Lawmakers push Wall Street giveaway disguised as increased worker security

The nation is facing a retirement income crisis. Too many workers will never be able to retire and maintain their standards of living. Employer-sponsored traditional pensions have largely disappeared, replaced with wholly inadequate 401(k)s and other tax-favored individual savings and investment plans. 

The solution to the crisis is simple: Expand Social Security. Frustratingly, there are politicians and think tanks that instead want to expand the very individual savings and investment approach that contributed to the crisis. A good example is the Retirement Savings for Americans Act, currently pending in Congress. It would automatically enroll all employees not covered by an employer plan into a savings and investment account with mandatory contributions of 3 percent of wages. 

To understand the incomparably superior approach of expanding Social Security over throwing more money, in the form of tax expenditures, at 401(k)s and similar plans, we have to understand the stark difference between retirement insurance and retirement savings. 

Social Security is insurance. Those who are insured — working families, in the case of Social Security — pay premiums or insurance contributions (in the case of Social Security, insurance contributions or premiums, required by the Federal Insurance Contributions Act or FICA) to a collective fund out of which benefits are paid when an insured event occurs. In the case of Social Security’s wage insurance, employers match their employees’ contributions dollar for dollar and the insured events triggering payouts are old age, disability or death leaving covered survivors. 

In contrast to retirement insurance, in which risks are pooled and the benefits are designed to replace pre-retirement earnings, retirement savings and investment plans such as 401(k)s and similar plans, proposed to be expanded by the pending Retirement Savings for Americans Act plan, pay out whatever happens to be in one’s individual account at retirement. Investment risk is borne completely by individual account holders. Participants are supposed to use that payout to afford the costs of retirement. Those payouts may be totally unrelated to pre-retirement wages. 

There are many reasons why retirement savings and investment plans do not provide adequate old age security. If money is lost in a stock market downturn or investments do poorly, say goodbye to a secure retirement. The Wall Street financial services industry skims considerable profits from these accounts. That significantly diminishes payouts. In contrast, Social Security spends less than a penny of every dollar on administration. More than 99 cents is spent on benefits. 

Over 40 years’ experience with 401(k) and similar accounts has shown that very few account holders are able to accumulate enough to afford a decent, secure retirement. A dollar contributed to Social Security provides much greater and better economic security than a dollar contributed to these accounts.

Put starkly, our Social Security system benefits contributors. Individual investment and savings accounts primarily benefit the financial services industry that manages and profits off of them. 

Notably, if the 3 percent of wages that the Retirement Savings for Americans Act calls for, were instead contributed to Social Security by all employees and employers, Social Security’s projected shortfall would disappear and we could expand benefits substantially. But there is an even better way to pay for an expanded Social Security.

Given the income and wealth inequality of recent decades, we should require the uber-rich to contribute their fair share, rather than increase the FICA rate on low- and middle-income workers. Importantly, a number of bills have been introduced in Congress which greatly expand benefits paid for by requiring millionaires and billionaires to pay their fair share. 

If members of Congress want to improve retirement security, they should expand Social Security rather than Wall Street-favored individual savings and investment schemes. What they should not do is throw more money at private-sector savings plans at the expense of Social Security. The absolute worst thing Congress could do is backdoor privatization of Social Security. That would happen if Congress expands private savings schemes and cuts Social Security’s modest but vital benefits. That would result in substantially less economic security for the nation’s working families. It must be avoided.  

Nancy J. Altman is president of Social Security Works and chairs the Strengthen Social Security Coalition. James W. Russell is the author of “The Labor Guide to Retirement Plans.” He was a member of the State of Connecticut Retirement Security Board.