Fixing America's Retirement Crisis Is Simple: Strengthen Social Security
Updated: Jun 27, 2019
The previous article in this series discussed Senator Sanders plans to reform worker compensation and representation. The current article discusses how to fix our current retirement crisis.
Many Americans are in the middle of a retirement crisis. They don't have enough saved for retirement. Retirement comes in up to three parts for most Americans. These parts include Social Security, Defined Benefit Plans, and Defined Contribution Plans. These plans are not working well enough for most Americans. We'll talk about each plan and how to solve the whole crisis.
Social Security is a defined benefit type of plan. It pays out to recipients a set amount each month. People also get costs of living increases to keep up with inflation. It's backed by the full faith and credit of the U.S. Federal Government. Basically, unless Congress raises or lowers the payments the only way that Social Security fails is if America becomes a failed state that can't make basic financial transactions happen. If that happens we'd be in an economic crisis greater than the Great Depression. It's unlikely any retirement plan would survive that intact.
A Defined Benefit plan is a pension of some sort. Employers and/or employees put money aside to be paid out set amounts for each month in retirement. The money set aside is invested and the proceeds are paid out in retirement. Payouts are guaranteed by the pension plan. Pensions can fail and the government agency that is responsible for guaranteeing them is underfunded. These can also be annuities, but most people don't have enough money to fund annuities to make them worthwhile as retirement plans.
A Defined Contribution plan is a plan like a 401k, 403b or IRA. These types of plans allow for employers and/or employees to put away money for retirement. This money is invested and the proceeds are made available for withdrawal in retirement. There are no guarantees. Employees are generally given choices about how to invest the money.
The three types of retirement plans are usually tax advantaged in some way for most participants. There are other important aspects to each plan, but the goal is to keep it simple for now.
When it comes to considering how to solve the retirement crisis, keep in mind that people either haven't saved enough, or have their money lost through bad investments, or the plan fails. The only plan that never fails, never makes bad investments, and never stops people from saving is Social Security. Changes can be made around the edges and all plans are useful to have, but Social Security is the easiest and most effective plan out there.
Social Security benefits should be substantially raised. This costs a lot of money. There are many ways to fund government programs, but here are two easy ones: Take away the payroll tax cap and raise the corporate tax rate back to 35%. Raising benefits helps curb the retirement crisis. Seniors will spend that money and it will help boost the economy.
Congress can vote to increase benefits, but they can also vote to reduce them. It may be necessary to propose a Constitutional Amendment that requires a supermajority within Congress or a national referendum to reduce benefits. Obviously, the precise wording of such an amendment needs to be carefully considered, because it's hard to undo a Constitutional Amendment.
States and even local governments could attempt to create their own types of Social Security supplements. But this approach also has issues. Will people be okay with substantial tax increases to fund it? What will be done with the money that is paid into the system between then and retirement? If the money is invested, how will it be invested?
The only easy solution to our retirement crisis is to increase Social Security payouts and to properly fund them. Then watch over Social Security so crooked politicians don't destroy it. It's easy to say, but much harder to do.