IN THE NEWS
McCrery to Dig Up Social Security Debate in 2007
Representative Jim McCrery (R-LA) recently remarked that he believes Republicans have little sway on issues like health care or tax reform, but that they could do something about Social Security. Rep. McCrery, who may replace Rep. Bill Thomas (R-CA) as the head of the House Ways and Means Committee, did not comment on a specific solution for Social Security but suggested that the issue would reemerge after the November elections. McCrery’s comments inspired seniors to protest plans to privatize Social Security outside his office in Louisiana. To read more, see “McCrery’s Social Security Remarks Stir Controversy” and “Seniors Reaffirm their Fight Against Social Security Privatization” (June 12 and 21, 2006, Shreveport Times).
New Direct Deposit Options for Taxpayers’ Refunds
The IRS has announced new direct deposit options for tax returns that will be available in January of 2007. At that time, taxpayers will be able to receive their refunds in one of or up to three types of bank accounts. The IRS hopes that this split-refund program will encourage taxpayers to save money. Last year over half of the refunds issued by the IRS were directly deposited into bank accounts. The new options will allow a taxpayer to deposit their refund directly into a checking, savings, and/or IRA account. See IRS Expands Taxpayers’ Options for Direct Deposit of Refunds (May 31, 2006, IRS Newswire).
Efforts to Save Census Bureau Survey
Proposed budget cuts for the 2007 fiscal year may lead to the elimination of the Census Bureau’s Survey of Income and Program Participation (SIPP). This 22-year-old survey has been crucial to measuring the effectiveness and impacts of social programs like unemployment insurance, food stamps, Social Security, Medicare, and Medicaid. It has allowed policymakers to base their decisions on actual program outcomes. The Census Bureau hopes to have an alternative survey developed by 2009 or 2010, but many are worried about a gap because it could take many years for the Bureau to perfect the new survey. Researchers and policymakers use the SIPP intensely now. For more information see, “Don’t Ask, Don’t Ask” (June 22, 2006, The Boston Globe), “Save our SIPP” (June 20, 2006, New York Times) and “Democrats Try to Save Poverty Survey” (June 8, 2006, Associated Press).
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Changes to the British Pension System
In Security in Retirement: Towards a New Pensions System (http://www.dwp.gov.uk/pensionsreform/whitepaper.asp), the U.K.’s Department for Work and Pensions outlines its new proposal for reforming the British pension system. The proposal addresses the U.K.’s growing older population and the sustainability of the state pension system, the availability of the full state pension for women and other caregivers, and the level of personal savings among pensioners. To address the balance between the number of retirees and the number of workers, the DPW proposes to raise the retirement age for women and men to 68 years (currently women can retire at age 60 and men at age 65). Additionally, the proposal calls for a reduction in the number of contributory years from 39 to 30, and a weekly credit for caring for children, and a contributory credit for caring for the severely disabled for 20 hours or more per week. The DPW has also proposed an automatic employer-provided 401(k) to promote better savings that will complement the state pension. This would entail the automatic enrollment of employees (with an opt-out option) into a 401(k)-type savings plan, with a required employee contribution of 4 percent, a required employer match of 3 percent, and a 1 percent contribution in the form of tax relief.
In Automating Saving: Making Retirement Saving Easier in the United States, the United Kingdom and New Zealand, the Brookings Institution compares the U.K.’s proposed plan to increase personal savings with plans brought forth in the U.S. and New Zealand. Certain aspects of the proposals for personal savings accounts like 401(k)s and IRAs are common to all three countries. For example, in all three, such proposals are meant to supplement the public pension system (Social Security in the U.S.) and contain an automatic enrollment component for new or all employees. The U.K. plan would require all employees to be automatically enrolled, with an option to then opt-out, and with a required employer match. The New Zealand plan would automatically enroll new employees into a 4 percent contribution savings account. Existing employees would have the option of opting-in to the system and employers would not be required to match the employee contribution. In the U.S., proposed legislation on 401(k) would allow employers to automatically enroll their employees into their savings plan, with an opt-out option for the employees. The legislation would also encourage automatic increases. Another proposed U.S. savings plan is the automatic IRA. This plan would require employers with more than 10 employees, who have been in business for at least two years, and who do not already sponsor a 401(k) plan, to provide this automatic, payroll-deduction savings vehicle. In return these employers would receive a temporary tax credit. Neither U.S. proposal would require an employer match.
New Projections of Retirement Security
In Retirements at Risk: A New National Retirement Risk Index, the Center for Retirement Research uses data from the Survey of Consumer Finances and the Health and Retirement Study to project households’ risk of being financially unprepared for retirement. Assuming a retirement age of 65, the study projects income replacement rates (retirement income to pre-retirement income), and compares them with target replacement rates that reflect what households need to maintain their pre-retirement living standards. Households are considered at risk when their projected replacement rates are below the target rate by 10 percent or more.
The study looks at income replacement rates for three birth cohorts: Early Boomers (born between 1946-54), Late Boomers (born between 1955-1964), and Generation Xers (born between 1965-72). Projections show a decline in replacement rates for Late Boomers and Generation Xers on a whole. Single women show the largest decline, with a 16 percent difference in replacement income between Early Boomers and Generation Xers.
Overall, 43 percent of households’ are at risk of their retirement income falling short of their target income replacement rate. Forty-nine percent of Generation Xers are at risk, compared with 35 percent of Early Boomers. Single-women (52 percent) are much more at risk than single-men (41 percent), as are dual earner couples (53 percent) compared with single-earner married couples (22 percent). Low-income households are the most at risk, with 60 percent of Generation Xers and 54 percent of Late Boomers falling below 10 percent of their target replacement rate. Not surprisingly, households at risk are far less likely to have any kind of pension coverage.
Expected Effects of Working Longer on Retirement Security
The Urban Institute’s paper, Working for a Good Retirement, discusses the effects of delaying retirement on both the solvency of the Social Security system and individual financial well-being in retirement. Using the Dynamic Simulation of Income Model (DYNASIM3), the paper finds that the additional Social Security taxes that would be generated from five extra years of work would offset more than half of the Social Security shortfall in 2045. One additional year of employment would increase the average net retirement wealth by $31,897. Postponing retirement for an additional five years would increase it by $160,992. Lower-income workers benefit more from the delay than do higher income workers. For those in the lowest quintile of lifetime earnings, working one additional year would result in a 16 percent increase in average annuity income at retirement and working five more results in a 98 percent increase; these figures for the top quintile are 7 percent and 42 percent, respectively. The paper proposes decreasing benefits for early retirement and raising the benefit entitlement age to encourage a delay in retirement.
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ACTION ITEM
Help Save the SIPP!
The House of Representatives Appropriations Committee has passed Representative Serrano's (D-NY) amendment to add an additional $10 million to the Census Bureau’s budget for the Survey of Income and Program Participation (SIPP). While this amount of funding covers just a third of the survey’s FY 2007 cost, it provides SIPP supporters with a basis for requesting full funding from the Senate Appropriations Committee. Social-science researchers, advocacy organizations, and policymakers rely upon the SIPP for detailed information on the economic well-being of people and families that use social programs over time. The SIPP allows for a real evaluation of programs like Social Security, unemployment insurance, and food stamps, and of our policies and priorities around poverty, retirement, and work and family issues. The Center for Economic and Policy Research (CEPR) is leading the fight to save the SIPP. If you would like to write your Senator to urge him/her to fully fund this important survey, please visit CEPR’s SIPP action page.
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McCrery’s Social Security Remarks Stir Controversy