Editor’s note: This is the eighth in a series of periodic editorials on Social Security.
The court ruling allowing United Airlines to walk away from a $6.6 billion liability in its pension funds underscores that the Social Security system is likely to be an even more vital part of the nation’s retirement system in the future than it is today. Cuts in private pensions fall hardest on middle-income workers, who are thus even less likely to support President Bush’s plan to sharply cut future Social Security benefits for middle-class beneficiaries.
Financial planners have long described a comfortable retirement as resting on a “three-legged stool” of Social Security, a company-funded pension plan, and private savings. But for a large and growing number of Americans, Social Security is the only leg still in place. The national savings rate is now less than 1 percent. And the American Benefits Council rep0rts that only 41 million people are now covered by traditional defined-benefit pensions. Another 60 million are covered by defined-contribution plans such as 401(k) accounts.
That leaves 50 million workers with no pension coverage at all. Many Americans in defined-benefit plans are scheduled to receive only modest benefits because they worked relatively few years under such programs. Likewise, low-income workers nominally covered by 401(k) plans often can’t afford to put in enough of their own money to trigger their employers’ matching share.
That picture was gloomy enough before the United bankruptcy dumped an additional $6.6 billion in liabilities on the already overburdened Pension Benefit Guarantee Corporation. The corporation, funded through corporate premiums, now has a $23 billion deficit, with $39 billion in assets and $62 billion in long-term liabilities. Its long-term prospects could be even grimmer, because the agency estimates total underfunding in America’s pension system has reached a record $450 billion, with auto, airline and retail industries at most risk.
The corporation doesn’t insure 401(k) plans. But even workers in companies it does cover may face cuts in their benefits. For pension plans ending in 2005, the maximum PBGC payment is $45,613 annually, for workers retiring at age 65. Airline pilots, who are required by law to retire at 60, thus may face a double round of pension cuts in what they were once told would be their “golden years.” Their relatively high pensions will first be cut to that ceiling, then reduced again because of their “early” retirements. In one actual case, a 62-year old former United pilot who retired two years ago with a $12,000-a-month pension can now expect to receive just $2,000 a month.
Middle-class workers battered by such pension cuts are unlikely to support Bush’s plan to cut future Social Security benefits for all but the lowest-paid American workers. Anyone earning more than $25,000 a year would see gradual benefit reductions under the Bush plan, with those earning $113,000 or more taking the sharpest cuts.
Those cuts, by the way, would be in addition to the cuts in Social Security that workers who opted for Bush’s private accounts would face. The privatization plan requires every dollar of Social Security taxes diverted to private accounts to be offset by reductions in that worker’s benefits, plus the rate of inflation, plus 3 percent interest. In an extreme example, a 35-year old worker earning $90,000 a year who opted for Bush’s private accounts could lose 85 percent of her guaranteed Social Security benefits upon retirement in 2037. Those benefit cuts would be partially offset by the earnings on those private accounts, but Bush’s plan offers no guaranteed floor for such returns.
Bush’s plan to cut benefits for middle-class workers has won little if any support in Congress. As we have noted previously, Sen. Chuck Hagel, R-Neb., has proposed a much fairer way to bolster Social Security’s finances by raising the retirement age for full benefits for Americans born in 1966 or later, now 67, to 68.
Under Hagel’s plan, early retirement at reduced benefits would still be available at age 62, and disabled workers would receive full benefits regardless of when they stopped working. Additionally, we’d gradually raise the earnings ceiling on Social Security taxes from the current $90,000 to $100,000 over five or 10 years, in addition to other already scheduled adjustments.
The non-partisan Congressional Budget Office estimates the existing Social Security program is sound through 2052 with no changes at all. Just these two modest reforms would likely ensure the solvency of Social Security through 2080, though future adjustments could be made if unforeseen circumstances warrant.
We think most Americans under 40 would rather work one more year before retirement than risk being hit by the double whammy of sharp cuts in pension benefits and lower Social Security to boot.
