Last week my friends down the hall at the Center for Labor Research and Education released a new book titled Meeting California’s Retirement Security Challenge edited by Nari Rhee. The book (available free for download) addresses many issues pertaining to retirement, and my part reports the lay of the land for current retirees in the United States and specifically for California. This figure is from my contribution in the book’s second chapter and it illustrates current sources of income for retirees in California.
The top pie chart represents income sources for low income retirees in California, defined as those with incomes in the bottom 25 percent. These retirees rely almost solely on the government-sponsored programs of Social Security and Supplement Security (disability). These two slices of retiree income make up, on average, 90 percent of this group’s income.
Even middle income retirees—the second chart—rely heavily on the pillar that is Social Security. The share of income coming from Social Security is 70 percent for this group. Retirement funds (defined benefit and/or defined contribution) account for just 16 percent of income.
It is only those in the top 25 percent that are supported by a diverse portfolio: 37 percent retirement funds, 23 percent from Social Security, 22 percent from ‘other’ funds, and considerable dividend and rental income.
The first two charts highlight that the metaphor of the ‘three legged stool’ of retiree income (income from pensions, Social Security and savings) is obsolete. It simply does not exist for most retirees in California or the United States.
Social Security has arguably been the most successful program administered by the government. It has been working for over 75 years to help protect retired workers from poverty as well as help the disabled. Poverty among the elderly was over 50 percent prior to Social Security, but today the age cohort with the lowest rate of poverty is people 65 years and older—only 9 percent of people older than 65 live in poverty, compared to 15.1 percent overall.
The debate over privatizing Social Security, or the constant rhetoric of its demise, is always in the air, but actual retirees and their finances are often lost in the discussion. In truth, says the Congressional Budget Office, Social Security is on sound footing until 2038.
A more immediate issue regarding Social Security is a plan to cut benefits by either changing the benefit formula and/or increasing the retirement age which would be detrimental to a large number of retirees. However, small tweaks to Social Security could help secure it well into the future. For example, the Center for Economic and Policy Research analyzed a proposed Social Security tax on earnings of more than $250,000 (earnings between $106,800 and $250,000 would be exempt) that could potentially add trillions of dollars to the fund—and only affect a little more than 1 percent of workers.
My review shows that doing just that—shoring up and strengthening Social Security—should be one of our top priorities.