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Social Security

How Congress Set Up Roadblocks to Saving

By Albert B. Crenshaw
Sunday, June 7, 1998; Page H01

It is one of the enduring truths of Washington that yesterday's solutions are today's problems.

Public policies undertaken to deal with the difficulties of one moment cause unexpected, though not always unforeseeable, consequences in the next, and government officials rush in to begin the cycle all over again.

Today's example is retirement savings.

The problem is all too real, given the nation's economy and demographics, and last week the Clinton administration and Congress convened a "National Summit" on the issue.

Only a relative handful of Americans are saving adequately to maintain their current standard of living in retirement. Traditional "defined- benefit" pensions – the kind that are funded and managed entirely by employers and guarantee an income for life – are in decline. Social Security faces an uncertain future, and the personal saving rate is at a 59-year low.

At the same time, life expectancies are rising. Today, half of all men who live to 65 can expect to live past 80, and half of the women who reach 65 can expect to live past 84. In fact, a 75-year-old woman today has a life expectancy of 12 more years – to age 87.

These factors combine to suggest that if nothing changes, large numbers of Americans will outlive their resources in the next century, inflicting enormous pain on themselves and their families and a crushing social burden on the government.

Even today, 80 percent of retirees get the bulk of their income from Social Security. If that system is allowed to deteriorate and savings do not grow in proportion, the situation can only get worse.

Americans are increasingly aware of the problem. Only about a quarter of workers surveyed recently by Mathew Greenwald & Associates, a public opinion consulting firm, said they are very confident they will have enough income in retirement. Just under a third are either not at all or not too confident they will have enough, while 44 percent figure they will be okay if nothing goes wrong – no 1970s-style inflation, no nursing-home stay, no other such disaster.

The solution, according to many of the public officials and private experts, is saving. Maximizing contributions to 401(k) and other employer-sponsored retirement plans, using individual retirement accounts and plain old saving are the way to a secure retirement.

"When it comes to saving, it's never too early and it's never too late," Labor Secretary Alexis Herman recalled being told as child. And she urged American workers to wake up to this idea, because "if you snooze, you lose."

Given the available options, which for many people seem to be save or starve, saving is clearly preferable. But whether Americans can really save enough to achieve a comfortable retirement is far from certain. And public policies that have shifted so much of this responsibility onto individuals should not pass unnoticed.

Much was made at the summit last week of the traditional "three-legged stool" that is supposed to support a person in retirement – Social Security, private pensions and personal savings.

For nearly two decades, Congress and a succession of administrations seeking to solve other problems, primarily a shortage of tax revenue, have supported policies that effectively merge two legs of the stool – pensions and private savings.

Today, for many workers, what is loosely referred to as a pension is nothing more than their own savings and perhaps an employer contribution rolled into a tax-deferred account. Real pensions – the professionally managed defined-benefit plans – account for an everdeclining share of total retirement coverage. They represent only about 8 percent of all retirement plans today, according to the Employee Benefit Research Institute (EBRI) here.

"The American retirement system is in transition, and there's no going back," said James A. Mitchell, chairman and chief executive of IDS Life Insurance Co.

The reasons for this are complex, but it is noteworthy that during the 1980s, the government imposed a variety of tough restrictions on defined-benefit plans, making them expensive and burdensome for employers to operate.

In search of revenue, Congress restricted the circumstances under which employers could make tax-deductible contributions to their pension funds. At the same time, anxious to shore up the government's pension-guarantee agency, Congress boosted the premiums employers have to pay if they provide defined-benefit plans.

Cost-conscious employers have been only too happy to replace their pension plans with 401(k) and similar "defined-contribution" arrangements. These are generally less expensive and shift the investment risk to the worker. These plans, originally meant as a savings supplement to a pension, have become the pension for many workers.

Defined-benefit plans, which numbered 103,000 in 1975, now total about 53,000, while defined-contribution plans have climbed to 647,000 from 208,000 in the same period, according to EBRI.

The rhetoric that has surrounded the shift to defined-contribution plans is full of buzzwords such as "personal responsibility," "control" and "an end to paternalism" that make it sound as if workers are being handed something really desirable.

And some are. Those who manage to take advantage of the savings opportunities, the tax breaks and the soaring stock market can, over time, put together a very large sum. Indeed, 401(k) accounts and IRAs with balances of six and even seven digits are already appearing.

But those workers who can barely meet current living expenses have a tough time doing all that saving. A young family making $28,000 a year is going to find it hard to put much into a 401(k) program or max out the $4,000 it can put into an IRA each year. And if they don't start until they are older, they may not have time to accumulate the nest egg they need.

And all of this assumes that investment returns will be adequate. Recent stock market performance has been that and more, but a rerun of the 1970s could leave a lot of workers short of their retirement goals.

The most important consequence of the current philosophy of self-empowerment, though, is likely to be the creation, in retirement, of an even wider gulf between the haves and have-nots than already exists in the working world.

Conversion of some or all of Social Security to investment accounts would exacerbate it further.

"The summit promotes the perspective that if people are . . . educated to save for retirement, they will become millionaires in retirement," said Karen Ferguson of the Pension Rights Center here. "The summit sidesteps the real issues presented by our woefully inadequate retirement income programs – how best to strengthen Social Security and restructure our private pension programs to make them work for all Americans."

There were proposals along these lines, and President Clinton called on Congress to solve Social Security's problems by next year.

But unless officials are careful, the solutions that come out of this conference will be the beginning of the next round of the familiar Washington cycle, and we can expect a new conference on why a few retirees have the bulk of the nation's retirement income.

© Copyright 1998 The Washington Post Company

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