Instead of growing financial security, Sam Pizzigati says the current retirement system in the U.S. is growing greater overall economic inequality.
(Rudy and Peter Skitterians from Pixabay)
By Sam Pizzigati
Inequality.org
Do you have a good pension? Do you have any pension at all?
Back in 1975, most Americans who worked for established employers could say that they do indeed have a decent pension. Back then, what the experts call “defined-benefit” pension plans set the standard.
If you worked for a company with one of these plans, you could look forward to receiving — for every month of your retired life — a pension check based on your salary and years of service.
These defined-benefit plans gave employers the responsibility for funding their employee retirements. Employers contributed into retirement funds and used the investment returns these funds generated to keep pension checks flowing. If those returns came up short, employers had to fill the shortfall.
Corporate execs, not surprisingly, didn’t like bearing that risk. Over time, they maneuvered to shift the pension risk onto employees, mainly by substituting “defined-contribution” plans for the defined-benefit pensions that had their heyday in the decades after World War II. By the early 2000s, pensions had essentially morphed into employer-sponsored savings plans.
In this new “defined-contribution” universe, employees have been contributing their own dollars into their own personal retirement accounts, with employers sometimes adding a bit of a match into the mix. The employees get no guaranteed retirement check, just the money contributed into their personal retirement account and whatever investment income the dollars in the account generate.
(David Mark from Pixabay)
If those investments don’t deliver, tough luck — for the employee.
In other words, with 401(k)s and other types of defined-contribution plans, workers bear all the economic risk. And in times like today, with a swooning stock market, that risk looms large for the vast majority of American workers since, as CNN reports, only 4 percent of the nation’s workforce now have their retirement relying on a defined-benefit pension plan, “down from 60 percent in the early 1980s.”
“If those investments don’t deliver, tough luck — for the employee.”
And what has this tilt toward 401(k)s and the like meant for average working Americans? The National Institute on Retirement Security addressed that question last year in a landmark study.
“The United States,” the Institute concluded, “has seen retirement security for many working families deteriorate in recent decades as collective sources of retirement income, such as Social Security and pensions, have been allowed to weaken, while defined contribution plans have dominated the private sector.”
The Affluence Benefit
This retreat from collective sources of retirement income does have its fans. The affluent have benefited from 401(k)s far more than average workers, and that dynamic doesn’t figure to change. These affluent, CNBC financial planning analyst Kate Dore observed earlier this month, will always be more able to contribute substantial shares of their paychecks into their 401(k)s, “allowing more time for compounded growth and greater tax benefits over time.”
The greater tax benefits have added up. Over half the tax breaks for company retirement plans are now going to our top 10 percent of income-earners.
In other words, we’re not growing retirement security in the United States today. We’re growing — with our current approach to retirement — greater overall economic inequality. The already affluent have become more affluent, and everyone else has become more insecure.
What else could we expect, suggests Tyler Bond from the National Institute on Retirement Security, in a society where income and wealth have furiously concentrated at our economic summit?
“A retirement system built around the individual ownership of financial assets cannot successfully provide retirement security,” Bond notes, “if the bottom half of near-retirees only owns 2 to 3 percent of their generation’s financial assets.”
So what can we do to start reversing the retirement status quo?
Social Security
“Security of the People” mural by Seymour Fogel in the Wilbur J. Cohen Federal Building in Washington. (Photographs in the Carol M. Highsmith Archive, Library of Congress, Prints and Photographs Division)
“Discussions of how to improve retirement security for all Americans often ignore the fact that the United States already has a nearly universal retirement savings system: Social Security,” note Bond and his colleague Dan Doonan in a new National Institute on Retirement Security study published last month. “A starting place for strengthening retirement security should be with Social Security.”
In Congress, progressive lawmakers have just launched an effort to shove America in just that direction. They’ve introduced legislation — the Social Security Expansion Act — that would significantly increase the benefits that Social Security provides and pay for those benefits by increasing taxes on America’s most wealthy.
An American making $147,000 currently pays 6.2 percent of that take-home in Social Security payroll taxes. But Americans making $1.47 million pay just 0.6 percent of their income to Social Security.
“That may make sense to somebody,” Sen. Bernie Sanders told a Senate hearing earlier this month. “It doesn’t make sense to me.”
Sanders and Sen. Elizabeth Warren are sponsoring the Social Security Expansion Act, along with six other Senate co-sponsors, and Rep. Peter DeFazio has 19 co-sponsors on companion legislation in the House.
Under current law, income over $147,000 faces no Social Security tax. Passage of the Social Security Expansion Act would apply the Social Security payroll tax, says Sanders, to “all income — including capital gains and dividends — for those who make over $250,000 a year.”
The new revenue from that move would guarantee existing Social Security benefits for years to come and increase Social Security benefits “by $2,400 a year for both new and existing recipients, lifting millions of senior citizens out of poverty.”
That sort of political move would also enjoy broad support. New national polling from the University of Maryland’s Program for Public Consultation shows “overwhelming bipartisan support” for subjecting income over $147,000 to Social Security tax, the core of the proposed Social Security Expansion Act. Some 88 percent of Democrats back that move — and 79 percent of Republicans!
“Maybe, just maybe,” says Sanders, “we might want to start listening to the overwhelming majority of the American people who want to expand Social Security and stop listening to right-wing billionaires who want to cut, privatize, and dismantle it.”
Sam Pizzigati co-edits Inequality.org. His latest books include The Case for a Maximum Wage and The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970. Follow him at @Too_Much_Online.
This article is from Inequality.org.
The views expressed are solely those of the authors and may or may not reflect those of Consortium News.
Bernie would be my last choice for a money manager. Capital gains is one of the most unlawful taxes ever conceived. You purchase an asset with money you’ve already paid taxes on in the hopes its appreciation will keep up with inflation. When you sell it and the goobermint gets their 45% in some states, you may be left with less than what you started with when adjusted for inflation. It prevents the middle class from building wealth.
In the land of the practical, ending the fiction that SS is a savings scheme and making it an old-folks-support scheme is probably a good idea, including making SS payroll taxes a flat percentage regardless of income level. This is definitely worthy of support.
On the matter of defined benefit pensions, there are still a LOT of them out there but mostly in the governmental sector. The reason the private sector abandoned them are: a) they are not portable and businesses need more flexibility on workforce (including the wish to poach employees from other companies), and b) pensions can create an existential risk for a company… many have gone bankrupt as a result of pension explosions. (Which helps the abandoned pension holders not at all.). So it’s not likely that defined benefit pensions will make a comeback for those reasons…. unless monopoly or state ownership also makes a (disastrous) comeback.
But let’s address why a SS is such a robust and good and necessary idea: about 1/2 the population is financially illiterate and over their lifetimes, they spend more than they earn. (The latest number I’ve seen is 55%). At whatever level people earn, they have a choice… to spend it or save and invest it. We know from the data how many people on average make the later choice vs. the former. The spenders will thankfully have SS to fall back on, given that they don’t have the good sense to set up an IRA. They gotta have that new car every few with the consequent allocation of 1/4 of their earning power. It’s a stupid thing to do (along with buying a house that’s too big), but I bet the people complaining above do it. And they also would have flunked the Stanford Marshmallow experiment.
I’m thankful that SS exists to bail out the bad planners, weak earners and over-spenders. SS is a good setup, inflation adjusted, and sufficient for the modest. If you are old now, dependent on SS and want more? The appropriate saying is ‘your poor planning is not my emergency’. You had your chance and blew it. Own up. Anything less is a disgrace.
Politicians will just blame the Russians, which odd as it may seem is not far from the mark. What about that $53 Billions for weapons for Ukraine? Hmmm.
I’m sorry, but this is not the kind of article I’ve come to expect from Consortium News (yes, I realize it’s not directly from CN, just republished, but why?). It’s garbage standard-issue neoliberal incremental inadequate change supposedly supported by the squad who won’t even fight for it anyway.
You start off talking about how since 1975, Americans have been screwed out of defined benefit plans in favor of defined contribution plans that utilize their own money and bear all the risk. All fine and dandy. But then your solution is … a little bit of an expansion of SS that would give seniors a mere $2,000/year based on a modest tax increase on the obscenely wealthy. Not to be rude, but eff that. It’s time we got back what we were screwed out of in the first place: defined benefit pensions. And besides that a massive wealth tax (100% over 100 million and substantial percentages before that) to pay for benefits for all Americans, not just seniors.
I know, I know, it’s not “politically feasible”. Well of course not if even a radical publication like CN is willing to settle for neoliberal crumbs.
Never ever ever tax people more than 50% of any earnings
When taxing wealth always give the option of investment, the chance to put money back in
Problem we have is the Rich are the worst investors and spenders
Now about inheritance above £1 million
No, it’s wrong on so many levels, so encourage legacy projects that will still be around in a 100 years time
“Maybe, just maybe,” says Sanders, “we might want to start listening to the overwhelming majority of the American people who want to expand Social Security and stop listening to right-wing billionaires who want to cut, privatize, and dismantle it.”
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He should examine the “lack of inflation” stats during the Obama years. SS recipients were left behind as inflation continued it’s climb.
I’m 72 and worked until 70 before ‘claiming’ my SS. Self employed for most of my life, I pay 40% effective tax rate for 2021. Most of my SS is simply taxed away. No IRA so no retirement exists in my future.
Shall we discuss the fiasco called Obamacare? In which Herr Obama gave the entire US health care system to greedy wall st. money changers?
The two party US system of gov’t is like two warring mafia families…with the 90% of the public paying the mordida. Don’t get me started on property taxes. The Sheriff of Nottingham could only wet dream about the society we’ve become.
No one owns their home. We rent from the landlord or the goobermint.
Don’t hold your breath. Pols say one thing and do the opposite. In this case pander to the majority of citizens while protecting their sponsors’ wealth.
Politicians listening to We the People? Sounds like an American dream.