The Prospects for Improving Entitlements and Retirement Policy
In the third of a series of articles that features the insights of American Enterprise Institute (AEI) Resident Scholar Andrew Biggs in light of AEI’s recent paper, “Increasing the Effectiveness and Sustainability of the Nation’s Entitlement Programs
,” Biggs shares his views on what can be done to improve entitlements and increase retirement saving.
Of course, even with Social Security it’s wise to save for retirement in additional ways. And one of the crucial matters in that is how great a percentage of pay employees do — and should — allocate to their retirement accounts. Contributing at least 6% of income is commonly cited as a good target, but the ARI paper argues that 9% would be a better figure in order to better provide a financially stable retirement.
So how likely is it that employees would increase their retirement plan contributions from 6% of income to 9%? Says Biggs, “BLS data show that total employer retirement plan contributions have risen from about 4% of employee payroll from 1988 to 2004 up to 5.7% of wages from 2014 to today. (These figures include part-time employees and employees who aren’t offered retirement plans, so employer contributions contingent on offering/participation is probably higher.)”
“It’s not clear precisely how employee contributions have changed,” says Biggs, “since the data don’t track them very well and because we’ve had an increase in participation rates due to the rise of automatic 401(k) enrollment. I do believe, however, that if given the choice between contributing more to their own retirement account or contribution more to Social Security — and in a broad sense, those are the choices — most Americans would be willing to save more in a 401(k).”
Another idea sometimes discussed is a way to ameliorate Social Security’s difficulties is to raise the early retirement age to 65. But is there the political will to do that? If not, what circumstances would make that more possible?
Biggs is skeptical, commenting “Probably not, even though most Americans could and would work longer if the early retirement age were increased. Back in 1950, the average person didn’t claim Social Security benefits until age 68, despite our workforce being more heavily engaged in physically taxing jobs such as manufacturing, farming or mining. “
But that doesn’t mean Biggs considers it impossible. “With better health and a shift to service-related jobs, I’m confident most Americans could delay retirement by a few years,” he says, “but politically raising the early retirement age is contentious because certainly some Americans couldn’t work longer.” He continues, “The question is how you address those workers — perhaps through the Disability Insurance program or by lowering the age for SSI elderly benefits from 65 to 62 — while still improving incentives for the vast majority of healthy near-retirees to work a few years longer.”
So what would help improve the prospects for Social Security reform? Biggs offers some ideas.
“The reality is that most people have no idea how their Social Security benefits work. Despite the annual Social Security Statement, even most near-retirees have only a hazy idea of what they’ll receive from the program. That fact, combined with the program’s financing shortfalls and Americans’ justified lack of confidence in their political leadership to address those problems, most workers don’t have much faith in the program,” he notes.
But all is not lost, Biggs suggests, offering some hope. “If we were to offer Americans a true guarantee — you will not retire into poverty, no matter what — and show that we can afford it, they might be willing to take the difficult personal step of reducing their current spending and putting more money away for retirement. But we need reform ideas that are both simple and effective — we need to explain to Americans what kinds of changes to Social Security we’re thinking about and we must be able to demonstrate that those changes will make the system work better for them and for all Americans.”
This is the third of a three-part series.