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Retirement Income: The Crucial Role of Social Security

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Retirement IncomeMay 2005 | EPI Book

Retirement Income

The Crucial Role of Social Security

Christian Weller and Edward N. Wolff

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Table of contents


Chapter 1: Measuring wealth, retirement wealth, and retirement income adequacy
Types of wealth

Chapter 2: Rising retirement wealth results in improved retirement income security
Social Security wealth at the heart of retirement wealth improvements
Other wealth plays larger role than pensions
Wealth inequality stays high and occasionally increases
Demographic groups with least adequate retirement income see improvements due to Social Security


Appendix 1: Methodology
Appendix 2: Literature review
About EPI


Retirement income security is a subject that regularly occupies the public debate, and President Bush’s proposal to privatize Social Security by using a substantial portion of the program’s contributions to create private accounts has only increased the attention on retirement income in the public policy arena. But Social Security benefits are only one piece of the retirement income security puzzle. A truly accurate assessment of Americans’ retirement security must consider all forms of wealth—including private pensions, housing, financial assets, and Social Security—and how they have changed over time for different groups.

Social Security is an insurance program that protects families from the economic loss of an adult wage earner who is no longer able to work regularly because of death, disability, or old age. These Social Security benefits can be converted into the amount that would need to be saved by individuals to replace the program’s benefits. For instance, for the typical worker, actuaries estimate that the disability benefit is worth $353,000, and the survivors’ benefit is worth $403,000. This conversion allows Social Security to be compared within a private “ownership,” or wealth, context.

In examining Social Security benefits within the context of other retirement savings programs, the data show a number of striking results:

  • For the typical person approaching retirement, the value of expected future Social Security retirement benefits represents the largest single source of wealth. That finding is consistent with the well-known fact that Social Security provides more than half of all income for about two-thirds of people over age 65.
  • Social Security provided a larger addition to wealth than any other form of wealth between 1989 and 2001 for the average person near retirement. As labor markets tightened and annual earnings improved over that period, the expected value of Social Security benefits rose. Although stock market and home prices rose significantly over that timeframe, these increases had only a modest effect on the wealth of those in the middle of the income spectrum; their stock market holdings were too low to be affected, and increased borrowing kept home equity in check.
  • In terms of the adequacy of workers’ retirement savings, the data indicate that the retirement system outside of Social Security is a system with many holes. Despite large tax incentives from the federal government for workers to save for retirement, more than one-fifth of households nearing retirement (those between the ages of 56 and 64) had no retirement savings other than Social Security. In contrast, nearly everyone can expect to receive some benefits from Social Security.
  • Even among the households that have private pensions, savings are very unevenly distributed. Indeed, one of the most dramatic transformations over the last two decades has been the replacement of traditional Defined Benefit (DB) pension plans with Defined Contribution (DC) plans such as 401(k)s. This shift has actually been detrimental to a large share of the working population. Despite increased coverage by DC plans and the rise in the stock market, the total DB plus DC wealth of the typical person nearing retirement was no higher in 2001 than in 1983.
  • Retirement savings, including Social Security wealth, notably improved from 1989 to 2001, although large trouble spots remain. The share of households that could expect to have retirement income of less than twice the poverty line declined. Also, the share of households that could hope to replace at least half of their current income with benefits from their savings in retirement rose from 1989 to 2001.
  • There is significant inequality in the retirement preparedness of different demographic groups. Minorities and single-female-headed households saw larger than average improvements in retirement preparedness, although they remained less well prepared than other groups. Much of this inequality results from an uneven distribution of retirement savings outside of Social Security, while expected Social Security benefits are an equalizing force. The tight labor market was particularly helpful in raising the annual earnings and future Social Security benefits of these groups. In addition, these groups depend more heavily on Social Security for their retirement income than do other groups.

The many ways in which Social Security has proven superior to private retirement benefits should give pause to those who want to carve up Social Security through privatization. Social Security is universal, and its value has risen faster than other forms of retirement savings for the vulnerable households that need additional retirement benefits the most.

The lesson is twofold. First and foremost, protect Social Security, because the inequality of other retirement holdings suggests variations in their returns and the need for some secure retirement savings. Second, fill the holes in the retirement savings system outside of Social Security, so that a decent standard of living in retirement as a reward for a life of hard work becomes a reality for America’s middle class and working poor.

About the Authors

Edward N. Wolff is professor of economics at New York University, where he has taught since 1974, and a Senior Scholar at the Levy Economics Institute of Bard College. He is a research associate with the Economic Policy Institute as well as with the National Bureau of Economic Research. He received his Ph.D. from Yale University in 1974. In the past he has served as managing editor of the Review of Income and Wealth, visiting scholar at the Russell Sage Foundation in New York, president of the Eastern Economics Association, council member of the International Input-Output Association, and council member of the International Association for Research in Income and Wealth. Dr. Wolff has also acted as a consultant for the World Bank, the United
Nations, the WIDER Institute, and Mathematica Policy Research. His principal research areas are income and wealth distribution and productivity growth. He is the author (or coauthor) of multiple research studies, including the 2002 EPI book Retirement Insecurity: The Income Shortfalls Awaiting the Soon-to-Retire.

Christian Weller is a senior economist at the Center for American Progress, where he specializes in Social Security and retirement income, macroeconomics, the Federal Reserve, and international finance. Prior to joining American Progress, he was on the research staff at the Economic Policy Institute, where he remains a research associate. Dr. Weller has also worked at the Center for European Integration Studies at the University of Bonn, Germany; in the Department of Public Policy of the AFL-CIO in Washington, D.C.; and in universal banking in Germany, Belgium, and Poland. His work has appeared in publications such as the Cambridge Journal of Economics, the Journal of Policy Analysis and Management, the International Review of Applied Economics, the Journal of Development Studies, and the Journal of International Business Studies. He is the co-author of the EPI study Health Insurance Coverage in Retirement: The Erosion of Retiree Income Security  (2004). Dr. Weller holds a Ph.D. in economics from the University of Massachusetts at Amherst.

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