Reasonable steps such as these, including possibly adjusting benefits, are enough to strengthen Social Security for the long term. But taking money out of Social Security payroll taxes for private investment accounts would worsen the solvency outlook rather than improve it, and could lead to large benefit cuts. This approach is risky, hugely expensive and unnecessary.
Strengthening Social Security is the cornerstone of providing economic security for future generations, but creating and protecting pensions and savings are also essential.
Defined-benefit pensions are being replaced by defined-contribution plans like 401(k)s and IRAs. This shifts the investment risk to the individual. We have long championed improvements in these private accounts. But for a secure retirement, we need these savings in addition to Social Security, and definitely not at the program's expense.
The federal government's retirement system—the Thrift Savings Plan—does this now. Ironically, some of the supporters of private accounts at the expense of Social Security cite this program. Well, it's precisely the model we would like to see: Social Security as the foundation, supplemented by a private pension and savings.
As Henry Aaron at Brookings has shown, increasing national saving is a proven way to grow the economy while lessening the burden on future generations. But the savings rate in America is abysmally low.
People need to save more, and there are two steps we can take that are relatively simple. First, new employees joining companies with a 401(k) usually have to decide whether to join the plan. But if they were automatically enrolled and had to make a conscious decision to opt out, savings would increase dramatically.
The second way to increase savings is to provide an option for those receiving tax refunds to have all, or a portion of it, automatically deposited into the individual's savings. According to the experts, these two steps alone could double the nation's savings rate and provide people with a much greater retirement income.
About half our working population does not have a pension plan. For these people, there are few options currently available to save for retirement. One thing that is available is the saver's credit, which was enacted in 2001.
But the saver's credit is small, it expires in 2006, and it is not refundable. It should be enhanced and made permanent.
We also need to explore bigger ideas, such as a universal plan that would require employers to make available to each worker the option of a 401(k)-type retirement account.
Chairman Bill Thomas of the House Ways & Means Committee and Chairman Jim McCreary of the Subcommittee on Social Security have both said they want to think outside the box about combined strategies to strengthen Social Security, increase national savings and perhaps address the problem of long-term care. AARP stands ready to help.
As people age, there is more they can do for themselves. Among the most important is to continue to work, if they are able. There are huge benefits to this.
Older workers continue to earn money in addition to their income from Social Security and pensions. They stay engaged and productive. And while getting their retirement benefits, their wages and salaries are still subject to FICA withholding, so they continue to pay into a system that is paying them. Finally, mature workers will help avert the labor shortages from the retirement of the boomers.
To speed up this trend, we need to reduce age discrimination, which still persists. We need to educate employers about the ability and affordability of older workers. We must inform older people about the opportunities and advantages of work. And we need government policies for employers to hire older workers and for individuals to keep working.