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How the Deficit Commission is Threatening Your Retirement

Let's talk about deficits for a moment. Not that $1.3 trillion federal shortfall that's in the news these days (A CBS News poll shows that only a handful of Americans think that's an urgent problem.) No, I'm talking about the gap between how much money people have presently put away for retirement and how much they would need to save to maintain their standard of living when they finally stop working. That deficit comes to a whopping $6.6 trillion, according to a new report by Demos, a New York think-thank.

It also raises questions about the deficit commission's plan to help balance the budget by curbing Social Security benefits. Under the proposal, annual increases in SS payments would shrink, while the retirement age for full benefits would gradually be extended from 66 (or 67 for people born after 1960) to 69 by 2075. Indeed, there are are a number of reasons we shouldn't touch SS.

Hands off Social Security
First, the idea that the program is financially troubled is a myth. Calculations by the nonpartisan Congressional Budget Office show the program is fully funded through 2037. With a few modest tweaks, such as raising the employer and employee payroll tax rates by a small amount, SS will be solvent for another half-century after that.

Second, SS isn't adding one penny to the federal deficit. Benefits are entirely financed by payroll taxes, taxes on benefits and interest earned on the program's surplus. As Demos notes, the deficit is a result of the slumping economy, Bush-era tax cuts and the cost of fighting two wars (whatever their merits).

Third -- and here's the kicker -- the deficit in retirement savings stems not from any problems with SS, but from 401(k) and other private pension plans that have done a generally poor job of helping people plan for their "golden" years. As a result, report author Robert Hiltonsmith writes:

Unless Social Security is expanded, a retirement system that relies on Social Security to provide the majority of retirement income for seniors would leave many seniors unable to meet even their basic needs.
Why your retirement savings stink
Consider this:
  • 21 percent of retired couples and 43 percent of retired single adults rely on SS for more than 90 percent of their retirement income. Fully half of all retirees rely on the program for more than 80 percent of their retirement income.
  • Only 59 percent of full-time workers have access to retirement plans at work, leaving a large part of the U.S. workforce relying solely on SS benefits.
  • Workers retiring in the next 20 years can expect to make only 65 percent in retirement of what they made during their working years -- 16 percent less than their parents.
  • Baby boomers retiring in the next ten years can expect to live on 77 percent of what they earned during their peak working years. By contrast, Generation Xers can expect to subsist on 65 percent of their peak earnings.
  • For Americans with retirement savings, the median balance for people aged 55-64 is $98,000. That's less than half what they will require to maintain their standard of living.
  • The average SS retirement benefit is $1,182 per month, while the median monthly benefit for the bottom fifth of income earners is roughly $750, below the federal poverty line.
  • The median SS benefit is set at $14,000 per year, also forcing many recipients to live below the federal poverty line.
  • The median 401(k) balance in 2008 was $12,655, 33 percent less than in 2007. In 2008-09, the average 401(k) participant lost one-third of his or her savings.
  • Only 45 percent of service workers have a work-funded retirement plan, compared with 80 percent of management-level and professional employees
As Demos persuasively argues, the average 401(k) plan has proved far inferior to traditional pension plans as a vehicle for retirement planning. Mutual fund management fees are high, reaching as much as $70,000 for the life of a plan. And as the financial crisis proved, market volatility can wipe out savings in a hurry.

That leaves Social Security, which wasn't designed to make up for the deficiencies in private retirement plans. Hiltonsmith writes:

The shift from traditional pensions to individual plans has significantly endangered the gains our country has made in reducing old-age poverty since the introduction of Social Security. This shift is especially troublesome because Social Security alone cannot meet the retirement needs of workers; it was never intended to be the sole income source for the elderly.
The deficit commission estimates that the bottom 20 percent of income-earners would see their benefits rise under its proposal. Good news. But most others would see their benefits fall.

SS isn't broken. The program is increasingly vital for a growing number of Americans, so now is no time to "fix" it.

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