V I E W P O I N T

Social Security and Retirement Income Adequacy

American seniors need Social Security. It's a simple truth often lost in the political and philosophical debates swirling around "entitlement reform". A new study released by the National Academy of Social Insurance (NASI) examines the pocketbook realities facing retirees, now and in the future. Too much focus has been on long-term macroeconomic projections with little analysis of income adequacy, overall retirement security, and the role Social Security will play as the older population increases in numbers. Doomsday predictions of an entitlement spending tsunami generate attention-grabbing headlines and flawed policy recommendations but offer no insight into the deeper issue of how financially prepared Americans are as we enter the largest demographic shift in our nation's history.

The NASI study clearly demonstrates that today's Social Security benefits are modest yet essential in providing an adequate retirement income for millions of American seniors. The average Social Security benefit is only about $1,000 a month. It replaces just about one third of workers' average earnings, and once the retirement age increases to 67, that replacement rate will shrink further. This leaves little room for the significant benefit cuts proposed by some policymakers.

We believe the NASI report helps refocus the debate on what needs to be done to ensure Social Security is not just preserved but strengthened for future generations. As millions of older adults begin to receive the benefits they will depend on, the National Committee is more resolute in our belief that solving Social Security's long-term funding gap solely through large benefit cuts, as some have proposed, won't work. While we search for long-term solvency solutions, we must not forget the consequences these solutions will have for millions of retirees, particularly if Social Security is diminished at a time in our history when it's needed more than ever.  

Here is what the NASI study shows:

Social Security benefits are modest by anybody's standards. The average retiree benefit in 2007 is $12,530 a year. When Social Security benefits for a lifetime average earner retiring at age 65 today are compared to his earnings prior to retirement, the benefits replace only about 40 percent of past earnings. As the Social Security retirement age phases up to age 67 and Medicare premiums rise at a rate faster than Social Security benefits, replacement rates for the average earner retiring at age 65 will fall to 32 percent by the year 2030. For people who retire earlier than age 65, Social Security benefits will replace even less of their income. Among 30 countries with advanced economies, the United States is 5 th from the bottom in the generosity of its benefits for average earners.

Retirees rely heavily on Social Security, and retirement income lost from cuts in Social Security benefits would not be easily replaced with other sources of income. Social Security is the most common source of income for older Americans. Of the dollars received by older people, four in 10 come from Social Security. Only half of married couples and less than one-third of unmarried women have income from pensions or annuities. Only one-in-three elderly couples and one-in-six unmarried women receives $2,000 or more a year in income from assets.

Even when other sources of income are added to Social Security benefits, many beneficiaries do not have adequate retirement income. While retiree households with pension income often reach a standard replacement goal of 70 to 80 percent (counting Social Security, pension income and annuitized assets), retired couples without pensions achieve only a 55 percent median replacement rate. If pre-retirement earnings are measured based on recent earnings rather than an average of lifetime earnings, retirees do not fare as well. Couples with pensions will have a median replacement rate of only 60 percent, while couples without pensions have a median replacement rate from Social Security and annuitized assets of only 45 percent.

The future looks even more uncertain as 401(k)-type plans replace traditional employer pensions. As employers shift to 401(k)-type plans, more risk is shifted to the worker. In addition, many workers aren't taking full advantage of the plans or making optimal choices. Today's workers nearing retirement have a median balance of $60,000 - which would produce an annuity at age 65 of only $324 a month.

The U.S. already has a retirement income program with all the features that experts agree make an effective and efficient system. That system is Social Security. Social Security is portable; covers the vast majority of workers without complex burdens on employers; offers protections to spouses and children; pays a monthly annuity that lasts as long as you live; provides inflation-indexed payments; and offers disability insurance. Social Security has evolved to do the things that American workers need and want.

Click here to read the full NASI study.

Government Relations and Policy, May 2007