Dec. 11 (Bloomberg View) — You’re probably going to be hearing a lot about a “retirement crisis” over the next few years. And Democrats think they know just what to do about it.
Some academics are convinced that Americans aren’t saving enough, or being provided enough by the government, to sustain themselves in old age. Many Democrats think their party hasn’t adequately addressed the economic anxieties of middle-class voters. Put the two concerns together, and you get a simple plan: Offer people more generous Social Security benefits. Senator Elizabeth Warren is already on board, enthusiastically throwing around the word “crisis.”
The good news is that there is no retirement crisis, as my American Enterprise Institute colleague Andrew Biggs has been carefully explaining. Americans have among the highest retirement incomes in the world, both in terms of absolute buying power and relative to the incomes of the working-age population.
The National Institute on Retirement Security came out with a scary, and influential, report last year saying that 84 percent of Americans aren’t saving enough for retirement. But the report used dubious assumptions, targeting a retirement income higher than other analysts think reasonable and judging people against a rigid schedule of savings. (According to the institute, people should save 12 percent of their income for retirement each year from age 31 onward, and people who expect to do more of their saving in their 40s and 50s are behind.)
Another source of alarmism is the Census Bureau’s Current Population Survey, which suggests that Americans receive little income from individual retirement accounts and 401(k) plans and are increasingly dependent on Social Security. But the survey’s measure of retirement income excludes the unscheduled, as-needed withdrawals from IRAs and 401(k)s that are the primary way Americans draw down their accounts. Thus the census figures omit most of the income from such saving methods, an error that becomes ever more important as an ever-larger percentage of Americans uses them. So while the survey seems to show a growing problem, all it really shows is an increasingly large methodological flaw. Already it isn’t counting 60 percent of income from retirement plans.
That doesn’t mean that there’s nothing at all to worry about. Social Security fails to keep all the elderly out of poverty, which is rather amazing considering how much it spends. Certain groups, such as single women with no education past high school, have a high risk of ending up poor in old age. Biggs favors a reform of the system that creates a flat, universal benefit. It would be set high enough to keep all senior citizens out of poverty, but low enough to make the system solvent and to create a stronger incentive for middle-income and high earners to save more for their retirement. Data from the Organization for Economic Cooperation and Development shows that the more generous government benefits are for the elderly, the less people generate their own retirement income through work and saving.
And then there’s the fact that Social Security itself faces a financing shortfall with a net present value exceeding $10 trillion. That is a genuine problem — but not one, of course, that can be solved by expanding the program’s benefits.