A Safety Net That Needs Patching
By Amey Stone
Seventy years ago this weekend, on Aug. 14, 1935, President Roosevelt signed the Social Security Act into law. Nine years later, 1 million retirees were receiving benefits. By the end of 2004, there were 48 million beneficiaries of Social Security, with retirees receiving an average monthly benefit of $955.
On its 70th anniversary -- at a time when the Bush Administration has proposed changing the program to include private accounts -- it is worth remembering what a great job Social Security has done in providing a safety net for American families.
"Social Security touches over 95% of Americans at some point in their lives," says Social Security Commissioner Jo Anne Barnhart, adding that without the program it's estimated that 20% of the nation's elderly would be in poverty, or roughly twice the number in dire economic straits today.
"Back when the program was created, elderly people were dying because they had nothing to eat and no health care," says David Wyss, chief economist at Standard & Poors. "Social Security has been incredibly successful at virtually eliminating poverty among the elderly."
Given what retirement experts say is an unequivocal need to either reduce benefits or increase payroll taxes to shore up the program's finances, this anniversary should also be a reminder to individuals that the program is not intended to fund a prosperous retirement, says Wyss. "The Constitution does not guarantee the pursuit of life, liberty and playing golf every day from age 65 on," he says.
Social Security is -- and always was -- meant to provide a minimum standard of living for the elderly, says Dan Houston, senior vice-president at the Principal Financial Group's retirement division.
Frances Perkins, the first female Cabinet member and the Labor Secretary who created the Social Security program, saw the dire need for a national safety net after the stock market crash in October, 1929, and kicked off the Great Depression. She vividly recalled those times in a 1962 speech.
All through 1929, 1930, and 1931, the specter of unemployment -- of starvation, of wandering boys, of broken homes, of families separated in the search for work -- stalked the U.S. And in its train followed the images of helpless homelessness: the eviction notices, the furniture and bedding on the sidewalk, the old lady weeping over it, the children crying, the father out looking for a truck to move belongings to his sister's flat or some relative's already overcrowded tenement. Others were captured at the nadir of despair, sitting bewildered and waiting for charity officers to come and move them somewhere.
Since then, says Barnhart, "Social Security has become part of the fabric of American life." But she says its 70th anniversary shouldn't just be a time to reflect on accomplishments, but "to look ahead and make a commitment to making the program secure for the future."
It's the looming retirement of 78 million baby boomers that threatens the program's long-term solvency. In 2004, some 157 million people contributed to the program through payroll taxes at the rate of 6.2% of wages, or a maximum $5,580 a year. But at that rate, tax revenues will start falling below program costs by 2017, the administration projects. By 2031, there will be only 2 workers contributing to the program for each retiree, down from a ratio of 3.3 contributors today.
While people near retirement age don't have to worry about losing benefits, Barnhart says, the program does need to change so funds will be available for the grandchildren of current retirees.
"Social Security is one of the things that really made our country great," says Catherine Collinson, senior vice-president at Transamerica Retirement Services. "But 70 years is a long time to expect the same underlying assumptions to apply."
Fact is, Americans need to save more for retirement no matter what is done to reform Social Security, says Houston. With life expectancy rates climbing, retirements are stretching by decades. In 1940, life expectancy for men was 61 and Social Security payments started at age 65. Today men are expected to live to 74 and Social Security starts between 65 and 67, depending on date of birth.
Transamerica's recent surveys of baby boomers found that fewer than 20% had saved more than $250,000 for retirement. The majority had less than $100,000 socked away.
In July, the firm surveyed more than 1,200 adults by phone, and more than 25% said they were not currently saving anything for retirement.
Houston's rule of thumb is that employees need to save 15% of preretirement income throughout their working lives in order to be able to replace 100% of their income in retirement. "It's just that simple," he says. Yet surveys show employees are saving just 6% or 7% in their 401(k) plans, he says.
Clearly, while it's worth celebrating that Social Security has provided a minimum standard of living to elderly Americans for 70 years, Americans will need to do a lot more saving on their own in the future.
Stone is a senior writer for BusinessWeek Online in New York