees are no longer paying  their full share into Social Security due to the payroll tax holiday.

“This could be the beginning of the  end of the idea that this is an earned benefit [and] where benefits enjoy a  certain amount of political protection because of a notion that they have been paid for in the past by the beneficiaries,” he says.

There’s anxiety among Democrats as well  about the prospect of prolonging the payroll tax cut. Nancy Altman, co-director  of Social Security Works, a Washington-based advocacy group, says she’s been  alarmed to see a Democratic administration dipping into Social Security’s  revenue stream to stimulate the economy.

“Democrats were the ones that created  Social Security and the ones that were the strongest champions over its 76  years,” Altman says. “So to have a Democratic president proposing to
undo the dedicated revenue … it’s a fundamental change that supporters of the  program, I think, should oppose.”

Altman worries the payroll tax cut has  become so popular it will be hard to end it, and that’s one reason why she  opposed it in the first place.

“Many of us at the time said that it’s  no way this is just going to last one year. And sure enough, we’re back now  talking about expanding it,” she says.

Some lawmakers do say the tax break is  worrisome, including Rhode Island Democratic Sen. Sheldon Whitehouse.

“I think one more year should be about  the limit,” Whitehouse says, “because of the nature of Social  Security.”

A program that, until now, has always paid  its way.


Oppose Social Security Tax Cut

December 2, 2011

by Steve Max December 1, 2011

Yesterday I received an e-mail from MoveOn summoning me to a demonstration in support of the Obama Administration’s attempt to fundamentally restructure
Social Security and shift half of its funding into the congressional budget processes. Of course MoveOn never mentioned Social Security.  They are deceiving their members by saying
only that they support a “small but useful tax cut.”

I am sure that you too are being asked to join the campaign to restructure Social Security and I urge you not to do so. The argument that this Social Security payroll tax cut needs to be
passed as a stimulus measure is simply fraudulent. The same amount of stimulus can easily be created, as it has been in the past, by cutting the income tax for middle income people, and by making a payment similar to the earned income tax credit to those with lower incomes.

Instead of directly cutting the income tax, the Administration proposes to both extend and increase the Social Security payroll tax cut and repay the money to Social Security out of general revenue with new money from a 3.25% tax on incomes over one million dollars.

In a phone call yesterday with staff at Senator Schumer’s office, Daniele and I were told that the Democrats are taking this course because they might get Republican support
for restructuring Social Security but not for cutting the income tax. Well of course they might. The Republicans sense that this is their chance to change Social Security from the self-funding independent program that FDR set up, to one that can be largely controlled through the budget process by a majority of either house. That is assuming the Democrats will continue in the belief that allowing this tax cut to sunset is actually a tax increase, and will want to keep it on the books for years to come.

This morning it became clear that the President’s shortsighted opportunism has led the Democrats into yet another Republican trap. The Republicans have introduced
their own bill to extend the Social Security revenue cut at its present level for another year but to pay for it by freezing federal employee salaries and reducing the federal
work force by 10%. By promoting a smaller cut in Social Security revenue than the Democrats advocate, the Republicans can now masquerade as defenders of Social
Security, while still supporting a middle class tax cut and shrinking government. Pretty smart! To continue their stimulus charade, the Democrats will have to make the type
of compromise of which the Administration has been so fond.

Let us all demand that Obama and Congress end this dangerous game.

See also the posting by Social Security Trustee Charles Blahous explaining why this proposal is a bad idea.

Social Security Payroll Tax Cut – A Temporary Stimulus with Permanent Damage

December 2, 2011

by  Charles A. Blahous

Published September 23, 2011

As a former colleague of mine has astutely observed, sometimes the most consequential policy mistakes occur because everyone is looking the other way. The President’s
latest “jobs” proposal to extend, and expand, cuts in the Social Security payroll tax is a good example. While nearly everyone has focused on the debatable efficacy of temporary
payroll tax relief as a stimulus measure, few seem to have noticed the severe problems it could create for Social Security itself.

Specifically, the proposal would accelerate a process begun last December: transforming Social Security from what it long has been – a benefit earned by worker contributions –
into an income tax based system more akin to welfare.

As a Social Security Trustee, I believe it is critical both lawmakers and the public have a greater understanding of this effect before the policy is advanced further.

The payroll tax is Social Security’s lifeblood. If it continues to be significantly cut, then only one of two things can happen:  Social Security’s insolvency is accelerated, or;
Social Security must be financed by general (read: income tax) revenues.

Either choice undercuts Social Security’s future ability to operate as it has in the past. So far, the Administration has quietly made choice #2: to convert Social Security into a general revenue-financed program.

The current payroll tax cut, enacted last December, was accompanied by a provision to funnel roughly $105 billion in general revenues into the Social Security Trust Funds. This
year’s “American Jobs Act” aims to cut payroll taxes by a further $240 billion next year alone. The proposed bill would also transfer an offsetting $240 billion in general
revenues into the program to make up for the uncollected taxes. In total, these proposals would make $345 billion of general revenue (income tax) commitments just over 2011-12
to support Social Security benefit payments.

This is not a small change; it would significantly alter the way Social Security is financed.

Consider this: in 2005, President Bush proposed that workers be permitted to invest part of their Social Security contributions in personal accounts. The Congressional Budget
Office then projected that this would result in roughly $323 billion in payroll tax revenues being redirected from the trust funds to personal accounts over the next decade;
critics decried as ruinous what was termed the “transition cost” of personal accounts.

But just two years of the payroll tax cuts proposed by the Obama Administration would shift more payroll tax revenue away from the trust funds than CBO found President Bush’s
proposal would over ten. Even more important, unlike President Bush’s proposal, none of this payroll tax cut would be saved to finance future Social Security benefit payments. The revenue would be “replaced” by new debt issued from the general government accounts.

This proposal should be provoking vigorous opposition from both ends of the political spectrum.

Progressives should oppose it because cutting the payroll tax directly undermines our ability to finance benefits (this is why 61 House Democrats wrote the President on July
21 to express firm opposition to a further payroll tax cut extension).

It also is incompatible with the progressive vision for Social Security’s future. Many progressives argue that the solution to Social Security’s shortfall is to raise taxes by
increasing the wage base subject to the payroll tax . But the case that Social Security might be rescued with significant future tax increases is fatally undermined if
elected officials conclude that the current payroll tax already is too high to sustain during a recession.

For conservatives, the primary problem isn’t cutting payroll taxes, it’s issuing general revenue transfers to the Social Security Trust Funds. Essentially, the proposal would
require that income taxes (rather than payroll taxes) must be raised in the future to redeem Social Security Trust Fund debt and to pay benefits. This would convert Social Security
into a program that requires higher income taxes to fund. It also would convert Social Security into something more like welfare, for which the funding is provided – not by
contributions from all covered workers – but preferentially from those subject to the income tax.

Choking off Social Security’s tax revenue and issuing debt in its place is a dangerously short-sighted policy that would swap, at best, a fleeting gain for potentially
devastating long-term consequences. At the very least, policymakers need to fully understand the stakes, and then ask themselves – and the public – if it’s a trade-off
they’re willing to make.

This is a condensed version of an article by Dr. Blahous previously published by e21. Please click here to view the full article.

[Charles Blahous, a senior research fellow at the Mercatus Center at George Mason University, is one of two public trustees for Social Security and Medicare.]

Security Plus Annuities – A Bad Idea

July 18, 2011

The Aspen Institute recommends establishing “Security Plus Annuities” to supplement Social Security benefits, an idea endorsed by Richard H. Thaler, a University of Chicago economics professor with ties to the financial services industry, in the New York Times (“Getting the Most Out of Social Security,” July 16, 2011).

The idea is that individuals would be able to top off their benefits by purchasing with 401(k) or other funds supplemental annuities from Social Security. 

If the Aspen Institute had stopped there, it would have been a good idea.  Social Security could sell annuities to the public at a much lower price than are the life insurance companies that dominate the commercial market.  Purchasers could be guaranteed the same pay-out rate as the rest of their benefits.

But the Aspen Institute didn’t stop there.  It recommended that “the federal government pre-select a private market annuity provider or providers (depending on the volume of purchases) to underwrite Security Plus Annuities on a group basis.”  The federal government would  provide “record-keeping, marketing, distribution and other administrative services, keeping Security Plus Annuities low-cost and a good value.”  Pay-out rates would vary according to interest rates in the economy as a whole.

In other words, the federal government would provide the work and prestige of Social Security to steer customers to private providers who would reap substantial profits.

Such a plan might have marginal advantages for retirees over the commercial annuities that are available now, but they would be far less than if Social Security issued as well as administered the annuities.  It would be similar to having Medicare collect taxes and then give them to a private medical insurance corporation to provide the insurance.  As with the Security Plus plan, it would add a layer of unnecessary private profiteering that would drive up costs to participants.     

James W. Russell