A retirement deficit that's only deepening

By Karen Friedman

Before the members of President Obama's deficit commission reveal their recommendations, which they are scheduled to do this week, it should be noted that any cuts to Social Security benefits will do nothing to reduce the long-term federal deficit. By law, Social Security is self-financing and prohibited from going into debt.

Social Security reductions would, however, increase another deficit: the retirement-income deficit that millions of Americans are already facing.

The retirement-income deficit is the gap between what people have saved for retirement and what they would need to have saved by now to meet their basic retirement needs. This gap is already huge: According to the Center for Retirement Research at Boston College, the retirement-income deficit is already $6.6 trillion, or five times the size of the federal deficit.

That figure includes Americans in their peak earning and saving years, from age 32 to 64. It also assumes that they will continue to work and accumulate additional retirement savings, pension benefits, and Social Security benefits until they retire at age 65 - later than most people currently retire. And it assumes retirees will use all their accumulated wealth in retirement, including home equity. In many respects, then, $6.6 trillion is a conservative estimate.

Cuts to Social Security will only make the problem worse. Two-thirds of American retirees and their spouses rely on Social Security for at least half their income, and one-fifth do so for almost all of it.

Social Security benefits - $14,000 a year for the typical retiree, $11,000 for women - amount to subsistence support. A full-time worker earning the federal minimum wage makes about $1,000 a year more than the average Social Security beneficiary. With benefits that lean, there's no fat to cut.

A proposal released by the co-chairmen of the deficit commission, former White House chief of staff Erskine Bowles and former Wyoming Sen. Alan Simpson, recommends a range of substantial cuts to Social Security. Among them are cost-of-living reductions for all current and future beneficiaries, including those receiving disability and survivor benefits as well as those receiving retirement benefits. The proposal would also reduce initial benefits for future retired and disabled workers and their families, as well as the families of deceased workers. And it would increase the normal and early retirement ages to 69 and 64, respectively.

As a result, today's retirees would see their benefits reduced as health-care costs are rising. And the commissioners' grandchildren would be living on Social Security benefits that have been decreased by as much as 36 percent.

The commissioners may think phasing in Social Security cuts will motivate young people to save more for retirement, but that's unrealistic given what we know. Half of today's private-sector workers have no retirement plan at work, which likely means they will depend on Social Security.

Meanwhile, true pensions - employer-paid plans that guarantee benefits - are disappearing. In 1980, two out of three American workers participated in traditional pension plans with guaranteed lifetime benefits. Now that figure is one out of five and falling. Employers are canceling such plans, rescinding promises to workers, and turning to do-it-yourself 401(k)s.

But 401(k) plans are failing to close the retirement deficit. Even before the stock market collapsed two years ago, half the households with 401(k) and other retirement savings plans had less than $45,000 in their accounts. For those approaching retirement, the median account balance was just $98,000 - not much to retire on.

It's hard to see how this situation will get better for future generations. Employers have made it clear that they don't want the responsibility of contributing to retirement plans, and do-it-yourself approaches haven't worked.

Social Security cuts would only aggravate matters. Policymakers must work to protect and strengthen the program and to create a modern pension system on top of it, with the responsibility shared by employers, employees, and the government. We need a comprehensive retirement policy that protects future generations of retirees.