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Today Senate Leader Mitch McConnell said that Republican leaders will focus on cutting Social Security, Medicare, and Medicaid. 

Pay attention to financial advice your financial adviser won't give you. Advisers do not emphasize that the government is a vital financial partner and partnership requires engagement.  Government programs that ensure a baseline of income and health-care security insure our own household baseline security. It seems older people are getting the message; but younger not so much. Every adult eligible for Medicare and Social Security can vote, and they vote more. In the 2016 Presidential election turnout was 78% for people over age 75 and 58% for all Americans.

A key part of financial planning is understanding the roles the major government social insurance programs, Social Security, Medicare, and Medicaid will play in your later years. Consider this: they are worth almost a million dollars to a middle-income American. According to economist Eugene Steuerle and his colleagues at the Urban Institute, a single man who retires in the year 2020 after a full career earning a median wage (about $44,000) can expect to receive $536,000 in Social Security and Medicare benefits. In a couple where each spouse earned constant “average” wages over a career beginning at age 22 and retired on his or her 65th birthday would have over $1 million in health and retirement benefits. The expected benefits for couples turning 65 in 2050—age 30 today—are scheduled to rise under current law to almost $2 million.

These are stunning numbers. Our country made a commitment during the Depression to make sure that everyone and their families would be protected as they aged and if they became disabled. But national commitments don't renew themselves. Voting does.

The tax cuts in 2017 were a result of the Republican control of the federal government -- almost all Republicans voted for the tax cuts and almost all Democrats did not. The cuts added $1 trillion to the federal deficit and the nonpartisan Joint Committee on Taxation did not support Republican arguments that the $1.5 trillion tax cut would pay for itself with economic growth. Senator McConnell's announcement today makes clear  political elites will use Social Security, Medicare and Medicaid as bargaining chips in budget negotiations and call for cuts in government spending.  The higher deficits caused by the tax cuts of 2017 will fuel the chronic attack to cut the programs.

White House economic adviser Larry Kudlow commented that “We have to be tougher on spending." Mitch McConnell just said rising federal deficits and debt is not the Republican’s fault but the deficit is caused by unwillingness to contain spending on Medicare, Medicaid and Social Security.

Here are key realities of Social Security that everyone should know:

Reality #1: Social Security is an essential form of insurance. It provides support for young families in the event of the death or disability of its breadwinners. It helps children with severe disabilities. It insures workers against old age, disability, or dying and leaving behind a survivor without adequate income. As a retirement benefit, Social Security is worth about $300,000 for the average household. Equally important, its benefits are guaranteed. In contrast, 401(k) returns are not guaranteed.

Reality #2: Social Security and Medicare benefit all workers, whether white-, pink-, or blue-collar. In 2012, 55 million Americans (out of a population of 313 million) cashed Social Security checks. These were members of all segments of society— rich and poor, left and right. Economist Moshe Milevsky makes this clear in his excellent book Your Money Milestones: A Guide to Making the 9 Most 102 Important Financial Decisions of Your Life. He writes that all households, rich and poor, have the government as an economic partner.

We all pay taxes, and we all receive benefits from it. Through our votes, we exercise some control over how that money is spent. So no matter what your political leanings are or what your tax bracket is, the government is part of your financial life and always will be. This is equally true for the corporate CEO, the small business owner, and the starving artist.

Reality #3: Social Security is on sound financial footing. In fact, it’s a lean and efficient success. In 2015, its administrative expenses (as a percentage of all Social Security spending) were less than .7%,  compare that with the average 401(k), which has expenses three times as high – which can erode lifetime benefits considerably by 20-30%.

Any clear-sighted look at Social Security’s finances, free of politically motivated spin, shows that the program is in strong shape. It has a reserve fund to pay all benefits until 2034 without any change in current policy. And with some small policy changes—for instance, raising the payroll tax by 2.83 percentage points (shared between employer and employee) or eliminating the earnings cap—we could put the system in balance for the next 75 years. (The earning cap means that only wage income up to a certain ceiling is currently subject to Social Security taxes. In 2019, it will be $132,900, but that figure will rise in response to wage inflation.) We are easily poised to keep the system healthy well into the future.

The rising federal deficits will surely lead to political efforts next year to cut spending on Social Security, Medicare, and Medicaid if nothing changes. Vote.

This is a repost from Forbes. 

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The American workforce is an aging one, filled with people concerned about retirement. Still, despite the aging population, $140 billion in annual tax breaks, and relatively light regulation of defined contribution plans, retirement plan coverage at work (including defined benefit and 401(k)-type coverage) has declined over the last two decades. Just 40 percent of workers were covered by any type of retirement plan through their workplace in 2017, 4 percentage points lower than in 2014. And retirement plan coverage has fallen in 14 out of 17 years since 2000.

The lack of retirement plan coverage hits some groups more than others.  And, though employer-provided retirement plan coverage declined for every demographic group, some groups lost more than others. The coverage rate for white (down 5 points to 43 percent), black (down 5 points to 38 percent) and Asian (down 4 points to 37 percent) workers all fell significantly.  Coverage for Hispanic workers (down 1 point to 29 percent) remains lower than for other workers.

A surprising and politically important fact is that workplace retirement plan coverage fell the most for high-income workers. Coverage of workers in the top 10 percent of the income distribution (those with incomes more than $115,000) fell to 50 percent in 2017, down 10 percentage points compared to 2014. Coverage of workers in the next 40 percent of earners (between $42,000 and $115,000) fell 7 percentage points to 50 percent. Finally, just 34 percent of workers in the bottom half of the income distribution were covered by a retirement plan at work, down 4 percentage points from 2014.

Union workers’ retirement plan coverage is twice that of nonunion workers, but their 67 percent coverage rate is down 3 points and that of non-union workers is 36 percent, down 5 points. Coverage of private sector employees declined by 4 percentage points, to a low of 38 percent. The coverage rate for public sector employees was 68 percent (down 4).

Workers in information and communications jobs (42 percent, down 10) experienced the greatest decline in coverage, followed by workers in finance, insurance & real estate jobs (42 percent, down 7).

In sum, just when the labor force necessitates more retirement coverage – workers are aging, they expect to live longer, and Social Security benefits are not likely to increase – coverage falls. The 401(k) was supposed to be so popular for people and firms. The government -- relative to DB plans -- lightly regulates 401(k)-type and IRA plans and 401(k) plans are cheaper than defined benefit plans for firms.  However, the voluntary system still fails to cover most workers; only 40 percent of workers are covered.

Michael Papadopolous provide research assistance for this report.

Workplace Retirement Plan Coverage of Full-Time Workers Ages 25-64

  2014 2017
Full-Time Workers Ages 25-64 103,903,578 109,373,216
Coverage Rate 44% 40%
By Gender    
    Male 43% 39%
    Female 47% 42%
By Race/Ethnicity    
    White non-Hispanic 48% 43%
    Black non-Hispanic 43% 38%
    Asian non-Hispanic 41% 37%
    Hispanic 30% 29%
   Other 43% 40%
Income Percentile    
    Bottom 50% (less than $40,000) 33% 29%
    Middle 40% ($40,000 to $115,000) 57% 50%
    Top 10% (greater than $115,000) 60% 50%
By Age Group    
    25-34 37% 34%
    35-54 45% 42%
    55-64 51% 44%
By Education    
  Less than High School 18% 14%
  High School 38% 30%
  Some College 44% 37%
  Bachelor’s Degree 52% 44%
  Graduate Degree 59% 52%
By Classification    
    Self-employed 14% 12%
    Private Sector 42% 38%
    Public Sector 72% 68%
By Firm Size    
    1-99 Employees 24% 21%
    100-499 Employees 48% 42%
    500-999 Employees 55% 48%
    1000+ Employees 61% 55%
By Union Contract Coverage    
    Not Covered 41% 36%
    Covered 70% 67%
By Industry    
    Construction 29% 25%
    Manufacturing 49% 44%
    Wholesale and Retail Trade 37% 34%
    Transportation and Warehousing 43% 38%
    Utilities 68% 63%
    Information and Communications 52% 42%
    Finance, Insurance and Real Estate 49% 42%
    Professional, Scientific, Management & Administrative Services 38% 34%
    Educational, Healthcare, Social & Other Services 50% 45%
    Arts, Entertainment, Recreation, Accommodation & Food Services 23% 23%
    Public Administration 72% 70%
By Citizenship Status    
    Non-Citizens 32% 30%
    Citizens 47% 43%


Source and notes: Author’s calculation using the March supplement of the Current Population Survey, 2015 and 2018 and the March supplement of the Current Population Survey, 1999-2018 (survey asks about coverage in previous calendar year). Sample includes workers ages 25-64 who report having worked at least 35 hours per week. Starting in 2013, the Census Bureau changed questions related to retirement income, but not questions related to workplace retirement plan coverage. In 2013, it fielded the old questions to 5/8 of the sample and the new questions to 3/8 of the sample. We present data for retirement plan coverage in 2012 for these two samples separately. Another source found that a change in the CPS questionnaire in 2014 accounts for part the decrease seen in subsequent years (EBRI report). The direct question regarding workplace retirement plan coverage was unchanged, but other questions related to retirement income were changed. However, the trend of decreasing coverage predates the questionnaire change and alternative surveys of retirement plan coverage coverage such as the Survey of Income and Program Participation and the Survey of Consumer Finances show decreasing coverage over similar time periods. Recent data does not allow defined benefit and defined contribution plans to be analyzed separately.

This is a repost from Forbes. 


Indeed, Social Security needs shoring up to help solve the looming retirement crises.  If we do nothing, the number of poor or near-poor people over the age of 62 will increase by 25% between 2018 and 2045, from 17.5 million to 21.8 million. And, in the next 12 years, 40% of middle-class older workers will be poor and near poor elders.

Why not just expand Social Security to solve the retirement crises? If we expanded Social Security to provide adequate retirement for the vast majority of American workers payroll taxes would rise to nearly over 25% percent of pay– up from 12.4%.

What Other Nations Do

Rarely do nations secure pensions for all workers with a just a PAYGO system.   Nations that achieve widespread retirement security do so with both advanced–funded and Social Security-type pensions. France and Spain are rare cases that started out with just a PAYGO system. Their high replacement rates for the average worker -- 55% for France without taxes and transfers (70% with taxes and transfers) and 82% for Spain -- are paid for with corresponding high payroll taxes -- 37% and 28%.

To keep those tax rates from getting any larger and to scale them down, France and Spain are each developing an advanced-funded system composed of mandated hybrids between defined benefit and 401(k) type plans.

In contrast, the U.S. Social Security system taxes workers and employers 12.4% (6.2% each) which in turn pays for low benefits -- a 35% replacement rate for the average worker. If the U.S. wanted to reach a target replacement rate of 70% -- and that is what most of us need -- the payroll tax would double.  (The table at the end of the article, which matches selected nations' payroll tax with their pension benefits, indicates the U.S. rate is 15% because that includes the OECD estimation of Supplementary Security Income. which is funded by general revenues).

The U.S. Needs Social Security and Pensions for All 

 All workers need a restoration of Social Security promised benefits – Rep. John Larson (Connecticut, D.) and others are sponsoring (Social Security 2100 Act). The bill solves the math problem that without more revenue -- an immediate increase in the Social Security payroll tax from 12.4% to 15.4%, or an elimination of the taxable earnings limit -- Social Security benefits for the median retired household will be cut by a quarter and replacement rates will fall by one-fifth in 2034.  All workers and their spouses and children need Social Security’s insurance against disability, early death, and inflation -- this social insurance is the base of any retirement plan. But, though Social Security replaces about 80% of pre-retirement income for the low-wage lifelong earners and their families, it only replaces 38% of pre-retirement income for middle-class workers and less than 20% of pre-retirement income for the top 10%.

It should be obvious by now that despite our aspirations to balance our retirement income by getting funds from a number of sources, the U.S. system is no three-legged stool – only the highest income retirees get a third of their retirement income from Social Security, a third from pensions, and a third from assets. The bottom 40% of Americans over age 65 receive over 90% of their retirement income from the PAYGO Social Security system. Those in the top-half of the income distribution get a smaller share of retirement income from Social Security – an average monthly benefit of about $1,500 – and need more to maintain their standard of living. But nearly half of Americans are not covered by a workplace plan.

Everyone needs an option to the crumbling 401(k) and IRA system and more than anything now proposed in Congress. Workers need Social Security and pensions, so that investment earnings, and not just tax revenue from younger workers,  pay their pensions when the times comes to retire.

Because a blend of PAYGO and advanced-funded plans is more efficient, meaning administrative costs and risks are smaller, a large government plan can manage economic and demographic shocks better than a pure PAYGO system or a totally capitalized system.  Nobel prize winner Peter Diamond and Nicholas Barr make this point.  Households can fund their retirement more cheaply with a combination of regulated add-on pension accounts and Social Security. An improved U.S. retirement system would mandate contributions, professionally-manage investments, and pay out annuities. Even those with access to retirement plans have little saved and  face contribution and investment risk and concerns about how the money will last a lifetime.  Tony James and I have a plan to supplement Social Security called the Guaranteed Retirement Accounts (GRA). GRAs work in concert with Social Security.

Bottom line: Why not just expand Social Security as our retirement system fails? If we expanded Social Security to provide replacement rates of 75-80% for most workers payroll taxes would rise to over 25% of pay and we would lose the potential efficiencies of advanced-funded retirement plans.



The tax rate for Social Security (old age survivors and disability insurance OASDI) is 6.4 percent for both the employer and employee and is paid on earnings up to a cap, which will be $132,900 in 2019. Based on Social Security’s handy wage data in “Wage Statistics” -- it is a fascinating table -- did you know out of the 165 million wage earners only 205 earn over $50 million a year and report an average earnings of exactly $97,338,760.37?  I estimate if we expanded Social Security to provide replacement rates of 75-80% for the 75% of American workers who earn between $10,000 per year and $140,000 per year, payroll taxes would rise to to 25% of pay– up from 12.4% and more if the retiree cohort is much bigger than the working cohort. I only examine the tax rate needed to raise the replacement rate from an average of 34% to 70% for the middle 75% of earners  because I assume the bottom 21% of earners who earn an average $5000 a year need public assistance and the top 5 percent who earn over $135,000 will use personal assets for retirement.

Table: Internationally, High Payroll Tax Rates Yield High Replacement Rates (source: OECD Pensions at a Glance and Taxing Wages)

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An ominous week on Wall Street has President Trump blaming the Federal Reserve for raising interest rates, which the President claims has caused stock indices to fall for six consecutive days – for example, the Dow Jones average fell by over five percent in two days. Presidents second guess the Fed when rates increase, but Trump went beyond second-guessing when he described the Fed’s policies as “loco”, and said yesterday it “has gone crazy.”

The attacks on the Fed are curious because Trump himself chose Wall Street insider Jerome Powell as Fed chair, refusing to reappoint Janet Yellen (the first woman to chair the Fed, and the only Fed Chair not to be reappointed in the past 39 years).

The President is not right about the Fed; the central bank is steadily raising interest rates for solid reasons.

One reason is not because inflation is accelerating and the Fed wants to dampen price increases by slowing the economy.  As Forbes contributor Frances Coppola pointed out, the Fed has been predicting rising inflation for almost a decade, but we still don’t see significant price or wage pressures.  Although the unemployment rate has reached record lows, many workers are not getting raises. My recent analysis shows that more than half of older workers are being pushed out of their jobs, hardly a sign of a booming labor market.

Some market analysts believe the Fed is correcting a worrisome convergence between short and long-term interest rates—the “flattening yield curve,” which often signals an impending recession.  Others justify the rate increases as offsetting the economic stimulus provided by Trump’s tax cuts, which come at a time of steady economic growth but will balloon the federal debt and deficit in the future.

And many analysts (including me) believe the stock market is highly overvalued, pumped up by the tax cuts which went mostly to the wealthy, and are fueling unsustainable price/earnings ratios.  Corporations are generally not using their new found net-of-tax revenue to make productive investments, but instead are buying back their own stock and making aggressive mergers and acquisitions, further driving up the market.

Institutional investors have been worried about the inflated stock market for some time, and recently have begun to cut back their equity holdings.  The Fed may be picking up this nervousness among the big investors.

The Fed is also aiming to slow rising home prices.  The July Case-Shiller Home Price Index was up six percent from the previous year, and the Fed’s interest rate hikes will push mortgage rates higher, and home prices lower.

True, the downside of the Fed actions to increase rates is that interest rate changes are blunt instruments for policy.  They can’t slow buybacks, target productive investments, or improve credit quality.

The market’s increasingly dangerous separation from the economic fundamentals would be better served by limiting stock buybacks, imposing a stock transactions tax, and rolling back the tax cuts that are feeding the market and creating a risky long-term deficit and debt increase. 

The Fed’s movements aren’t crazy--they are steady, dull, and very predictable.  These are characteristics that many people wish there were more of in Washington.

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When 52% of older workers are pushed out of their jobs, working longer is not a viable choice. The stark truth is that a significant share of older workers  -- age 55-64 -- are not anywhere near being on track to afford retirement. The median retirement account balance for older workers is only $15,000. Even the highest income workers -- those earning over $200,000 per year who are in the top ten percent of the income distribution -- do not have enough money to retire and maintain their standard of living. Their median account balance is under a year’s salary at $200,000 and 15% of the highest earners have no retirement plan except Social Security.

For nearly 20 years, the advice to older people has been to make up for inadequate retirement wealth by working longer. Yet, from 2008 to 2014, at least 52% of retirees over 55 left their last job involuntarily as a result of direct job loss (they were laid off or their business closed or changed ownership); they felt they were pushed out so they quit; their health deteriorated; or they had to leave work to take care of a sick family member.

University of Massachusetts Sociologist Katherine Newman (in a forthcoming book Downhill from Here, 2019) tells the story of one worker whose friend told him how to navigate the financial options his company offered him. “Take the lump sum and run… the company is going to hell,” was the given advice. Interviews of workers who left Verizon years before they intended to revealed that, “the company was hovering over its older workers, pressuring them with more rigorous performance evaluations and emphasizing if they didn’t take the retirement deal they could face retractions in benefits instead.” These stories illustrate the pressure and difficulties older workers face as they work longer to make up for a lack of savings.

Often, working longer is unsustainable and cannot serve as an alternative to adequate retirement savings. Those pushed into retirement early face barriers to returning to work. They are likely to be unemployed longer than younger people. And, if older people land a job after searching for work it is likely their new job will pay 25% less than their previous salary.

How did we get here? Retirement used to be a time most middle-class workers could remain middle-class retirees. The 401(k) plan was born in the early 1980s and since then has become the primary retirement vehicle for most American workers despite design flaws like patchy coverage, high fees, and opportunity to take pre-retirement withdrawals. Those exposed to the 401(k) system for most of their working lives are now approaching retirement with far less than they need to maintain their standard of living. The result is that forty percent of middle class older workers are at risk of being downwardly mobile and falling into poverty when they reach retirement age.

Public policy that relies on the hope that people can work longer to make up for eroding pensions is not realistic. Hope is not a plan. To ensure people can retire when they need to without experiencing economic deprivation we need to strengthen Social Security, get some control over Medicare premiums and copays, and create pension plans that every worker and employer must contribute to.And the large share of older workers forced into retirement makes it clear: because of many factors -- dynamics of a labor market, which demands ever-changing skills, health issues, and age discrimination -- working longer is not a solution to the retirement income security crisis. Workers cannot rely on being able to work until they are ready to retire.

My coauthor and I, Tony James, have proposed Guaranteed Retirement Accounts (GRAs), a not-for-profit 401(k) or IRA plan. The proposed GRAs are universal, secure retirement accounts funded by employer and employee contributions throughout a worker’s career paired with a refundable tax credit. They would allow all Americans access to dignified retirements after a lifetime of work.

Working longer is not a solution to the retirement savings crisis because workers cannot rely on being able to work until they are ready to retire.

August 2018 Unemployment Report for Workers Over 55

August2018 Jobs ReportThe Bureau of Labor Statistics (BLS) today reported a 2.8% unemployment rate for workers age 55 and older in September, a decrease of 0.3 percentage points from August.

Despite the low headline unemployment rate, many older workers leave the workforce involuntarily. click

Older workers often need to continue working to make up for inadequate retirement savings due to lost pensions and inconsistent employer contributions. Yet, from 2008 to 2014, at least 52% of retirees over 55 left their last job involuntarily, the result of job loss or a deterioration in health.

Those pushed into retirement early face barriers to returning to work. They are likely to be unemployed longer than younger people, and when they find a job they will earn on average 25% less than their previous salary.

Working longer is not a solution to the retirement savings crisis. Workers cannot rely on being able to work until they are ready to retire. Those who have inadequate retirement accounts and leave the workforce involuntarily are at risk of being downwardly mobile and falling into poverty.

To ensure people can retire when they need to without experiencing deprivation, we need to strengthen Social Security and create Guaranteed Retirements Accounts (GRAs). GRAs are universal, secure retirement accounts funded by employer and employee contributions throughout a worker’s career paired with a refundable tax credit. Together, these proposals would allow all Americans access to dignified retirements after a lifetime of work.

This is a repost from Forbes. 

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If we don’t do something in ten years, 40% of middle-class older workers will be downwardly mobile into retirement poverty – a potential political flash-point and certain human tragedy. Older workers don’t have adequate retirement accounts and Social Security won’t be enough for most retirees to maintain their living standards. The median older worker, age 55-64, has only $15,000 in their retirement account; the middle-class worker has $60,000; and even those in the top 10% of the income distribution don’t have enough, the median balance is only $200,000.

Two fixes could help secure adequate retirement income without extra cost or new bureaucracies. Congress could allow Social Security to administer bridge annuities to help people delay claiming Social Security benefits and allow people to buy extra Social Security creditsSocial Security should innovate fast to save Americans' retirement future.

Though most people don’t have enough retirement income to spread over their retirement life, many can use their IRAs and 401(k)s to delay claiming higher Social Security benefits -- benefits are reduced by as much as 44 percent if beneficiaries claim before age 70. My coauthor and I, Tony Webb, propose that the Social Security Administration help people use their retirement account to bridge to a higher Social Security benefit. We also proposed in a recent AARP innovation competition, with another coauthor Michael Papadopoulos, that people could buy extra Social Security credits., called Catch-Up Credits

Fix #1: Bridge Annuities:  Workers should maximize their Social Security benefits by spending down their IRA and 401(k) balances and delay claiming. Congress could help people do that efficiently by allowing Social Security to convert retirement balances to “bridge” annuities to  delayed Social Security receipt.

Let’s take Wanda, an average wage earner who has $100,000 in her retirement account. She has several choices and unless she has a fatal disease and no spouse only one is a good choice. Her bad choice  is to keep her $100,000 and claim a reduced $1,125 Social Security benefit at 62. Her good choice is to delay claiming Social Security until age 70 to get a lifetime monthly of $1,980. How would she survive those 8 years waiting? Wanda can get by in those eight years by spending down her $100,000.

Another way to see how bridging can maximize benefits is to calculate the present value of Wanda's choices. If Wanda waits, she gets more in present value terms. A 2018 price-indexed annuity of $1,125 at age 62 is worth about $291,000. But a $1,980 monthly annuity in 2026 is worth $307,000 today! And people could choose how long to bridge. Bridge to age 63 with $100,000 and live on $8,502 per month. Bridge to age 70 and live on $1230 per month until the $1980 Social Security benefit kicks in. The bridge works with more or less money and at various ages.

 Fix #2: Buying Extra Catch-Up Credits in Social Security

Congress could also help workers boost their lifetime Social Security benefits by defaulting workers into Social Security catch-up contributions of 3.1% of earnings starting at age 50. This extra credit would increase the chance a person can maintain their pre-retirement living standards.  The proposed program uses the existing structure of Social Security. It would not increase the Social Security deficit, instead it would strengthen the program’s financial health.  All workers would get a decent return from their contributions of 3.1%.  Low- and middle-income workers would earn additional benefits of 7% of pre-retirement income and higher income workers would earn 3-4%. The detailed proposal is here

Social Security needs more revenue -- by raising the payroll tax from 12.4% to 15.4%  and/or raising or eliminating the taxable earnings limit. Without more revenue Social Security benefits will fall by 25% for the median household in retirement in less than 15 years.

But, Congress should look ahead and beyond just maintaining current benefits. Social Security is a well-run and efficient agency. It can effectively spread risk across a large population and over time. Adding bridge annuities and catch-up credits to Social Security reform is the type of old age income security we so desperately need as the current American retirement system crumbles described so well in the Wall Street Journal this summer.