Should Social Security Retirement Be Subsidized?

One of the central features of Social Security, and one that has helped insulate it from decades of effort to scale it back, is that it is designed to be self-funding, and to pay out an amount that is roughly consistent with what a retired worker paid into the program. The history of Social Security stands as a strong argument against turning it into a means-tested program, requiring higher-earning workers to contribute an even greater share of the cost of the program, or making benefits more contingent upon a retiree's assets and other sources of income than on his past contributions.

A few days ago, David Brooks argued that Medicare is too good of a deal for retirees - that, according to the Urban Institute, a couple of average income receive far more in Medicare benefits than they paid for over the course of their careers. Brooks did not offer a link to the Urban Institute's data and, in this era, the absence of a link makes me suspicious... so I searched until I found the source. Sure enough, the authors found that for a married couple earning an average wage and retiring in 2011 at age 65, under the author's formula the cost of Medicare to the couple was $119,000 and the benefit was $357,000.

Why wouldn't Brooks have linked to that? Because the figure for Social Security was contributions of $598,000, benefits of only $556,000. That is, if Brooks wants to argue that the couple is getting a great deal on Medicare, he has to admit that under the exact same analysis they're getting a raw deal on Social Security, and he apparently decided that rather than trying to reconcile his argument with the facts it would be better to play "hide the ball" with the numbers.

As it turns out, Social Security isn't a good deal for a single person earning an average wage - $299,000 in, and $290,000 out for a female recipient vs. $266,000 for a male. At average wage (or higher) the couple that sees a tremendous return on their investment is the one-earner couple, paying in the same $299,000 but receiving $448,000 in benefits. Looking at other data from the same authors, the subsidy to a couple with one low-earning partner and one partner with average earnings is modest, and everybody else earning an average or higher wage is providing a modest subsidy to other recipients.

There are plenty of reasons why we, as a society, would want to ensure that stay-at-home spouses will not be impoverished in their retirement in the event of divorce or the death of the spouse who was employed outside of the home.¹ The very fact that the phrase, "worked outside of the home" is preferred by many over "had a job" reflects a cultural value. If in fact we, as a society, choose to value and privilege the role of homemaker, that's fine - but taking that position raises the reasonable argument that it should be society, not other working adults, who subsidize that cultural value. We fund SSI benefits out of the general fund due to the disconnect between those benefits and an employment history; why not do the same for retirement benefits extended to people who lack a sufficient work history of their own to otherwise qualify?

To look at it another way, if a Member of Congress were to propose eliminating or substantially reducing the subsidy to retirees in households in which only one spouse worked outside the home, what sort of firestorm would be unleashed? If our societal feelings are so strong that we can't even discuss the economic side of the picture, then we should be willing to address the cultural issue and the benefit we receive as a society by providing a very large subsidy to those households in retirement.

If the program is largely in balance other than for our determination as a society that stay-at-home partners of wage earners should receive most of the benefits that they would obtain had they also been employed outside of the home, it's reasonable to argue that the subsidy should come from the general fund and not by increasing the Social Security taxes upon or decreasing the retirement benefits that would otherwise flow to other retirees.

The Trouble With Pensions....

The League of Ordinary Gentlemen has had, in recent weeks, a number of thought-provoking posts on unions. If you're looking for something to agree with or to disagree with, if you review the posts odds are you'll find the opportunity to do both. (See, for example, "Public sector unions bad, private sector unions sort of good.")

E.D. Kain asks, in the context of the debate over pensions, whether the focus should be less on the idea that union members get too much and more on whether the real issue is that non-unionized workers are underpaid.

Nobody but public sector employees receive pensions anymore. And maybe this is an argument to move back to the pension model rather than an argument to get rid of public pensions. Maybe leveling the playing field is the right idea, but we should level it up rather than level it down.

I personally wouldn't mind having a pension (or more than one, if I could swing it) instead of being responsible for my own retirement. And yes, there are careers in the public sector for which workers of a certain age become less suited to the job. There's also an argument I've heard made that with the rate of job turnover, some government units can save money by having a defined benefit plan - provided it takes five or more years to vest. But....

In the argument about the negative side of public sector unions, Kain adopts the position that union members could collaborate to have union-friendly people elected to office and that those people might participate or influence future union negotiations. Not necessary. When managers negotiate union contracts, whether in the public or private sector, they almost inevitably give themselves equal or greater benefits. It's not fair, after all, if the union members get three days of bereavement leave and managers only get two - managers should have five. And it's not fair that a union member might be able to retire in twenty years with a vested pension unless....

I disagree with the idea that similar things don't happen in the private sector, although I'll concede that it's easier for private companies to avoid unionization, avoid their union contracts through bankruptcy, and that the directive is likely to come down from on high that concessions to unions aren't to affect the value of management's stock options. If you think that UAW workers were overpaid prior to the GM bankruptcy, did you happen to notice executive compensation and perks? Did you happen to notice that the government bent over backwards to keep the financial industry and AIG out of bankruptcy, with full, excessive compensation delivered out of taxpayer pockets and into those of the people who broke the financial system? It's not as if management suffers - just like public sector managers, the managers of publicly traded companies are happily spending other people's money, and are much more free to lavish it upon themselves.

Also, while vesting periods can potentially save money at one end (at the expense of a shorter-term worker) they cost money at the other end - people who stay a few years longer than they should in order to get their 'full' pension, or who get a last-minute promotion that significantly raises their retirement benefit. And the nightmares that can result when there's an attempt to reduce the workforce, with buyout packages, early awards of pension benefits, etc. - often with parity requirements such that you have to offer the same opportunity for a buyout or 'early retirement' to the people in other departments.

So, pensions? No, I would switch over to a defined contribution plan. The union can negotiate for a greater matching contribution. There's no future liability to government. Workers know exactly how much they have in their retirement accounts. Management services can be offered through companies with strong track records, such as TIAA/CREF. And no, people aren't as happy as they would be if they retired with a generous pension, but on the whole we'll be better off.

Addendum: I would do something similar with retiree health benefits. Perhaps the employer and union could negotiate for an annual contribution by the employer to retiree benefits, which would then be transferred to, held in trust and managed by the union.

Where Can I Find Employers Offering Pensions?

In a rather silly tribute to what she sees as a British love of austerity, Anne Applebaum lectures,

Hardly anyone in America is talking about cuts in Medicare, Medicaid or Social Security, for example, the biggest budgetary items (even though "private" pensions now look a lot safer, even when taking stock market fluctuations into account, than those who will depend entirely on a bankrupt federal budget 20 years hence).

Where exactly can I find a job that offers me a private pension? A secure one, that is. (Given her faith in private pensions, would Applebaum eliminate the Pension Benefit Guaranty Corporation as unnecessary?) Seriously, what country does she live in because... oh yeah, that's right, it isn't this one.

If Applebaum lived in this country, perhaps she would have noticed that Social Security cuts are very much on the table, and that the discussion recently made headlines in rather colorful terms. Medicaid benefits have been slashed across the country. Sure, Medicare reform is difficult, although the Obama Administration should get credit for going after Medicare Advantage subsidies; but when Applebaum comments, "In Britain, by contrast, everything is on the table: pensions, housing benefits, disability payments, tax breaks" it's interesting to note that her list of "everything" does not include cuts for the NHS - the budget has been "ring fenced" with some shifts in spending and plans to limit future growth. Sound familiar?

What is interesting about Applebaum's list is that she's principally rattling off benefits for the poor. She should recall from the 1990's that "welfare reform" is both popular and easy. She should be aware that Britain offer significantly more generous social support than the U.S., and that's unlikely to change even after the cuts are made.

Yes, wartime rationing had an effect on the nation, and I remember my grandmother's cupboard overflowing with boxes of sugar cubes - she was not going to go through another war without having sugar for her tea. But really, no, other than the handwriting on the wall being much more obvious, I don't sense that the British are slashing the budget because they want to show of their stiff upper lips and whatnot. If they loved austerity as much as Applebaum suggests, how does she imagine they got into their present financial crisis?

The Danger of Buyouts

Matt Miller suggests that schools will benefit from a bailout that provides them with funds to buy out the contracts of teachers who are no longer effective. He notes, quite reasonably, that teachers' contracts protect senior teachers against layoffs, and that schools could benefit from an approach that encourages underperforming senior teachers, many of whom will also be among the highest paid teachers in a district, to retire. He suggests that this approach could also save school districts in future pension obligations.

What's the problem? You can't simply single out underperforming teachers for such a buyout. You have to offer it to everybody who is similarly situated. By the time you offer an incentive that will entice the lowest performers to retire early, you've likely sweetened the pot to the point that many of the better performing teachers will jump at the offer.

A number of years ago I was living in a city that, following a change of administration, decided it wanted its attorney to retire. It put together a very generous package and, after the deal was signed, found out it was obligated to make the same offer to any number of similarly situated senior employees. There was a stampede to the doors. But even when the offer is less generous, similar results can occur. I recall a program implemented by a county court to encourage some of its more expensive employees to retire. A valuable employee retired and, under the terms of the retirement package, agreed that he was ineligible to be rehired by the county for a number of years. The county ended up hiring him back as a consultant at a significantly higher rate of compensation. Perhaps on the whole the court saved money, but you can see where this type of offer can lead.

Simply put, a teacher who is competent and motivated may see the grant of a year (or more) of salary, and perhaps a few years of credit toward her pension, as a great opportunity to pursue a new opportunity. A teacher who has no other viable prospects may find the offer tempting, but could easily decide that certain employment and a larger pension significantly outweigh the short-term benefit of the early retirement package.

Miller closes by suggesting that if Randi Weingarten won't get on board with his ideas, she's not a visionary and "we'll need a leader respected by all sides to champion and broker this breakthrough." Um... I suggest he take a few steps back and consider the full potential consequences of his vision, such that we're sure that his proposed cure won't be worse than the disease.

Gingrich & Goodman Idea #6: "Protect Early Retirees"

In their "Ten GOP ideas" piece, Newt Gingrinch and John C. Goodman observe,

More than 80% of the 78 million baby boomers will likely retire before they become eligible for Medicare. This is often the most difficult time for individuals and families to find affordable insurance.

That, of course, is why 60 Democratic Senators supported a Medicare buy-in for those workers, right up to the point somebody yanked Joe Lieberman's chain and caused him to flip-flop. Moreover, the Democratic Party was apparently more attuned to the actual needs of people who need health insurance but have not yet reached retirement age, because they did not require that a worker retire young before qualifying for the buy-in. If Gingrich and Goodman truly see this as a serious issue, as the Democrats do, why aren't they endorsing that solution?

Instead, they propose that "employers to obtain individually owned insurance for their retirees at group rates". Individual policies at group rates... they truly don't see a tension between those two concepts? Given that some of these individuals will be retiring early due to health problems, what do you think is going to happen to those rates? Insurance companies are already notorious for jacking small employer group rates through the roof when even one employee comes down with a costly illness, such as cancer. Do Gingrich and Goodman picture that the "group rate" concept will be preserved because the insurer will dump that individual, or do they simply not care that the "group rate" would quickly become unaffordable?

Gingrich and Goodman propose that employers help employees save for retirement by using health savings accounts; great, but in case they haven't noticed, most people don't have a lot of extra cash lying around these days. And what happened to the idea that we should break the tie between health insurance and employment? They also propose that "some or all of the premium amount for post-retirement insurance" go into a retiree's health savings account. "Some" meaning that the retiree has to pay an amount above and beyond the cost of insurance - because so many retirees have extra cash lying around to add to their savings accounts. "All" meaning that there is in fact no insurance, just a health savings account. Seriously....

Really, if Goodman, Gingrich and the GOP cared about early retirees, or people nearing the age of retirement who have difficulty obtaining or affording private insurance, but did not want to directly subsidize private insurance at a rate that would make it affordable to that high-cost group, they would be on board with the Medicare buy-in. Instead, they make noises and blow smoke, hoping that you don't notice that their "idea" isn't viable. Not one Republican vote for a Medicare buy-in? Tell me again, just how much the GOP cares about early retirees....

(Return to Parent Article.)

"Standard Practice"

With the demise of defined benefit retirement plans and the rise of self-funded plans, such as 401(k) plans, hundreds of billions of dollars have been poured into the stock markets. This wasn't due to the brilliance of corporate executives. It was (and is) where workers were advised to place their money. That didn't (and doesn't) stop CEO's from taking the credit for this influx of cash, to lay claim to astronomical salaries and stock options, and corporate benefits and perks that could make a Saudi Prince drool with envy. The best part is, they can keep pulling out those salaries and benefits right up to the day they either run a company into the ground, or get booted out and float gently to earth thanks to a generous golden parachute. Or perhaps better, they can run the company into the ground, get a multi-billion dollar taxpayer bailout, and still indulge:

American International Group Inc., the insurer that hosted a $440,000 event at a California resort less than a week after receiving an $85 billion federal loan, said it is "reevaluating" its costs a day after facing Congressional criticism for the trip.

"While this sort of gathering has been standard practice in our industry for many years and was planned many months before the Federal Reserve's loan to AIG, we understand that our company is now facing very different challenges," Chief Executive Officer Edward Liddy wrote today in a letter to U.S. Treasury Secretary Henry Paulson.

Because there's nothing like indulging yourself before, during, and after you set about a course of atrociously bad business decisions that run your company into the ground.

Congratulations - you helped bail out AIG, so that they could continue their "standard practices". But nobody's going to bail out your retirement savings.

Now It Makes Sense

Last week, John Tierney suggested that older Americans were greedy and lazy for not working past standard retirement age. Today, he tries to redeem himself, holding out President John Quincy Adams as an example:

Most workers could keep going longer if they and employers reconsidered the old assumption about a career trajectory. They could learn from the example of John Quincy Adams, who was elected to Congress after serving as president. He dismissed objections that the new job was beneath him, and voters didn't discriminate against him for being overqualified.

Adams started his new career at age 63, just about when the typical American man now retires. He wasn't especially spry, once calling his body "a weak, frail, decayed tenement battered by the winds and broken in on by the storm." Yet he stayed on the job until his death at age 80.

He accomplished so much in those years that he is remembered as a better congressman than president. You could call him an inverse example of the Peter Principle, someone who succeeded by being demoted below his level of incompetence.

So I guess the next time I see a person, past the retirement age, clearing tables at McDonalds or working as a "greeter" at WalMart, I'll keep in mind Tierney's suggestion of the "inverse Peter Principle" - that they were probably not competent at their jobs before they took the more humble work - and that they could be serving in Congress had they not found that particular job to be beneath them.

Oh, how sad it must be to be a former President, with so few income opportunities available to you - and all of them so demeaning. Tierney sure knows how to blow the wind out of the sails of a song like "Fortunate Son".