Entitlements and Their Implications for Retirement Policy

By John Iekel • October 03, 2016 • 0 Comments
The way we approach entitlements — particularly Social Security — could be improved. There may be accord on that, but how to go about it is more of a cacophony. Such reform would have many ramifications — and retirement policy is one of the many shores that would be washed by the ripple of waves it would set in motion.

In a recent paper, “Increasing the Effectiveness and Sustainability of the Nation’s Entitlement Programs,” the American Enterprise Institute (AEI) offers it views on the matter. To gain better insight into what AEI has in mind and its implications for retirement and the way we save for it, in a series of articles AEI Resident Scholar Andrew Biggs shares his views on entitlements in general and how they relate to retirement policy and benefits in particular.

Is the money the federal government spends on entitlements that provide retirement support money well spent? Has it been worth the investment/yielded the desired result?

“Federal spending on entitlements for the elderly does a lot of good, but it could do better at lower cost,” says Biggs. He elaborates: “For instance, the old age portion of Social Security spent about $750 billion in 2015 but 10% of retirees are still below the poverty line. One-third of retirees receive a Social Security benefit that’s below the poverty threshold. We could provide every retiree a poverty-level benefit and thus eliminate poverty in old age for much less than we currently spend on Social Security.”

So why is Social Security lacking? Biggs says it’s because “Social Security leaves many retirees in poverty because it has a relatively long vesting period — 10 years — and because benefits are scaled to earnings. This means that many low earners who had sporadic working careers either don’t qualify for benefits or receive a sub-poverty level benefit. At the same time, a person who earns $118,000 every year of his life will receive about $33,000 per year in government-provided benefits. That person, along with most middle and upper-income households, could and would save more for retirement on their own if their Social Security benefits were scaled back.”

The answer, Biggs posits, is that “Going forward, Social Security reforms should scale back on the growth of benefits for middle and high earners, while significantly improving the safety net for the poor. Government has a role in retirement security and government should play that role effectively.”

As for state governments, Biggs notes that while they “don’t play a large role in the retirement income of most of their residents, they do help provide Medicaid benefits that provide long-term care to poor retirees.” The big issue for state governments, he says, is pension benefits for their retirees. “These benefits are far more generous than the typical private sector worker receives,” he says, and the result is “Rising public pension contributions and the increasing risk of pension investments have destabilized government budgets.” He argues that state and local governments “need to think hard about whether these plans are necessary for recruiting and retaining public employees, and affordable to the taxpayer.”

This is the first of a three-part series.