Earlier this month, the House of Representatives passed the 21st Century Cures Act in a rare bi-partisan effort. The bill is meant to speed the development of lifesaving treatments, but critics warn it may also allow ineffective or even harmful drugs onto the market.
It’s a perfect storm: the percentage of active workers compared to retirees in the U.S. will shrink dramatically in the coming years. Social security funds will be depleted by the 2030s. Most U.S. companies have long since abandoned defined benefit pension programs. Workers are increasingly relying on the vagaries of the market, and many simply have no idea what they will live on in their retirement years. A former chair of the social security advisory board joins Diane to explain why the U.S. retirement system seems to be coming apart at the seams and what we should do about it.
- Sylvester Schieber former chairman of the Social Security Advisory Board and author or editor of numerous books on aging and retirement
Demographics, two major market meltdowns, and rising health care costs. These are just a few of the factors contributing to the unraveling of the U.S. retirement system. Sylvester Schieber is former chair of the Social Security Advisory Board. In a new book titled “The Predictable Surprise,” he explains why our retirement system, which seemed to work so well for so many years now seems to be coming apart, and what we can do about it.
“For A Long Time, People Thought Everything Was Pretty Grand
“The Social Security system got off to such a blockbuster start, seemed to thrive ’till we got to the 1970s when we had a little bump, but then has been on track for much of the last 25 years or so,” Schieber said. But, he added, it all seems to be coming apart now, and part of the problem is simply demographics. Back when the programs were getting started, there were many workers and not very many retirees drawing benefits, but now, of course, as the baby boomers become retirees, that ratio is almost reversing.
Other Factors Besides Demographics
Back in the 1980s, our policymakers wanted to raise a lot of tax revenue but also wanted to keep tax rates low, Schieber said. “So they reduced or limited the amount that employers could fund in their plans. But as Schieber points out, if you don’t fund a worker’s benefits as he’s earning it while he’s young, you have to make up both the contributions and the interest that wasn’t earned at a later time. And one of the big problems as Schieber sees it is that we hadn’t been funding plans for too long; many baby boomers were getting very close to retirement; and the markets tanked in 2008.
Payroll Tax Holiday A “Partial Holiday”
The payroll tax holiday is actually a “partial holiday,” Schieber said. It’s a reduction of 2 percentage points in the payroll tax, but funds are still being credited with the income as if it were still being generated. So in a way, there’s a sort of “IOU” check outstanding. “They’re just issuing additional government bonds and putting them in a binder out in Parkersburg, W.V.,” Schieber said.
“I Can’t Imagine We’re Going to Shut The Program Down”
Schieber said he can’t imagine that the social security program will be shut down. “That would be political suicide for anybody who is operating in our federal government in a policy-making position,” he said. “The projections right now are that in 2036 when the trust fund is projected to be depleted, we would still have revenues coming in. We’d still be collecting the payroll tax. The projections are that you’d get a benefit that’s at least 75 percent or so of the benefit that’s defined in current law. Now I can’t believe that congress is actually going to go up to that cliff and jump over it and let people’s benefits from one month to the next be reduced by 25 percent,” Schieber said.
You can read the full transcript here.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. Demographics, two major market meltdowns, and rising healthcare costs. These are just a few of the factors contributing to the unraveling of the U.S. retirement system. Sylvester Schieber is former chair of the Social Security Advisory Board. In a new book titled "The Predictable Surprise," he explains why our retirement system, which seemed to work so well for so many years now seems to be coming apart, and what we can do about it.
MS. DIANE REHMSylvester Schieber joins me in the studio. I know many of you have questions. I hope you'll join us. 800-433-8850. Send us your email to email@example.com. Join us Facebook or Twitter. Good morning to you, sir.
MR. SYLVESTER SCHIEBERGood morning, Diane. Thanks for having me.
REHMGood to have you here. People have talked about this for a long time, and yet the title of your book "The Predictable Surprise," do you think people really are surprised that this is going downhill?
SCHIEBERWell, I think for a long time, people thought everything was pretty grand, you know. The Social Security system got off to such a blockbuster start, seemed to thrive 'till we got to the 1970s when we had a little bump, but then has been on track for much of the last 25 years or so. Employer pensions got off to a little bit of a bumpy start early on, but Congress intervened in 1974 and passed something called the Employee Retirement Income Security Act and said if private employers were going to sponsor these plans, they had to actually fund them as benefits were being earned, and again, it looked like maybe we were on a pretty good track, but it all seems to be coming apart now.
REHMIs it purely demographics? What is it?
SCHIEBERWell, part of it is demographics. Back when these programs were getting started, we had lots of workers and not very many retirees drawing benefits, and now the systems have matured, and of course, we've got the baby boom generation, the demographic part, coming up to retirement, so we're going to have a lot of retirees, and fewer workers in relative terms to where we've been in the past.
SCHIEBERBut there's also an issue that's really separate from demographics. In the 1980s, partly because of the same discussion we're having today at the national policy level about taxes, our policymakers wanted to raise a lot of tax revenue, but they wanted to keep tax rates low. So they reduced or limited the amount that employers could fund in their plans. Well, if you don't fund a worker's benefit as he's earning it when he's young, you've got to make those contributions up as he gets older. And you not only have to make the contributions up, you've also got to make up the interest that was not earned.
SCHIEBERAnd so we went for a fairly long period, and it was actually accentuated by the fantastic financial markets in the 1990s, but by 2000 the wheels started to fall off. The baby boomers were now getting close to wanting their checks. We hadn't been funding, and the financial markets went in the tank.
REHMSo you're saying from 1935 when the Social Security program was first put in place, up until what, the early 1990s or the last 1980s, everything went fine?
SCHIEBERWell, everything went fine until the early 1970s.
SCHIEBERIn the 1970s, we changed the way we increase benefits in response to inflation.
SCHIEBERWell, we automatically index benefits...
SCHIEBER...for rising prices. When Congress did that, they got it wrong, and made the benefits oversensitive to inflation. Well, the 1970s were one of the worst inflationary periods certainly in the 20th century, and so we got it wrong at just exactly the wrong time.
REHMAnd tell me what years on which you served on the Social Security Advisory Board.
SCHIEBERI was appointed to the Advisory Board in January of 1998, and my second term expired end of September 2009.
REHMAnd tell me what the role of the Social Security Advisory Board actually is.
SCHIEBERIt was established in 1994 legislation that set up Social Security as an independent agency, and the law stated that there should be this seven-person board established who should look at various issues. Administrative issues, financing issues, disability issues, the whole range of issues that Social Security deals with, and should periodically inform the Congress and the administrations of issues that seemed to be arising that they ought to be paying attention to and addressing.
SCHIEBERTwo of the members are appointed by the Senate, one by the Republicans, one by the Democrats, two by the House, one each, Republican, Democrat, three are nominated by the president and then approved by the Senate. They're six-year terms. The president's nominees, only two of them can come from one party, so it's a bi-partisan group.
REHMAnd the kinds of issues you were dealing with from 1998 to 2009?
SCHIEBERWe spent a lot of time focusing on the disability program but we did look at some of the financing issues and the demographic issues. We also studied healthcare. Healthcare is an extremely important -- it seems kind of tangential to retirement, but older people tend to use more healthcare than younger people do. I'm of an age where I'm now beginning to understand that directly.
SCHIEBERAnd it takes money out of their budgets, and if you're living on a retirement income, oftentimes it's somewhat limited, and as healthcare gets more and more expensive, it's becoming a real problem.
REHMAnd how much authority does the Advisory Board actually have?
SCHIEBERThe Advisory Board basically can issue reports and testify before the relevant committees in the...
REHMBut you can't make the rules.
SCHIEBERWe cannot make the rules.
SCHIEBERThe rules for running the program are developed by the commissioner and the people that report to him. The rules for how the program operates on a legal basis are made by the Congress.
REHMYou write that when it comes to our retirement system, we keep forgetting what we already know. What do you mean?
SCHIEBERWell, when you look at the employer plans, we'll start there. By the 1920s, the first private plans were set up right after the Civil War in the 1870s. By the 1920s, we had learned that if employers, private employers, tried to establish these plans and run them on a pay-as-you-go basis, pay retirees out of current revenues, that when financial markets collapse, or when they're industry reorganizes, they run out of money and they can't pay benefits.
SCHIEBERWe ignored what we knew in the 1920s. We had more of those collapses during the 1930s during the Depression. Then we came out of the Depression to World War II. We got into the 1950s and we had some auto companies start to collapse, and in 1964, Studebaker collapsed and it was a spectacular public event, and that's what led to this legislation requiring employers to fund. But here we are. Most recently, a couple of weeks ago, we heard that American Airlines is collapsing and part of the reason it's collapsing is because it's got massive unfunded liabilities for retirement plans.
REHMAll right. You've got two separate plans out there. You've got the so-called defined benefit, you've got so-called defined contribution. Tell us what each of them does, how it works, and which seemed to be in more trouble.
SCHIEBEROkay. The defined contribution plans, many of us talk about them in the title of the Tax Code 401 (k). It's a section in the Tax Code that establishes the legal right for people to make a contribution with income that's not being taxed until the benefits are paid some time down the road. In those plans, the worker contributes, in many cases the employer will match. That money accumulates over the worker's career. When the worker gets to retirement, he or she walks off with a bag of money, and then they have to figure out what to do with it.
SCHIEBERIn the traditional defined benefit plan, the employer promises that they're going to pay a benefit at some future time, and they will establish the criteria for when you can get that benefit. It may depend on your service. It may depend on your age or some combination of the two.
REHMAnd is the defined benefit program mostly what the auto companies had?
SCHIEBERIt is. And it's the set of plans that's gotten in the most trouble, because these obligations to pay the benefits were growing all during the baby boomer's career, but we weren't funding them. So late in their career now we've got this massive number of workers and we're behind the eight ball, and so a number of companies have collapsed because of it, the auto companies, the airline industry, quite a number of companies.
REHMSylvester Schieber. We'll take a short break here. When we come back, we're going to talk more about the U.S. retirement system, what's happening to it, and what we can expect 10, 20, 30 years from now.
REHMAnd welcome back. Sylvester Schieber is with me. He was a member of the Social Security Advisory Board. He served a term from 1998 to 2004 and then another term ending in 2009. Now he's written a book about the Social Security system which he calls "The Predictable Surprise" subtitled "The Unraveling of the U.S. Retirement System." I hope you'll join us. I know many of you have questions, 800-433-8850. Send us your email to firstname.lastname@example.org. Join us on Facebook or Twitter.
REHMWhat are the latest projections, Sylvester Schieber, with no changes to the rules as to when the Social Security fund will be unable to meet its obligations?
SCHIEBERThe most recent projection that has been published was published about a year ago. There's another one supposed to come out next month. Last year they predicted that it would run out of funds, the trust fund would be depleted in 2036. This has not been a very good year in the economy over the last year. My guess is that next month when the new report comes out that may move toward us a year or two, 2035, 2034. The performance of the economy is extremely important in this program.
REHMWell, it's not only the performance of the economy. It's that we continue to have payroll holidays -- payroll contribution holidays from the Social Security system. How is that affecting the fund?
SCHIEBERWell, partly, I think it's a sad story about the way we do business here in Washington. The payroll tax holiday, it's a partial holiday, a reduction of 2 percentage points in the payroll tax that workers pay. But the trust funds are still being credited with the income. The...
REHMIn other words, there's an IOU check then.
SCHIEBERWell, that is correct. They're just issuing additional government bonds and putting them in a binder out in Parkersburg, W.V.
REHMHow did we get to this place?
SCHIEBERWell, partly I think we've been unwilling to read the warning signs on the road. We have known since the mid 1970s that the baby boom generation was going to pose a generational problem for Social Security. We addressed it partly in the 1980s. And in some regards, they thought they'd maybe kind of solved the problem in the...
SCHIEBER...by actually increasing the retirement age at which a full benefit could be drawn. Now that was not implemented until 2,000. And it's only partially implemented now. The age at which you can get the full benefit now is 66. Later on, it will go up to 67. But we have known certainly since the mid 1990s that we were facing a big problem and we simply refused to address it.
REHMSo what's the outlook then as we speak now for people who are going to reach retirement 20 years from now?
SCHIEBERWell, I can't imagine that we're going to shut the program down.
SCHIEBERI cannot. That would be political suicide for anybody who is operating in our federal government in a policymaking position.
REHMAnd yet there are people who are in their 40's right now who cannot quite believe that Social Security is going to be there for them either at 66, 67 or maybe even 70.
SCHIEBERWell, the projections right now are that in 2036 when the trust fund is projected to be depleted, we would still have revenues coming in. We'd still be collecting the payroll tax. The projections are that you'd get a benefit that's at least 75 percent or so of the benefit that's defined in current law. Now I can't believe that congress is actually going to go up to that cliff and jump over it and let people's benefits from one month to the next be reduced by 25 percent.
SCHIEBERThe sooner we begin to address this, the more people can plan. And we may want -- or may need to increase the revenue a little bit. But we can also adjust benefits and adjust expectations now so people have time to react.
REHMAll right. So what would you say those adjustments should be?
SCHIEBERWell, we can either tinker with the benefit formula, and there've been a number of proposals that would basically slow the rate of growth in benefits. What many people don't understand is there's quite a bit of growth in the benefit level over time. Slow the rate of growth of benefits for higher income people. We could talk about increasing the retirement age. Now that's usually a political nonstarter but the fact of the matter is we're living considerably longer now than we have in the past.
SCHIEBERWhen the first benefits were paid in 1940 the person retiring at age 65 had a life expectancy of between 12 and 13 years. Now at 65 you've got a life expectancy of around 18 years. But, oh by the way, instead of retiring at age 65 when they did back then, now we're retiring at 62. So we're starting earlier, we're living much longer. Doesn't it make sense at some juncture to say, well, maybe at least those of us who are able ought to work another year or two?
REHMIt's interesting that you did not mention lifting the cap on earnings.
SCHIEBERYou know, part of the issue is that the way we operate the program is that the economics of it are -- it's not a real good economic deal for someone who's at the tax cap and has been at the tax cap for most of their career.
SCHIEBERToday, it's $110,000.
SCHIEBERIf they've been at the tax cap throughout most of their career, if you collect all of the contributions that have been made on their earnings and -- with government bond interest, so accruing in interest rate, the value of the benefit they can expect to get in their retirement, single person, is about half the value of the contributions. Now, we're talking about raising these people's contributions and some of the proposals to raise their contributions are also talking about cutting their benefits.
SCHIEBERSo, you know, some people talk about means testing to a considerable extent we're already means testing the benefit. And anything we do with raising that tax rate by itself and cutting those benefits is going to make it worse. And at some juncture, I think you may begin to raise some questions about public support.
REHMSo you believe that the most direct way would be to raise the age level another notch or two?
SCHIEBERI think that makes the most economic sense, maybe not the most political sense given the seeming reaction. I believe that ultimately when we get to the finish line there will probably be some tax increase included in the fix. I think there also will be some grading down of benefits for higher income people.
REHMHow would you grade down that?
SCHIEBERWell, it gets to be pretty technical, but the rate of growth -- the purchasing power of a person with high income who's retiring 20 years from now will be about 30 percent higher than the purchasing power of a benefit for somebody with high income today. If we slowed that growth of benefits, the purchasing power from 30 percent down to 15 percent we could solve a considerable part of the problem.
REHMWhat about government employees who pay into Social Security and work for 30 years or so? Will they, if they retire say 20 years from -- will they get their full benefits?
SCHIEBERIt depends on what level of government you're talking about. If you're talking about federal employees today, since 1984, all newly hired federal employees are covered under Social Security as part of their total retirement package. They get a supplemental pension just the way people do it, General Motors, General Electric and so forth so that...
SCHIEBER...because they've got a separate employer pension plan. And it's funded and operated separately. But it takes into account the generosity of the benefits that are paid under Social Security in terms of its structure. There are people, though, in some states that are not covered under Social Security. States like Ohio, Colorado...
REHMState governments don't cover their employees?
SCHIEBERSome do not. About a third of them do not. And for them, there's an adjustment to the Social Security benefit if they get their Social Security benefit on a very short period of covered earnings because the program is disproportionately generous to people with low incomes. And because they've only got five years or ten years of earnings under the program, it looks like they've got a low lifetime income. So there's a technical adjustment made for them. But they would still get some Social Security benefit.
REHMYou know, people, as soon as we start talking about Social Security, constantly generate the questions about is there really a Social Security trust fund that still exists, or has it been totally borrowed out?
SCHIEBERWell, the way the system works, if the government collects more money in payroll taxes than it pays out in benefits, that money's actually collected by the Treasury. And what the Treasury Department does with that money is it issues a bond that is equal to the surplus. And those bonds are kept in Parkersburg, W.V. at the Bureau of Federal Debt. Those bonds collect interest. And when the trust fund is running short and needs more money than we're collecting in payroll taxes, as is the case right now, they cash some of those bonds. And Treasury repays the money that is borrowed plus interest.
SCHIEBERNow, is there a trust fund? That argument has been going on since 1936. And in some regards I think it's kind of the wrong argument to get into because I think if there's, you know, an argument going on for 75 years or whatever, maybe we ought to put it aside and try and figure out how to get on with life instead of that argument.
REHMSylvester Schieber. His new book is titled "The Predictable Surprise: The Unraveling of the U.S. Retirement System." And you're listening to "The Diane Rehm Show." We've got lots of callers, 800-433-8850. First, let's go to Jerry in Edina, Ohio. Good morning to you.
JERRYGood morning, Diane. Wonderful show. My statement is...
REHMJerry, I'm sorry, there is something wrong with your cell phone. Are you on a speaker?
JERRYNo, ma'am. I'll talk better into the phone. Is that better?
REHMYeah, it's a little better. Go ahead.
JERRYOkay. My statement is, I'm a blue collar worker. I wish that they would find a way to lower the age of getting Social Security. My craft and with people who are working blue collar working in heat and cold and expect people to work 'til they're 65...
REHMI understand that point and that's a person doing physical labor, Sylvester. And the question as to whether they work 'til 65 or 67 does raise an important issue.
SCHIEBERThat is exactly correct and I agree. And I have always said we need to find a way to make sure that people in those kinds of positions who work like that takes a physical toll on people and their ability to continue to do it. It's something we need to be sensitive to. That said, the kind of work we do today in our economy is much different than the kind of work they were doing back in the 1950s and even the 1960s and '70s. Back in the 1950s, people were retiring in their mid 60's. Today, we're retiring much earlier than that.
SCHIEBERNow we do need to be careful about what we do and not be foolish here, but we also need to face the reality that if we don't address this, either people are going to be facing income reduction somewhere out in the future because their benefits are cut or we're going to levy a tremendously higher tax on our children.
REHMBut don't you have to take into account, for example, someone who's worked in a coal mine...
REHM...for 25 years who has inhaled all of this terrible coal dust who probably doesn't have the total life expectancy.
SCHIEBERI agree wholeheartedly with you and I think we need to be mindful of any adjustments we make that possibly gives some particular industrial exceptions or occupational exceptions, and maybe even some income exceptions.
REHMOkay. But are the industrial exceptions being talked about as much as the income exceptions?
SCHIEBERNo, because the political leaders, actually, I think in both parties, don't want to talk about this issue. As I said before, I think economically it makes a lot of sense, but politically it seems to be a nonstarter.
REHMSo you are not expecting anything to happen anytime soon in terms of a realistic discussion?
SCHIEBERWell, I think the clock is ticking and some of our political leaders are beginning to focus on it and understand it. We certainly haven't had a responsible discussion about it break out yet. But I know some fairly senior folks in the House and Senate in both parties who are beginning to focus on this and are concerned about it. And I think we'll start to seriously discuss it one of these days. Now...
REHMI sure hope you're right. Sylvester Schieber. His new book all about the unraveling of the U.S. retirement system is titled "The Predictable Surprise." We'll take a short break. When we come back, more of your calls, comments. Stay with us.
REHMAnd welcome back. Here's an email from Patricia. She says "I think we should document the amounts going to SSDI, Disability and to SSI versus the amounts going to regular Social Security Retirement benefits so we can see where the money's going. I wonder if the disability portion should be in a separate program, not coming from retirement taxes." Would that solve the solvency problem?
SCHIEBERThe short answer is no. First of all, let's talk about SSI, the Supplemental Security Income program. That's financed out of general revenue not out of the payroll tax. So that's a completely separate revenue source. And there's no inter mingling of funds...
REHMNo mixing at all there.
SCHIEBER...of the funds there.
SCHIEBERNow, in terms of the payroll tax, it's partitioned into three separate amounts, the tax you see on your pay stub...
SCHIEBER...part of it goes to the retirement fund, part of it goes to the disability fund and part of it goes to fund Medicare. Okay, the accounting for the disability program and for the retirement program are separate. And their costs are estimated separately. You can you go to the Social Security website and find the actuaries page on their website and you can find the annual report. And it will show you the exact expenditures, year in and year out, to these different programs.
REHMAll right. To St. Louis, Mo. Good morning, Scott.
SCOTTYeah, yeah, you know, the disability, it's easier for the middle class to get disability than it is for the poor. But also, if they put all income under the payroll tax and they don't increase the benefits for the rich, wouldn't that solve the problem?
SCHIEBERIt would certainly help. But it would raise some pretty significant equity problems. The argument we're having over the one percent, a lot of people are concerned about the one percent of the income distribution, I think that break off is around $300,000. You would be affecting people in larger urban areas who are not considered at all wealthy. And you'd be affecting them quite significantly. You know, we hear a lot of about these big, extremely rich people, Bill Gates and people like that but they're a relatively small number of people.
SCHIEBERAnd the benefits that these people are already getting back, somebody earning $110 to $150,000 relative to their contributions is just not very fair and we would make it even less fair. Franklin Roosevelt was worried about that prospect when he started the program. The people like Robert Ball, the former commissioner, a strong proponent of Social Security worried about that problem until his death a couple years ago. I think many of the people who are strong supporters of this program would not be willing to do that.
REHMAll right. To Houston, Texas, hi there, Marie, you're on the air.
MARIEHi, Diane. My question is, you know, my understanding of you know, sort of, what happened with Social Security during the '80s was that Congress borrowed funds from that trust fund or surplus funds, however you want to call it. And you never hear this discussed in Social Security now. And maybe that's because both parties who were responsible for it and don't want to call attention to that. But my question is that, were any laws passed to keep congressional hands off those funds in the future? And also, how did that affect the current state that we're in now?
SCHIEBEROkay. From the very beginning, the only assets that the federal government could invest Social Security trust fund money in were federal bonds. So in the 1980s, when the trust fund began to grow, it started out from almost zero in 1982, early '83, to today it's around $2.5 trillion. Every surplus dollar of income was invested in government bonds and those government bonds have drawn interest, year in and year out.
SCHIEBERAnd that's where that $2.5 trillion comes from. Now, you can argue economically about whether or not this is real investing or not. But the fact of the matter is, the trust fund has in it the contributions that have been made and the interest that has been earned. And there is no argument or evidence there's been any malfeasance on anyone's part.
REHMOkay. But let's go to the movie "It's A Wonderful Life." Suppose everybody in this country who was 65, suppose they were all 65 at the same time and went to draw on Social Security funds, would they be there?
SCHIEBERNo. In order to pay our Social Security benefits, we need a productive economy. We are, for almost all practical purposes, the money that's being spent this month in terms of benefit checks that are being sent out is dependent on money we've been collecting.
SCHIEBERAnd if nobody's working...
SCHIEBER...then we're not going to have any money to collect.
REHMSo there has not been that indexed increase for the last couple of years in Social Security? Do you expect it to be there next year?
SCHIEBERCertainly. I mean, I don't think we have solved, forever, the inflation. I think prices will continue to rise. You know, most of us have to stop by the gas pump from time to time these days. Our rents go up, our heating bills go up, our food budgets go up. Inflation is what drives the benefits up.
REHMAll right. Susan emails "Speaking of fair, Sylvester Schieber has not addressed either Congressional or Senate pensions that they receive for life."
SCHIEBERAgain, this is one of these issues that's extremely confusing to a lot of people and extremely heated. They have strong feelings about it. Many of our Senators and Congressmen, for better or worse, come and serve quite a number of years in our government. And they are like other federal employees in that regard. Once they come into the Congress, into the House or into the Senate, they begin to earn a federal pension. That federal pension is a supplement to Social Security.
SCHIEBERThey also pay the payroll tax. They are covered under Social Security. So again, they're getting a pension when they reach retirement but that's really not any different than the workers at Ford or General Electric or IBM or many other companies where the companies are sponsoring some form of supplemental retirement program.
REHMBut suppose somebody comes in, serves one six year term in the Senate, how much does that individual get in a pension plan?
SCHIEBERWhen they reach retirement age, when they can claim benefits, and I'm not sure I've got exactly the detail here but it'd probably be age 62 or age 65, they would get a benefit that was approximately 12 percent of their earnings...
REHMDuring their time?
SCHIEBER...when they were serving.
REHMI see. All right, that answers that question. Here's an email from Mike who says "You're missing a most important issue in this discussion. That is, many people in their late 20s, early 30s, are getting onto Social Security Disability program. That means they're on Social Security payroll for the next 70 to 80 years. As a physician," says Mike "I tell you, most of these people get on the SS Disability on simply reversible problems, like back pain and nerves."
SCHIEBERThe problem with disability is an extremely difficult one. First of all, we haven't changed the definition of disability since we started the program in the mid 1950s. Now, our economy is very different. Many of us sit at keyboards and do work today that we could probably do even if we met the disability definition of 1957 that was aimed more at people that were working on, you know, assembly lines. So one of the things we ought to do is we ought to revisit the definition. Some of these ailments, you know, the back problems, some of the psychiatric problems, it's really hard to determine who's disabled and who's not in some cases.
SCHIEBERAnd, you know, undoubtedly, they get some of these decisions wrong. And one of the things, when I was at the Social Security advisory board, we looked at some of the decisions that the judges were making. Some of the judges were passing everybody that came before them, others were denying most of the cases that came before them. They're probably not seeing that different kinds of cases. So there are irregularities here that need to be look at. And the agency has been working hard to try and deal with this problem. But it's going to continue to be a very sticky problem.
REHMAll right. To follow up on that, Chris in Cincinnati, Ohio has a question. Good morning to you Chris.
CHRISYeah, you guys have answered both of the aspects of my question. So I'll rephrase another way. Taking something from the private sector, suppose my 401 (k) can provide for my retirement, what about paying me a lump sum and forgoing future payments? And could the system save money that way?
SCHIEBERWell, first of all, the purpose of the system, at least in part, is to protect people against outliving their resources. And if we gave everybody who wanted the lump sum, all of the cash, and then they went off and they bought a boat or whatever, they would come back with their hand out and they would want to get on SSI or some other program at government expense, to meet their needs. So by paying it out as to the form of an annuity, we protect the people who live an abnormally long retirement period but we also protect their income security by paying it in this way.
REHMAnd you're listening to "The Diane Rehm Show." Here's a question from Indianapolis. Good morning, Steve.
STEVEGood morning, Diane. Thank you for taking my call.
STEVEI am an actuary and I work in the life insurance field and I know that one of the things that helps life insurance be profitable is that not everybody who starts a life insurance policy ends up claiming a benefit, it's a lapse. I wondering how your guest would react to an option to let people, after they've paid in to the Social Security system for say 10 or maybe 15 years, to opt out at that point and get all of their payroll taxes deferred to themselves.
STEVENot only their own contributions, but also the employer contribution. I can tell you that it would really make difference in my life if I had an extra 12 or 15 percent of my salary that I could use to buy my own life insurance, my own supplemental long term care insurance or my own additional retirement program.
REHMAnd the question is, would you really?
STEVEOh, I think I certainly would. Right now, I feel like we are constrained and we are being told that there will be a retirement package for you. And so therefore there are a lot of people who would like to have an additional thing but they feel constrained by the amount of money that's already being taken out of their paycheck.
SCHIEBERThe problem at this juncture is that we're operating on the system on a pay as you go basis, a hand to mouth operation. We have to send checks out to the people who are currently retired. And we haven't saved much money. So in order to send those checks out, we actually have to collect those payroll taxes. So if you opt out and go off and spend your -- or invest your 12 percent, 12.4 percent, in your own thing going forward, who's going to pay off the benefits for the current retirees and the people who are close to retirement? It simply won’t work when you start working through the arithmetic of it.
REHMSo in your view, do you believe we're going to be able to fix this system before we face any dire consequences?
SCHIEBERWell, I think that we can and I think we could fix it in a way that most people would not consider the changes to be at all catastrophic. But I think there is a risk, there's a temptation on the part of our policy makers to continue to use these retirement programs as a bludgeon against each other. And use it for short term political gain as opposed to really using them to provide retirement security for not only the current generation of people who are retired but future generations of workers who someday are going to depend on these benefits as much as current retirees do.
REHMIt's interesting that during the Bush administration there was that Social Security commission established to study the whole issue. And what did they do, they came back with three possible solutions rather than coming up with a set of consistent recommendations.
SCHIEBERThey had a recommendation that was their favorite recommendation and I think everybody knew that. But it was part of this kind of dispirit view that we have here in Washington about how the system should work. They wanted to take a little bit of the contribution and put it into an individual account. The democrats used that in their political ads to say they were trying to tear the system down.
REHMSo we have an ongoing argument and more predictable surprises to come, I’m sure. Sylvester Schieber, "The Unraveling of the U.S. Retirement System." Thank you for being here.
REHMAnd thanks for listening all, I'm Diane Rehm.
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