The Return of Mass Elderly Poverty in America’s Future?: (Late) Wednesday Focus: April 30, 2014

Jared Bernstein reads my very sharp ex-boss Alicia Munnell and comments:

Jared Bernstein: A Picture of Fragile Retirement Preparedness: “The broader question of retirement security is one I don’t post enough about here…

…so I wanted to be sure to call attention to Alicia’s piece. The figure shows net wealth (net of debt) compared to income for households by age level for a bunch of different years…. The most recent year, 2010, is an outlier, suggesting diminished retirement preparedness. Moreover….

1. Life expectancy… at age 65 rose by 3.8 years for men and 2.3 years for women [over 1983-2010]….
2. For any given level of income… workers [need] to accumulate more… to support themselves over their longer… retirement….
3. Social Security replacement rates have been declining as the full retirement age moves from 65 to 67….
4. Retirement plans ha[ve] shifted from defined benefit to 401(k)…. The shift from unreported to reported retirement assets would have been expected to increase the wealth-to-income ratio….
5. Health-care costs have risen substantially….
6. Real interest rates have fallen significantly since 1983, so a given amount of wealth now produces less retirement income….

Part of what’s going on here is… the bursting housing wealth bubble. But … we cannot depend on [unburst] asset bubbles… [for] retirement security…

Perhaps the most interesting thing is: from the aggregate perspective, the replacement of the defined benefit by defined contribution and tax favored IRAs as pension vehicles appears to have been completely unsuccessful.

Defined-benefit pensions are gone–except for the lucky few of us at places like the University of California. But the wealth that would have been held in properly-funded defined-benefit pension plans has not shown up elsewhere in the system: it has disappeared. Wealth that was held by individuals in the form of privately-owned and privately-controlled but taxable financial assets has indeed been transferred to tax-favored employer-sponsored defined-contribution, IRA accounts, and other vehicles. But there has been no increase in private savings out of disposable income, or in the ratio of privately-owned and privately-controlled financial wealth accumulation to income, even though the entire point of the tax preference for savings was to trigger such an increase.

Combine this with what look to be be simply awful average returns on 401(k)s and IRAs. The fortunes of the princes of Wall Street have to come from somewhere, and they seem to come mostly from buying low and selling high to individual investors who buy high and sell low. The upshot is that we have here what looks to me to be potentially another great national economic disaster in retirement savings–as great a disaster as our economic disasters via excessive spending on:

• healthcare administration,
• building five bedroom houses with swimming pools in the desert between Los Angeles and Albuquerque, and
• going all-in on the naïve belief that finance is the industry of the future and that financial professionals’ incomes need to be massively boosted.

Looking at Munnell’s chart and other evidence thus reinforces my belief that we need a much stronger Social Security system. What we really ought to do is:

• substantially increase its scope;
• invest the trust fund in global equity indexes; and
• wall-off that asset pool from the general government budget discussion.

We have proof-of-concept from the Clinton Democrats of the 1990s that a prosperous America is very capable of running ex-Social Security budget surpluses. Thus the argument that our political economy is such that the U.S. government cannot be a net saver is simply wrong.

It is also true that we have proof-of-concept from the Reagan Republicans of the 1980s and the George W. Bush Republicans of the 2000 cynical and innumerate politicians and their ideologues can make bad policy.

But this is not limited to Social Security: consider George W. Bush’s Middle Eastern policy, or Ronald Reagan’s AIDS policy. The fact that a well-thought and well-designed policy would fail if the government is in the hands of the cynical and the innumerate is not an argument that those of us who are numerate and idealistic should not push for good policies that enhance public welfare.

And if we are doomed to elect the cynical and innumerate every other decade, and so destroy our ability to pursue welfare promoting government policies? If that is indeed the case, rational, reality- and evidence-based advocacy for first-best policies remains the best way to limit the damage they do.