The U.S. retirement system is a complex framework of various programs and mechanisms designed to help individuals save for their retirement years. It aims to ensure that citizens have a financial safety net when they stop working and rely on retirement savings and benefits to maintain their quality of life.
Actually, the U.S. retirement system is a sprawling complex, a so-called “three-legged stool” of Social Security payments, workplace savings plans and individual wealth.
But is the system falling short in its primary goal of achieving a secure retirement for all Americans?
“Judging why and to what extent seniors may be falling behind is harder than it might sound,” experts said.
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The response, however, has significant policy repercussions that range from the abundance of public benefits to the popularity of employer-sponsored plans like 401(k)s and pensions.
“This is a fraught area,” said Olivia Mitchell, a professor of business economics and public policy at the University of Pennsylvania and executive director of the Pension Research Council. “There’s not a simple answer.”
Is old-age income poverty too high?
Consider this thought exercise: What is a tolerable poverty rate among American seniors?
By one metric, the U.S. fares worse than most other developed nations in this category.
About 23% of Americans over age 65 live in poverty, according to the Organization for Economic Co-operation and Development. This ranks the U.S. behind 30 other countries in the 38-member bloc, which collectively has an average poverty rate of 13.1%.
Only Mexico falls short of the United States in terms of old-age “poverty depth,” which refers to the average income of the poor being low in comparison to the poverty line. And just three countries have worse income inequality among seniors.
There are many contributing factors to these poverty dynamics, said Andrew Reilly, pension analyst in the OECD’s Directorate for Employment, Labour and Social Affairs.
“For one, the overall U.S. poverty rate is high relative to other developed nations a dynamic that carries over into old age,” Reilly said. “The U.S. retirement system therefore “exacerbates” a poverty problem that already exists,” he said.
“Further, the base U.S. Social Security benefit is lower than the minimum government benefit in most OECD member nations,” Reilly said.
The United States is the only developed nation that does not require citizens to work as part of their benefits, such as mandated work credits for mothers on maternity leave. The majority of other countries likewise mandate credits for parents who take time from work to care for their young children.
“There’s very little security relative to other countries,” Reilly said of U.S public benefits.
That said, the U.S. benefit formula is, in some ways, more generous than other nations. For example, nonworking spouses can collect partial Social Security benefits based on their spouse’s work history, which isn’t typical in other countries, Mitchell said.
Old-age poverty seems to be improving
Here’s where it gets a little trickier: Because the OECD assesses poverty differently from American statisticians, some scholars believe the OECD data exaggerate the severity of old-age poverty.
For example, according to U.S. Census Bureau data, 10.3% of Americans age 65 and older live in poverty a much lower rate than OECD data suggests. The Congressional Research Service estimates that during the past 50 years, the rate of elderly income poverty has decreased by more than two-thirds.
Historically, poverty among elderly Americans was higher than it was for the young. However, that’s no longer true seniors have had lower poverty rates than those ages 18-64 since the early 1990s, CRS found.
“The story of poverty in the U.S. is not one of older folks getting worse off,” Mitchell said. “They’re improving.”
Regardless of the baseline OECD, Census Bureau or other data there’s a question as to what poverty rate is, or should be, acceptable in a country like the U.S., experts said.
“We are arguably the most developed country in the world,” said David Blanchett, managing director and head of retirement research at PGIM, the investment management arm of Prudential Financial.
“The fact anyone lives in poverty, one can argue, isn’t necessarily how we should be doing it,” he added.
Despite improvements, certain groups of the elderly population such as widows, divorced women and never-married men and women are “still vulnerable” to poverty, wrote Zhe Li and Joseph Dalaker, CRS social policy analysts.
Two major problem areas persist
At the very least, there are facets of the system that should be tweaked, experts said.
Researchers seem to agree that a looming Social Security funding shortfall is perhaps the most pressing issue facing U.S. seniors.
Longer lifespans and baby boomers hurtling into their retirement years are pressuring the solvency of the Old-Age and Survivors Insurance Trust Fund; it’s slated to run out of money in 2033. At that point, payroll taxes would fund an estimated 77% of promised retirement benefits, absent congressional action.
“You could argue pending insolvency of Social Security is threatening older people’s financial wellbeing,” Mitchell said. “It is the whole foundation upon which the American retirement system is based.”
About 40 years ago, half of workers were covered by an employer-sponsored plan. The same is true now.
Olivia Mitchell
“Raising Social Security payouts at the low end of the income spectrum would help combat old-age poverty but would also cost more money at a time when the program’s finances are shaky,” experts said.
“The easiest way to combat poverty in retirement is to have a safety-net benefit at a higher level,” Reilly said. It would be “extremely expensive,” especially in a country as large as the U.S., he added.
Blanchett favors that approach. Such a tweak could be accompanied by a reduction in benefits for higher earners, making the system even more progressive than it is now, he said.
Currently, for example, Social Security replaces about 75% of income for someone with “very low” earnings (about $15,000), and 27% for someone with “maximum” earnings (about $148,000), according to the Social Security Administration.
Reducing benefits for some would put a greater onus on such households to fund retirement with personal savings.
However, the relative lack of access to a savings plan at work known as the “coverage gap” is another obstacle to amassing more retirement wealth, experts said.
The likelihood of Americans saving increases significantly when their employer supports a retirement plan, according to research. But coverage hasn’t budged much in recent decades, even as employers have shifted from pensions to 401(k)-type plans.
“About 40 years ago, half of workers were covered by an employer-sponsored plan,” Mitchell said. “The same is true now.”
Of course, workplace plans aren’t a panacea. Contributing money is ultimately voluntary, unlike in other nations, such as the U.K. Additionally, it necessitates financial sacrifice, which may be challenging given other household necessities including shelter, food, child care, and healthcare, according to experts.
