Young savers face Social Security misdirection
CHICAGO, Date (Reuters) - Kathryn Anne Edwards doesn't look at Social Security like most 26-year-olds.
Her cohort takes a dim view of the program's prospects, according to a slew of surveys. Some 76 percent of young Americans don't think Social Security will be able to pay them a benefit when they retire (Gallup); 86 percent would like to divert the taxes they pay to Social Security into private accounts (Pew Research Center); 48 percent of Americans under 40 think the system is in crisis and about to go bankrupt (Lake Research Partners).
But Edwards isn't buying any of that. "I'm convinced if young people knew the facts, they wouldn't have any reason to be against Social Security. It's effective, efficient, sustaining and important."
What makes Edwards different is that she knows more about how Social Security works than most people her age - or any age, for that matter. She's a Ph.D. candidate in economics at the University of Wisconsin, and co-authored a guide to Social Security for young people (here) while working at the Economic Policy Institute, the liberal Washington think tank.
Edwards and other young Americans do have this much in common: they're all very interested in having a guaranteed source of income in retirement.
A survey released last month by The Hartford found that 95 percent of workers younger than 30 found it "very" or "somewhat" appealing to be able to turn at least a portion of their retirement savings into guaranteed income - a higher percentage than any other age group surveyed.
Another study released this week by Bank of America Merrill Lynch found that 82 percent of employees would give up five percent or more of their salaries if it meant getting "reliable income to help them live comfortably" during their later years; 42 percent were willing to give up 10 percent or more of salary.
"The willingness to sacrifice take-home pay to get a more predictable retirement points to the pessimism people are feeling about other pieces of the retirement puzzle," says Kevin Crain, head of Institutional Retirement and Benefit Services for Bank of America Merrill Lynch.
"They're pessimistic about the future of Social Security, they're seeing defined benefit pensions disappearing and their 401(k) account balances have been going up, down, left and right over the past few years."
Granted, financial services companies have an axe to grind here -- many are pitching guaranteed income annuity products to plan sponsors and individual investors.
Still, the divergent survey data points to a disconnect on how young people understand the role Social Security plays in providing a base of secure retirement income. And the confusion isn't accidental. Young people are facing a barrage of negative messages from opponents of Social Security who hope to cut benefits or privatize the system.
This year's report on the health of Social Security by the program's trustees did show some acceleration of the drawdown of Social Security's vast trust fund reserves. Absent Congressional action, the trust funds of the retirement and disability programs are expected to be exhausted in 2033 as baby-boomer retirements accelerate - three years sooner than projected a year ago. But even at that point - even if Congress does nothing -- there will still be sufficient assets from payroll taxes to pay about 75 percent of benefits.
Social Security's long-range actuarial shortfall is projected to be 2.67 percent of taxable payroll - in other words, 2.67 percent of all the earnings subject to Social Security contributions. That's a modest shortfall - and it fluctuates over time due to economic cycles and changes in assumptions about growth in taxable earnings.
Yet Republican presidential candidates ran around this year calling Social Security a Ponzi scheme. Former Senator Alan Simpson, who co-chaired the Simpson-Bowles deficit reduction commission, argues that the commission recommendations aim to save the future of young people who "are going to get gutted" absent reform.
The opposite is true: an analysis of Simpson-Bowles by the National Academy of Social Insurance, a non-partisan non-profit research group, found that the plan's largest benefit cuts would fall on the children and grandchildren of today's seniors.
The anti-entitlement message also is going straight into classrooms. The Teachers College at Columbia University recently released a curriculum on fiscal responsibility, debt and deficits that will be offered at no charge to every high school in the country. The project was funded by a $2.45 million grant from The Peter G. Peterson Foundation, a leading player in the national fiscal debate and advocate for cutting Social Security benefits.
Ostensibly focused on broad issues of debt and deficit, the Columbia curriculum kicks off with a chapter on "Social Security and the National Debt." This despite the fact that Social Security doesn't contribute a dime to debt. In fact, the program has a $2.6 trillion surplus stashed in Treasury notes - which means the government borrows from Social Security, not the other way around. By law, Social Security can't borrow a dime.
The curriculum purports to reach for balance, urging students to contemplate a "wide range of thinking." But it fails to frame Social Security for what it really is - a social insurance system paying benefits earned through worker contributions. Instead, it hints that Social Security might really be a welfare program: "Others believe it is a moral obligation for a society to provide for its neediest citizens."
Columbia also states incorrectly that Social Security is "currently in a cash-flow deficit." While Social Security has been paying out more than its receives from FICA taxes, it's still comfortable cash positive when you include bond redemptions and interest, and income taxes paid by some beneficiaries. On that basis, Social Security has adequate cash flow for the next 25 years.
Peterson funded a similar project for college students called "Students Face Up to the Nation's Finances." Public Agenda, a respected nonpartisan public opinion research and public engagement organization, received a $500,000 grant from Peterson for that curriculum project.
Doubts among the young about Social Security aren't new. The worry level shot up after the program went through a financial crisis in the early 1980s, and has never since receded.
But Edwards finds that attitudes among the young vary. "If you are a child of a retired person, or you've received survivor or disability benefits, you probably are more knowledgeable about Social Security and why it's important," she says.
"Otherwise, when you're 23, you probably think you'll never be dependent on the government for anything"
(Editing by Linda Stern)
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