Time For An Overhaul?

Social Security has been the nation's single most successful social program, helping millions of men and women to escape poverty in old age and reducing the financial burdens that their children and grandchildren would otherwise have to bear.

Women are far less likely than men to have retirement income from a private pension or a savings account, so the Social Security program is crucial for women. In fact, nearly 30 percent of older women living alone depend on Social Security for all of their income.

But now some members of Congress say that Social Security is living on borrowed time and requires a major overhaul rather than just a tune-up with the types of minor adjustments that have been made throughout its history. Are they right? Is it time to change Social Security by creating a nationwide system of individual accounts?

The Basics
Today, the present system works like a defined benefit plan – when you retire you receive a certain benefit for the rest of your life. You also receive an increase in your benefit to protect the value from declining because of inflation.

Those who want to totally revamp the system want to change it to a defined contribution plan - when you retire you'll have a certain amount of money in your personal account. When you reach retirement age, you can cash it out or buy an annuity that will pay you a benefit for the rest of your life - but without inflation protection.

Proceed with Caution
For all the doomsday talk, the fact is that Social Security is not going broke. The most recent report from the Trustees shows that without any change to the present law, full benefits can be paid until 2041. After that, even if no changes were made, the amount of money being paid in would still cover 74% of expenses. So we are not looking at bankruptcy of the system we're looking at an eventual shortfall. Changes should be made but there is no immediate crisis. The house is not burning down, it just needs repairs.

Women have a particularly important stake in making sure that any changes to Social Security are carefully considered. Here are some reasons why:

  • Women earn less. What happens if you didn't earn much money during your working years? Typically women have a record of lower earnings, because they leave and re-enter the workforce to care for their families and because women earn only 77 cents for every dollar that men earn. The current system favors lower earners over higher earners because of the formula used to calculate benefits. This type of protection is lost in an individualized account system. 
  • Women live longer. What happens if you outlive your income? The current system pays a benefit for as long as you live. Under an individual account system the size of your benefit depends on your investments. Because women live longer and longevity is increasing, we should be careful of changes that could make matters worse. Today, more than twenty percent of older single women live in poverty.
  • Can you count on the stock market? Having a private account means that you bear all the risk of investing. But even if the stock market continues to climb, a system of private accounts will only do well on average. Because women typically earn less, many will have smaller-than-average accounts.

    And because people with less money are typically conservative investors, women are likely to earn below-average returns. Moreover, you could lose your shirt if because of the timing of your retirement you have to cash out your account or convert it to an annuity when the stock-market is not performing well. Moral: Beware of rosy scenarios based on averages.

  • What if you get divorced? Under the present system, a woman who was married for 10 years or more is entitled to half of her former husband's benefit while he is alive. When he dies, she is entitled to the same widow's benefit she would have received if she had stayed married. At this stage, none of the proposals include provisions relating to divorce.
  • What about Social Security’s other benefits? The current system provides protection for the spouse and children of a worker who dies or becomes disabled. An individual account system would give less protection by only providing what's in the account at the time of death.

While the present system can clearly be improved - for example, by increasing benefits for widows, who are four times more likely than wives to end up in poverty - but it's hard to justify a major overhaul that would reduce guaranteed benefits unless there's no other choice. And that's not the case. According to the acclaimed financial writer Jane Bryant Quinn, an individual account system would be a losing deal for most people.


Making the Wiser Choice

Minor changes
Here are a few of the easy fixes being suggested: investing some of Social Security's revenues in the stock market, instead of exclusively in low-yield Treasury bonds as required under present law. This could increase investment returns, just as with private accounts - but without the risks to individuals. Also if the Consumer Price Index was calculated so that adjustments for inflation were on target, much of the shortfall would be eliminated.

As with any proposal that attracts the attention of Congress, we need to look whether or not it would benefit the majority of working Americans. Unfortunately, the current focus on just Social Security is distracting attention from what should be a more immediate concern: improving private retirement plan coverage. Less than half of the workforce has retirement plans – that's the real retirement problem that Congress and the media should be looking at.


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