Reforming Pensions to Save Them

Social Security isn't going bankrupt. But demographics and economics are projected to squeeze this important lifeline for seniors. Let's do the unpopular thing, and act now.

Key retirement benefits for seniors face some major strains. We can fix this.


Once upon a time, more than a third of elderly Americans were poor. No longer. Helped by pensions and Social Security, the poverty rate among Americans age 65 and over fell to 8.7 percent by 2011. They survived the Great Recession in better shape than younger folks did.

But many younger Americans won't fare as well when they're seniors. For the coming generations of retirees -- baby boomers, Generation X-ers, and millennials -- the value of Social Security benefits keeps eroding due to the gradual increases in retirement ages enacted in 1983. In the private sector, traditional pensions have all but evaporated, and 401(k) retirement accounts haven't come close to replacing their value. Typically, people ages 55 to 64 held no more than $120,000 in household retirement accounts in 2010, according to the Federal Reserve Board--a pittance, compared with what they'll need. Only a seventh of Americans, in a recent Employee Benefit Research Institute survey, report being "very confident" they'll have enough money for a comfortable retirement.

So, why should economists care? Social Security and pension payments, it's true, boost consumer spending. Still, fixing this crisis-to-come is less a matter of economic strength than of social justice--a test of the kind of society we are. The question: Can we avoid a new crisis of elderly poverty?

At the center of things is Social Security, which many retirees will have to count on as their sole -- if meager -- lifeline in years ahead. The program plays no direct role in the federal deficit. But it does face a challenge long term: Its vast $2.7 trillion trust fund is projected to be exhausted in 2033 as baby boomers' retirements accelerate; from then on, payroll taxes would fund only 75 percent of promised benefits.

Acting early would mean an easier solution, but of course that's not how Washington works -- unless, in this case, President Obama agrees to a reduction in Social Security benefits to lure House Republicans into a "grand bargain" on reducing the deficit. That's a possibility.

For future retirees, bold action on pensions would be nicer still. Barely two-fifths of private-sector workers ages 25 to 64 have a retirement plan of any sort in their job, Boston College's Center for Retirement Research has reported -- "shockingly low and showing no sign of improving on its own." Only a third of private-sector workers hold a traditional pension, down from 88 percent in 1975, according to the National Institute on Retirement Security. The use of 401(k) accounts has soared, but the average worker's contribution of just 3 percent is too small to grow much of a nest egg.

Fixing the problems with pensions isn't at the top of anyone's list in Washington. But lawmakers could encourage a revival of traditional pensions by making them less costly for employers--for example, by letting private-sector workers contribute to their accounts, like public-sector workers do.

State governments are a likelier source of ideas. California recently enacted legislation to lay the groundwork for state government to sponsor a retirement-savings plan for employees of companies that don't offer their own. Money deducted from a worker's paychecks would, upon retirement, be converted to a dependable, pension-style payout. Policymakers in 10 other states are pondering similar plans.