The Collapse of the Three-Legged Stool - Expand Social Security Now!: How to Ensure Americans Get the Retirement They Deserve - Steven Hill

Expand Social Security Now!: How to Ensure Americans Get the Retirement They Deserve - Steven Hill (2016)

Chapter 2. The Collapse of the Three-Legged Stool

For many decades after World War II, a comfortable middle-class existence was possible for an increasing number of Americans. A generation of returning veterans, most of them men, was able to take advantage of the GI Bill to buy a home cheaply, go to college, start a business, and receive other benefits. Millions of men, as well as their families, prospered. A rising tide floated most boats, as the United States created what was at the time the highest standard of living for more people in the history of the world.

This initiated the building of suburbs and rows upon rows of “little pink houses for you and me.” Each house became a family’s home, which became a repository for the owners’ growing stake in the world, contributing substantial wealth to their eventual retirement. Wages were rising, so beyond being able to afford a home mortgage, more and more Americans also began socking away money into their savings accounts. Those savings accounts eventually turned into certificates of deposits (known affectionately as CDs), money market funds (an early prototype of a mutual fund), and other savings vehicles that became popular in the 1970s.1

America’s postwar businesses also were flush, raking in more profit than ever before. Feeling charitable, many began rewarding employees with benefits like company pensions and, much later, contributions to 401(k)s. The government also had more tax revenue and started offering generous pensions and health care to public employees. Across the country, Americans as individuals and as families enjoyed their rising status in a superpower nation, becoming more affluent and securing their place in the world. Children had better schools, fathers (though not so much mothers, initially) had better jobs, and college graduates had more opportunity (though obviously there were differences in people’s fortunes based on race, gender, and region).

And when you became older and it was your turn to retire, the resources that could be marshaled for your retirement and that of other seniors were unprecedented. You had access to a stable and increasingly robust three-legged stool of a retirement system—your monthly Social Security payments, which by law increased with inflation; your company pension, which, like Social Security’s annuity, also provided a guaranteed monthly stipend; and your own private savings, which were mostly invested in the sturdy foundation of your home and could be repurposed (sold or remortgaged) in your final years to pay for your elderly needs. Never had a generation of elders been so well treated; instead of being shooed away as too weak and fallow to work or be productive, a castaway fated to live out your final days in poverty and shame (which had always been the usual lot for most old people), more seniors now lived longer than ever and traveled the world as tourists in leisure and comfort. For many Americans it was truly a Golden Era of Retirement, one of the most momentous accomplishments in human history, all of it founded on this three-legged stool.

Yes, the first several decades after World War II was an Ozzie and Harriet world, unleashed by the supernova of the New Deal. And while the reality was never as contented as the myth (especially for certain demographics of Americans), there was considerable affluence in these communities, and more and more people on the whole shared in this prosperity. The great middle class in the United States had arrived, and quickly became the envy of the world.

But then, something happened to shake the foundation. The three legs of the retirement stool began to grow slowly unsteady. They were shaved back and whittled—not by misfortune or ill luck, but by specific government policy. We are a nation of laws and regulations, and the right ones can do marvelous things, but the wrong ones—well, today the stool is not so stable or secure. We live in a very different world today. What happened?

The First Failing Leg of Retirement Security: Pensions and Employer Retirement Plans

The first leg to go was the one provided by private businesses. The pensions of old worked kind of like Social Security’s annuity, in which retired employees received monthly benefit payments. These types of employer-based retirement annuities are known in technical jargon as a “defined-benefit plan,” and it was not just a type of savings account but a form of insurance. Once it kicked in upon retirement, it provided a monthly stipend for as long as you were alive, what is known as a “life annuity.” Typically both the employer and employee contributed to the plan, based on a formula that calculates the contributions, which are actuarially based on the employee’s life expectancy, years of service, final salary, normal retirement age, and other factors. The company funded the pensions, hired someone to run the plans (investing the money from the pension fund into the stock market), and was on the hook if its pension fund investments headed south. In essence, with a defined-benefit plan, the employer bears all the investment risk and commits to its employees’ retirement needs in perpetuity.

The company pension system worked marvelously well for many workers, but it wasn’t perfect because it wasn’t “portable”—workers who had a pension with a particular employer would lose the ability to contribute further to and build that pension if he or she left that job. That made a lot of workers reluctant to change jobs, a situation known as “job-lock.” But on the whole, the private company pension was a beneficial complement to the monthly Social Security check. The two of them were a dynamic duo of old-age insurance, kind of like the Batman and Robin of retirement. In 1979, nearly four out of ten private-sector workers were covered by an employer-sponsored pension plan, and about 80 percent of employees in medium- and large-size companies still had such plans in 1985. But in a relatively short period of time that changed dramatically—by the mid-2000s, barely 15 percent of private-sector workers had guaranteed payout pensions, including only 32 percent at medium and large companies.2

In the public sector, an even higher percentage of workers was covered by pensions. That percentage is still high today, with approximately 78 percent of state and local government employees, and nearly all federal workers, still participating in government-sponsored pension plans.3 But both the public and private company pensions began running into problems. They were impacted by a baby-boom bulge in the number of retirees, which was entirely expected. But what was not expected was the erratic nature of the stock market during the two financial crises in 2000 and 2008, which led to unanticipated low returns on the investments that helped fund the pensions. Yet another factor was that some public and private pension plans failed to make adequate contributions into their funds, despite making hefty promises to employees, irresponsibly spending employees’ contributions on other priorities. Ultimately many private and public pension funds became plagued by inadequate funding and threats of bankruptcy.

Pensions for public employees at federal, state, and local government levels began entering truly worrisome orbits of underfunding, posing a serious threat to their stability. The Federal Employees Retirement System (FERS), which covers federal government employees, has an “unfunded liability”—in other words, it is in debt—to the tune of more than $600 billion.4 There is no real risk that the federal government will be unable to pay promised benefits, and the situation has been alleviated somewhat by the fact that the number of public-sector workers has declined dramatically in recent years, accelerating as a result of the Great Recession. There are now a million fewer federal employees than when Ronald Reagan left office, and public-sector employment as a percentage of the population is at a thirty-year low.5

But at the state and local levels, things look considerably more grim. The Pew Center reports that all state-run retirement systems combined had a shortfall of nearly $1 trillion in 2013, and a total unfunded liability of over $3.4 trillion. That’s the gap between the promised pension benefits that governments owe to their workers and the funding available to meet those obligations. The gap had increased by $54 billion from the previous year.6 This funding gap affects nearly every state, but some are affected worse than others. Some states like Wisconsin and South Dakota are in fine shape, with 100 percent of their pension obligations funded; but other states are in terrible shape, such as Illinois and Kentucky, with only 39 and 44 percent funded. Only fifteen states had an overall funded ratio of 80 percent or higher, which is the level considered “healthy” enough to cover long-term obligations.

California, being the most populous state, has by far the largest unfunded liability of $610 billion, though to its credit 72 percent of that liability was funded as of 2013. California’s two largest public retirement programs, the California Public Employee Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS), which cover 65 percent of the 4 million state, county, and local employees who are eligible for public pension benefits, reported $62 billion and $74 billion in unfunded liabilities for 2013.7 In addition to pension liabilities, states are responsible for hundreds of billions of dollars more in other unfunded benefits, including retiree health, dental, and life insurance.

City governments are also beleaguered by underfunding pensions. The Chicago Teachers’ Pension Fund was reported in 2012 to be on the brink of collapse.8 The New York Times reported that from 1999 to 2012, the New York City pension for city employees fell to just 63 percent funded from 136 percent. In 2015, the city set aside more than $8 billion for pensions—11 percent of the budget—which is a twelvefold increase in the city’s outlay since 2000, when the payments accounted for less than 2 percent of the budget.9 Other cities like Los Angeles, Boston, Atlanta, and Pittsburgh have also seen funding for their city pensions enter the red zone.10

But it’s not just public pensions that have been having problems. Not only have the sheer number of private company pensions declined drastically, but most of the ones that remain are in serious financial trouble. US private pensions were some of the hardest hit in the world by the Great Recession and stock market collapse, at one point falling in value by 37 percent from their peak in 2007. Many of them (though not all) have recovered a bit, but it shows the shakiness and unreliability of private pensions dependent on a roller-coaster stock market for the returns that fund their employees’ benefits.11

Pension plans at some of the largest US corporations are woefully underfunded. Some of the nation’s largest companies, which happen to be led by CEOs who have been prominent in their criticisms of Social Security, have huge deficits in their employee pension funds. These companies include General Electric and its CEO, Jeffrey Immelt ($21.8 billion deficit); Boeing and its executive, Jim McNerney ($16.6 billion deficit); and AT&T and its CEO, Randall Stephenson ($10.2 billion deficit).12 ExxonMobil, one of the world’s largest companies, had a funding deficit of more than $10 billion as of 2011.13 More than two-thirds of the five hundred companies that make up the S&P 500 have defined-benefit plans, and as of 2012 only eighteen of them were fully funded, according to the New York Times.14 All told, the unfunded liabilities add up to around $355 billion, or about 22 percent of the funds’ promised benefits.

Many labor union pension funds also are struggling, particularly in the aftermath of the Great Recession. A number of union pension funds are what’s called “multiemployer plans,” jointly sponsored by many employers and local or regional units of a labor union. At the end of 2008, 76 percent of union-backed multiemployer pension plans were safely solvent, but by 2009, after the crash, only 20 percent remained in the green zone. The rest had sunk into a yellow warning zone. The number of multiemployer plans projected to become insolvent has more than doubled. Nearly two hundred plans, or about 15 percent, are at risk of failure, potentially affecting nearly 2 million people. Those include the Central States Fund, the Teamsters’ second-largest pension plan, and the United Mine Workers of America 1974 Pension Plan. Both are projected to run out of money in the next ten to twenty years unless they cut retirement benefits to members. The nation’s largest multiemployer pension fund, the Western Conference of Teamsters Pension Fund with 583,000 participants, saw 28 percent of its pension assets wiped out by the financial crisis in 2008 (it has since recouped some of those losses).

Even the federal Pension Benefit Guaranty Corporation, which is the federal insurance backstop charged with bailing out struggling union pension funds, is in trouble. It has a $5.2 billion deficit and has booked liabilities of $7 billion dedicated to bailing out forty-nine insolvent multiemployer pension plans. An additional sixty-one plans have been terminated and will run out of money (and cease paying benefits to members) over the next few years, and forty-six more will terminate within the next decade.15

So both the private and public components of the US pension system have been on shaky ground for some time. The defined-benefit pension once provided a secure stream of retirement income on top of Social Security for many Americans, but in recent years the massive shortfalls in private and public pensions have become one of the great whispered secrets of modern politics. Nobody is quite sure what to do about it or how to build political consensus around a grand solution, so we just don’t talk about it. Compared to these, Social Security is a model of financial sanity and stability.

The Cruel Hoax of 401(k)s and IRAs

During the Reagan era, private employers began walking away from their historical role as a mini-New Deal outpost providing pensions, health care, and other parts of the safety net for their employees. But have no fear America, said our nation’s leaders: we have conjured up another means for providing retirement security. Enter the 401(k), along with its close cousins the 403(b) and the IRA.

Starting in the early 1980s, businesses began converting their company-sponsored defined-benefit plans to what became known as a defined-contribution plan, which meant the company would no longer pay a guaranteed monthly amount but would instead help collect your personal contributions into various tax-favored investments, such as a 401(k). It might seem obvious why companies would want to do that, given all the funding troubles that pensions began encountering in both the private and public sectors. Yet at the same time that companies were saying they could no longer afford defined-benefit pensions for their employees, they were paying increasingly astronomical salaries and bonus packages to their executives. Businesses were also receiving (and still receive) substantial federal deductions in the amount of a hundred billion dollars annually in return for providing their employees with pensions.16 It’s a matter of fiscal priorities, and where one chooses to spend the company profits produced by employees’ labor and productivity. Nevertheless, the companies began winding down their company pensions and enrolling their employees instead in savings vehicles like 401(k)s, 403(b)s, IRAs, and the like. This turned out to be a disaster for most American workers, as well as the nation’s retirement system.

The 401(k) and IRA vehicles were established by federal law in the late 1970s to allow workers to take part of their pay as tax-free deferred compensation. In the Revenue Act of 1978, Congress inserted a new section into the tax code, section 401(k), and prior to that, Individual Retirement Accounts (IRA) had been created as part of the 1974 Employee Retirement Income Security Act (ERISA). As for 403(b) accounts (tax-deferred accounts for employees of nonprofits), these have been around since the 1930s. But section 401(k) was the first provision that allowed workplace-sponsored retirement accounts that were fed by tax-deferred income for all types of employees. This opened the door for the proliferation of such accounts in the decades since.

A 401(k)-type plan is structured in a way that the architects believed would encourage Americans to save for their retirement. Just like with a pension, defined-contribution plans allow employees to have deducted from their pay on a voluntary basis a fixed amount of salary. That money can then be deposited into various types of investment vehicles, such as stocks and bonds, or into portfolios made up of various stocks and bonds, such as mutual funds. The more generous employers match a certain percentage of the employee’s contribution to their retirement plan, but the contribution amount from the employer is much less than under a defined pension.

The amount deducted from the employee’s monthly salary is then subtracted from their gross wage when calculating taxable income, significantly lowering their tax burden. When I participated in such a plan through my employer, I socked away the maximum of around $22,000 per year and deposited that money into a bank account, mutual fund, or other investments. According to IRS rules, I was then allowed to deduct that $22,000 from my gross income, which meant I paid income tax on a much lower income, saving thousands of dollars (though because it’s tax-deferred, I will have to pay taxes on that income once I retire, but by then my retirement income is likely to be lower, and so will be the income tax). By investing a chunk of my salary year after year in the stock market, it is assumed that several decades of investment income will expand my individual economic pie significantly. Another nice advantage of this method is that, unlike job-based pensions, the 401(k)s and IRAs are somewhat portable from job to job, so you don’t have to worry about job-lock.

It can be a really great deal—but only if you earn enough income to participate. In an age of stagnant wages for most working Americans, therein lies a huge problem. Nearly half of all households have virtually no retirement savings. With incomes flat for the past several decades, who had extra money to save? You can’t benefit from the tax-deferral of a 401(k) if you don’t have any savings.

The decline in company pensions and the rise in 401(k)-type vehicles mirrored each other like the two ends of a seesaw. As the number of private pensions declined, the number of 401(k)s and IRAs dramatically increased. By 2011, the percentage of private-sector workers covered by company pensions had dropped from around 40 percent to 15 percent.17 Yet at the same time, the number of businesses offering defined-contribution plans like 401(k)s soared. Since 1979, 401(k)-type retirement plans have gone from covering only about 17 percent of the private workforce to around 42 percent today.18 Essentially these defined-contribution plans have taken over from traditional pensions.

Defined-contribution plans were hyped and sold to the American public as the new and improved successors to the guaranteed monthly payouts of a traditional pension. In actual fact, the 401(k) has been a dismal failure for a number of reasons. Besides most Americans not earning enough income to contribute much into these accounts, this type of private savings vehicle forces individuals to endure a number of significant risks, including:

Market risk. Unlike Social Security or the company’s pension plan, a defined-contribution plan is not insurance—it is merely a tax-deferred savings account that can be invested in the stock market. A 401(k) puts all the risk upon the workers, who must decide how much to invest, and in which investments. Workers who have 401(k)s risk losing a chunk of their savings in a stock market downturn or crash, a particularly damaging prospect for workers nearing retirement.19 Of course, this can happen to anyone who invests their money unwisely. In the case of a total stock market collapse, like what happened in 2000 and 2008, you can lose a lot of money if you invest anything at all. So switching from a defined-benefit plan to a defined-contribution plan has forced workers to assume a major amount of risk. Given stock market volatility in recent years, and the inherent gamble that investing in the stock market entails, the best investment strategy might be not to invest in the stock market at all. Because depending on when the next crash hits, you may be left holding the bag at the exact moment when you need that money for your retirement. In the financial crisis of 2008, individuals lost $2.8 trillion in the value of their 401(k) or IRA retirement plans.20 That loss is equal to nearly a sixth of the size of the entire US economy.

Investment risk. In addition to the overall volatility of the market, 401(k)s force workers to manage their own investment portfolios, which often leads to lower-than-optimal performance for many reasons. Workers are not experienced stock market analysts and too often make the wrong decisions. They tend to hold undiversified portfolios, invest in too many high-risk stocks, and get impatient and/or spooked by market fluctuations and so buy and sell at the wrong time. Not surprisingly, most people generally lack the expertise necessary to earn high returns.21

Chris Farrell from Bloomberg Business says, “A cottage industry of behavioral economists has chronicled how poor most people are at making sound investment decisions. It’s all too easy for employees to get caught up in market enthusiasms.” Most people, he says, pile in just when prices are peaking and—when the market spooks—selling around a perceived market bottom. “Few get the hang of the differences between growth stocks and value stocks, let alone the key elements of diversification [and] asset allocation,” says Farrell. “There’s little time to learn modern portfolio money management.”22

It’s not just investment decisions that give most people difficulty. A study by the National Bureau of Economic Research found that more than one-quarter of baby boomer households thought “hardly at all” about retirement, and that financial literacy among boomers was “alarmingly low.” About a third of households don’t have a savings account, and more than 40 percent don’t have enough savings to cover basic expenses if they lost their main source of income. Half the households could not do a simple math calculation (divide $2 million by five) and fewer than 20 percent could calculate compound interest.23

So, how could such individuals realistically be expected to oversee their own investment portfolio? Even many experienced mutual fund managers often fail to beat the performance of the stock market exchanges. Any retirement system that relies too much on the investing skill and acumen of the average person is destined to fail.

Contribution risk. Workers often contribute too little or too inconsistently to their accounts, so most are not able to accumulate a sufficient nest egg. Financial experts say it will take a monthly retirement income of about 70-80 percent of preretirement income levels—in addition to $200,000 to $300,000 in personal savings—for the average American to have a secure retirement.24 Yet most older Americans have saved only a fraction of that. Three-quarters nearing retirement age have less than $30,000 in their retirement accounts, with one estimate from the National Institute on Retirement Security showing that a typical “near retirement household” has on average only $12,000 in “retirement account assets.”25 Retirement expert Alicia Munnell at the Center for Retirement Research has found that about half of all Americans are at risk of having insufficient retirement income, and three-fifths of low-income households are at risk of not having sufficient retirement income to maintain their preretirement standards of living (which, for poorer people, was already a low standard to begin with). All of these problems were exacerbated by the Great Recession.26

Longevity risk. Heaven forbid that it should be a liability that you might live too long. But for retirees who rely on their 401(k) to supplement Social Security, this is a real possibility. In their best-selling book Get What’s Yours: The Secret to Maxing Out Your Social Security, experts Laurence Kotlikoff, Philip Moeller, and Paul Solman write that the greatest danger that retirees face is outliving their savings. They portray an old age in which the “golden years” have turned to lead, “weighed down by penury and its attendant anxieties.”27 That is a greater risk with a 401(k) or other type of defined-contribution plan, compared to a guaranteed payout pension plan (with a defined benefit), which lasts the rest of your life. Unquestionably, US workers were insured more efficiently and more securely under the traditional pension system. Without access to a company pension, many workers have become almost completely dependent on Social Security for their retirement needs.

Financial fees risk. Because most Americans do not have the expertise to know how to invest their savings, or the time to figure it out, many end up contracting with investment management firms that charge high account fees and take a big bite out of already-inadequate savings. As Yeva Nersisyan and L. Randall Wray have argued, the entire industry can be justified only if, through skill or luck, pension fund management can beat the average risk-free return on US treasuries by enough to pay for all of those industry compensations plus add growth to the fund portfolio.28 Yet numerous studies have shown that the vast majority of professional managers don’t realize higher stock market returns than what lead index funds like the Dow Jones Industrial average earns. There is no strong evidence that the typical fund manager can even consistently beat the average return on US treasuries. In other words, there is little expertise involved in performing no better than the stock market as a whole.

So even though it makes no economic sense to pay fees to financial managers, nevertheless the “hyper-individualized” nature of administration and management of millions of accounts generates excessive overhead costs that are ultimately absorbed by the workers themselves. By some estimates, these costs are more than twice as high as they would be under a more efficient retirement system.29 Various reforms have been proposed, such as stricter regulations on brokers, disclosure of 401(k) fees, or requiring plan sponsors to offer lower-cost index funds. But those would fail to fix this fundamentally broken system. Fees would still remain high and workers would still be forced to shoulder most of the risks.

Welfare Plans for the Wealthy

Besides the increased risk and exposure to stock market fluctuations, defined-contribution plans like 401(k)s have fostered another appalling outcome that would be laughable if it wasn’t so twisted—most of the tax-deferred subsidies have disproportionately benefited affluent Americans. Here’s why.

As we have seen, individuals participating in 401(k)s, 403(b)s, and IRAs are allowed considerable tax deductions. These act to reduce the taxable income of only those people who are affluent enough to benefit from these savings instruments. Higher-income people take full advantage, and as a result they pay less tax on their reduced taxable income. Also, in some cases, they end up in a lower tax bracket and pay a lower tax rate. These advantages are mostly not available to the middle and working classes, and especially not to the poor, who rarely earn enough income to divert for savings or investment.

In 2012, the federal government spent over $165 billion subsidizing individual retirement savings, nearly 80 percent of which went to the top 20 percent of income earners.30 Typically fewer than 30 percent of all filers even itemize deductions on their tax returns, which is necessary in order to receive a tax-deferred subsidy like a 401(k).31 Again, the poor and middle classes rarely earn enough income to benefit from itemizing deductions. Only higher-income individuals earn enough to enjoy that luxury. Going forward, the nonpartisan Congressional Budget Office has calculated that from 2015 through 2024 the United States will spend $2.1 trillion subsidizing defined-contribution plans, most of which will benefit people in the top 20 percent income bracket.32

Social Security expert Philip Moeller agrees that the benefits of 401(k)s have been limited to higher-earning Americans. “The people who need the help the least are thus getting the lion’s share of the tax benefits of these accounts, while half of the nation’s workers can’t even participate in a 401(k) and many of those who could simply do not make enough money to do so.”33

No public interest justifies subsidies of private savings for the better-off through the tax code—yet that is exactly what current policy does. Nor is it sensible to have one of the three legs of the retirement stool dependent on several entirely unpredictable factors: how much discretionary funds one can stuff into these savings vehicles during your working life, which excludes those unlucky ones who don’t earn enough income; how well the stock market performs over the life of the 401(k)/IRA, since that will determine its ultimate value; and how savvy the average person is at picking stock market winners. That just doesn’t make sense, either from the perspective of retirees or of having a secure and stable retirement system. It only makes sense from the employer’s perspective—shedding its obligation for providing company pensions and switching to 401(k)s was much less expensive and involved less risk for the company, and fewer potential headaches caused by fluctuations in stock and investment returns. Instead, all the risk was handed off to everyday American workers, most of whom are woefully ill equipped for such an undertaking.

It is important to emphasize that these risks and costs are an inherent part of the 401(k) system. So any reforms will have limited impact because the problem is endemic to a defined-contribution system where participants’ success is dependent on an unpredictable stock market and their own ability to pick winners, and tax-deferred subsidies are provided to those who are already better off. Thus both the private and public components of the US employer-based retirement system are under severe strain, as the Great Recession—combined with prerecession patterns of rising inequality, stagnant wages, and a diminishing social contract—have taken their toll. We now have decades of data with which to assess the “defined-contribution revolution” from the 1970s, and we can unequivocally say that it has been a failure. It has shifted risks and costs onto everyday Americans who can least afford it, and it has failed to provide sufficient support for retirees.

With traditional company pensions covering fewer workers, and the remaining pensions on shaky ground, and with defined-contribution plans by definition riskier and more costly for employees, this leg of the three-legged retirement stool has been chopped back to the point where it is too short and unstable to contribute much to retirement well-being. It has led to more risk, more stock market gambling, and less guaranteed security.

The Second Failing Leg of Retirement Security: Homeownership and Private Savings

The second failing leg of the retirement system is based on individual asset ownership, and mostly is centered on homeownership. For tens of millions of Americans, security in their elderly years has been directly linked to the value of their homes. Yet the rupture of the housing bubble, which caused the value of homes across the country to collapse, illustrated the danger of over-reliance on home values for retirement security.

Homeowners lost approximately $8 trillion in value during the Great Recession, a 53 percent drop in the overall worth of the national homeownership stock.34 Like our protagonists Howard and Jean, almost 10 million Americans—nearly a fifth of all homeowners—still remain “underwater” today, owing more on their mortgage than their home is worth, seven years after the housing collapse.35 That number is even higher—30 percent—among those owning low-price homes. According to Forbes, more than one-third of all homeowners with a mortgage are “effectively” underwater, meaning they have less than 20 percent equity in their home. These homeowners are for the most part flat broke if they have no other accumulated savings or retirement vehicle (which, as we have seen, most don’t have).

Prior to the housing collapse in 2008, only the top 50 percent of income earners had accumulated enough wealth from financial assets and pensions to weather the bursting housing bubble, when the value of homes took a nosedive by 40 percent or more. The bottom 50 percent had not saved enough beyond their homeownership to avoid severe wreckage to their retirement plans when their homes’ worth plummeted. This was devastating for Americans’ retirement well-being because, with the rate of homeownership in the United States being 65 percent of all households (before the housing bubble collapse in 2008 it was nearly 70 percent), this accounts for a large proportion of the assets owned by a large portion of the population.36

Besides homeownership, many people also have some degree of non-home assets in the form of private savings. But for most Americans, their level of private savings is too low to serve even as a personal buffer against sudden hard times, let alone as the basis of a secure retirement. New York Times columnist Paul Krugman reported about a household survey conducted by the US Federal Reserve in 2015, which found that “47 percent [of households] said that they do not have the resources to meet an unexpected expense of $400,” and “would have to sell something or borrow to meet that need.” Only $400! More than three in ten Americans reported going without some kind of medical care in the past year because they couldn’t afford it, and the same number have no retirement savings or pension.37 These 132.1 million “liquid asset poor” Americans include many members of the middle class: more than a quarter of households earning between $55,465 and $90,000 per year have less than three months of liquid savings.38

Complicating matters, the lack of private savings has weakened the other legs of the retirement stool. More than one in four households has had to withdraw savings from their 401(k) or 403(b) retirement accounts before retirement to pay for an emergency. These early withdrawals totaled $60 billion out of a total of $176 billion (40 percent) contributed by employees to defined contribution accounts in 2010, even though early withdrawals come with heavy penalty fees.39 With defined-contribution plans already insufficient to cover retirement needs, the lack of private savings to cover sudden personal emergencies has made the problem much worse.

There is one other disturbing aspect about using homeownership as a personal piggy bank. As with the federally subsidized 401(k)s and IRAs, the United States provides substantial subsidies for homeowners through vehicles like the home mortgage interest deduction, a deduction for state and local property taxes, a lower capital gains tax rate on home sales, and other home-related deductions. These are meant to encourage homeownership-based retirement. Yet here, too, the homeownership deductions are upside down—they primarily benefit well-to-do Americans, even though these are the people who need assistance the least.

The federal subsidy for the home mortgage interest deduction amounts to around $70 billion per year, and a lopsided 86 percent of the home mortgage interest deductions in 2014 went to those people in the top 10 percent income bracket.40 Then there’s also a federal tax deduction for state and local property taxes paid on one’s home that cost the federal budget another $32 billion in 2014.41 And adding insult to injury, homeowners also do not have to pay taxes on up to $250,000 of capital gains when they sell their primary residence, which doubles to $500,000 for married taxpayers; that capital gains exclusion cost the government about $52 billion in 2014 and almost exclusively benefited the rich.42 Together, these three housing tax expenditures totaled an astonishing $154 billion in 2014—and they primarily benefited higher-income Americans.43 So, only a small minority of people benefit from these policies. Renters and most low-income people don’t benefit at all. If the mortgage interest deduction were banished from planet Earth, most middle- or working-class Americans would see no negative impact on their taxes because it already doesn’t involve them.

In comparison, the US Department of Housing and Urban Development, which administers the government’s largest affordable housing programs for low-income people, spent barely a quarter of that $154 billion, about $42 billion in 2014.44 In addition, over a third of the nation’s households are renters, yet they received less than one-fourth of all federal housing subsidies; three-quarters of federal housing expenditures in 2012 went to homeowners (with a disproportionate amount of that benefiting wealthier Americans). Overall, the Center on Budget and Policy Priorities found that the 5 million households with incomes of $200,000 or more received a larger share of federal spending on housing than the more than 20 million households with incomes of $20,000 or less—even though lower-income families are far more likely to struggle with finding affordable housing.45

Treating homeownership as a core part of the retirement stool, and then providing deductions, exclusions, and deferrals for homeowners through the tax code, has turned out to cause massive subsidies to flow to the upper 10 percent of wealthy Americans. Yet these people in fact don’t need help nearly as much as the bottom 90 percent of Americans. So this second leg of the three-legged retirement stool—homeownership and private savings—has proven to be as weak and unreliable as employer pensions and 401(k)s. In our upside-down system, the higher one’s income the greater the value of the tax subsidies offered. The current retirement system finances upper-income people at the expense of middle- and working-class Americans who can least afford homeownership or private retirement savings. The tax code has created a two-tier welfare state in which wealthier people enjoy generous tax deductions as incentives to encourage homeownership and personal savings. While a couple of decades ago it seemed like a good idea to deploy the tax code for that purpose, at this point it’s clear that the tax system has become so turned on its head that it’s better-off Americans who are today’s “welfare queens,” not the poor.

A phasing out of these various loopholes, and gradually reducing the amount of private income that wealthier people can shelter from taxation, would result in increased revenue available to convert Social Security into a more robust and expanded platform (in chapter 5, I will explore various ways to pay for a doubling of the Social Security payout, especially targeting the tax rules that shelter high-income households and businesses from paying their fair share; can you say “step-up in basis”?). Far from hurting the economy, reducing these tax advantages for the better-off would not only be more fair, but it would help the economy in a number of ways, including contributing toward an expansion of Social Security that would have a stimulating effect on the entire national economy.

With private-sector employers walking away from their traditional role of providing a pension; and with the decline of unions, which is correlated with the decline of pensions in both the public and private sectors; and with chronic volatility in the stock and housing markets, and an over-reliance on 401(k)s and homeownership as part of our national retirement system, two of the three legs have been sawed back to nubs. The retirement stool is no longer stable or secure, and consequently the retirement prospects for most Americans have deteriorated. In the decades ahead, the vast majority of baby boomers and other retirees will be almost completely dependent on the third leg—the single remaining leg—of Social Security for their retirement.

The Third (Surviving) Leg of Retirement Security: Social Security

Where would the nation’s retirees be without Social Security? At this point, most Americans have internalized the collapse of the two legs of the retirement stool; everybody knows it has happened, even if we don’t talk about it. It’s become the new normal. While Social Security was originally conceived back in the Great Depression of the 1930s as a mere retirement supplement, it has now come full circle to be the country’s de facto national retirement system for most Americans—the last leg standing. Thankfully, despite what so many of its critics say, Social Security is on pretty solid financial ground. The Congressional Budget Office projects that Social Security can pay all scheduled benefits out of its own dedicated tax revenue stream through at least 2033 (after that, it will be able to pay 75 percent of benefits, assuming no other reforms are enacted). The reason why is because Social Security has its own dedicated funding source, and every working American sees evidence of that on every paycheck in the form of a 6.2 percent deduction from their checks (with employers matching that). Contrary to what so many critics say, Social Security has not added a penny to the federal budget deficit, indeed it has been running surpluses. No other government program except Medicare can claim it is fully funded with dedicated revenue for the next twenty years.

So, Social Security is not “going broke,” not by a long shot. That sound bite is just the static put out by its critics to spread F-U-D—fear, uncertainty, and doubt. The bigger problem with the US retirement system is that, with the sawing off of the other two legs of the retirement stool, Social Security has become our country’s de facto national retirement plan. Despite that criticality, its payout is relatively meager, certainly too meager to play such a central role. Currently it replaces 30-40 percent of a worker’s average wage at retirement (other countries with more robust national pensions provide twice the US replacement rate). That income is simply not enough to live on when it is your primary—perhaps your only—source of retirement income.

That’s why this book will make the case that, rather than cutting Social Security, we should expand it. In fact, we should double the individual payout for the 43 million Americans who annually receive individual retirement benefits.

But as we will see in the next chapter, rather than talking about expanding Social Security, the politicians in Washington, DC, are talking about cutting it. Bizarrely, the only bipartisan proposal currently under consideration calls for—not 401(k) overhaul, or raising the payroll cap, or a rethinking of homeownership as a retirement foundation—but cuts to the last remaining leg of Social Security. It’s a stunning failure of our nation’s politics and politicians, and of our collective imagination. It’s a failure of our national ideology, which is blinded by an allegiance to outdated ways of thinking.

For more and more Americans, the dream of a secure retirement is standing on a single wobbly leg, trying to stand upright as the ground beneath continues to shake. With the three-legged stool nearly collapsed for most people, the current cohort of seniors may turn out to be the last generation of well-off and secure retirees that the United States will ever see. Labor economist Teresa Ghilarducci spells out what’s at stake: “Policy makers and leaders can and must find a way to save retirement, a necessary—and now threatened—feature of civilized societies.”46