AM: Most have virtually nothing—about $30,000 in financial assets on average for those Americans approaching retirement. Americans don’t save unless there are organized savings mechanisms. The only place they have money is in their house. A house is an extremely important financial asset for most middle-income families. We need to create more financial mechanisms that let people stay in their homes, like reverse mortgages, which let people live off the equity that has accumulated. Under a reverse mortgage, a homeowner borrows against his equity and receives money from a lender. Unlike a home equity loan, no loan payments or interest are due until the individual dies, moves out, or sells the house. When one of these events occurs, the borrower or his estate is responsible for repaying the loan in full.
TL: Are these very common?
AM: Only about two percent of people who can take them do. People who have finally paid down a mortgage are reluctant to take out another one. And the fees on these products tend to be high.
TL: How will continually rising health care costs affect families who may have too little retirement income?
AM: I hardly know what to think about medical costs that are projected to increase at enormously high rates each year. It’s not clear how people can protect themselves.
TL: It sounds like another perfect storm is brewing—lower Social Security replacement rates, no more defined benefit plans, and little cushion from 40l (k) plans. What should people do?
AM: People should delay taking their Social Security benefits early if they can. They can help close the expected shortfall by working a little longer—say three or four years until they get to normal retirement age for full benefits. That will make a big difference for many families. Each year you delay taking Social Security after your normal retirement age, your benefit increases by eight percent.
TL: What should be done from a public policy standpoint that could improve a family’s well being in retirement?
AM: We need a new tier of retirement savings. The goal would be to combine the best aspects of a defined benefit plan and a defined contribution plan. This new tier would produce another 20 percent of pre-retirement income for families. Participation in such a plan should be either mandatory or strongly encouraged (though defaults). The accounts would be funded by contributions from employees, and perhaps employers, with low-income workers receiving some form of government subsidy. Participants should have very limited access to money before retirement, and benefits should be paid as annuities. The new tier should reside as much as possible in the private sector.
TL: How would this be different from privatizing the system? Or would it be a foot in the door?
AM: It would not affect Social Security benefits, which is generally what people mean when they discuss privatizing the system. These accounts would represent a new source of savings to supplement both Social Security and employer-sponsored plans.
TL: What are the policy solutions to closing the Social Security shortfall that deficit hawks are so concerned about?
AM: We have to put in more money, either through a slight increase in the payroll tax or having the tax apply to more wages.
TL: What is the earnings cap right now?
AM: Social Security taxes apply to $106,800 of income, and that covers about 84 percent of all wages. We could raise the payroll tax rate from 6.2 percent that is paid equally by employers and employees to 7.2 percent. Or we could raise the cap so that the tax applies to 90 percent of all wages.
TL: Has the press adequately informed the public about all of the options?
AM: One can understand why it hasn’t been given top billing, given everything else going on. But there needs to be more financial literacy, and the press can help out here. Our center has produced some materials that explain what happens when you take Social Security early, the options for fixing the Social Security shortfall, and the nuts and bolts of claiming Social Security benefits. People can find out more about them at http://crr.bc.edu.