The Great Retirement Squeeze – Pension Cuts Mean Poverty for Future Elders

San Francisco – Only a week after an election signaling a rollback in public-employee retirement benefits, new Federal Reserve data show a sharp decline in family wealth. The effect is especially acute for non-whites and Hispanic households.

The compounding factors of deep losses in U.S. family wealth, sharp declines in pensions and calls in Washington to reduce Social Security could tarnish Americans’ golden years for generations to come, particularly for economically vulnerable groups of older women and ethnic elders.

Recession Cuts Retirement Savings

The Fed’s new Survey of Consumer Finances for 2010 reveals that while white non-Hispanic families saw a 
10 percent decline in their wealth since 2007, nonwhite or Hispanic families saw their mean assets plunge by 26.8 percent.

Overall, only one in seven Americans are confident “in their ability to retire comfortably,” according to a survey published in March by the Employee Benefit Research Institute (EBRI). The findings, says the report, are at “historically low levels.”

The Fed’s latest figures add to the troubling picture of future retirement for today’s workers. Last week’s victory of Wisconsin Gov. Scott Walker and his policy terminating collective-bargaining rights by state workers, and the California votes in San Jose and San Diego negating existing pension agreements, were only the latest development in the great retirement squeeze.

Since the recession began in 2008, according to U.S. General Accountability Office (GAO), 35 states have cut pensions for many of the country’s 27 million teachers, police and other public employees.

Furthermore, GAO’s March 2012 report says that nationwide, one in four state and local government employees cannot fall back on Social Security, because many states opted to stay out of the national retirement program.

Unintended Consequences

The crunch on public pensions follows years of declining private-sector retirement plans, including the shift to smaller 401(k)s that swing their value with the stock market. Although eight in 10 public employees in the U.S. have traditional pensions, with their guaranteed retirement benefits and annual cost-of-living increases, government budgeteers nationwide were eyeing the San Diego vote on June 7, which authorized the city to shift new workers into 401(k)-style plans.

Many pension experts, though, say that the cuts-only approach to the nation’s old age security is likely to result in long-term instability for individuals, families—and government budgets, too.

“Transforming [public-employee pension benefits] to 401(k) type plans in order to reduce benefits will produce a number of negative unintended consequences that taxpayers might have rejected had they been considered or known,” said Teresa Ghilarducci, author of When I’m Sixty-Four:
 The Plot Against Pensions and the Plan to Save Them (Princeton University Press, 2008).

“Sadly,” said Ghilarducci, a behavioral economist at the New School in New York City, “the citizens of San Diego have built in destabilizing elements in their regional economies.”

Ghilarducci’s research has shown that while older-style pensions keep household incomes steady, 401(k)s actually “magnify the effects of a recession.”

6.3 Million Californians Lack Employer Pensions

“The election results are certainly troubling,” said Nari Rhee, a researcher at the University of California, Berkeley, Center for Labor Research and Education.

Cuts in both public and private pensions will lead to “even higher poverty and near-poverty rates for younger workers when they reach retirement age,” Rhee explained in an e-mail interview.

Rhee is the author of a study the center released June 9 showing that 6.3 million Californians—two-thirds of them non-white—lack access to pensions from private employers. Almost half of the total (46 percent) are Latino workers stuck in such low-wage jobs as hotel accommodations, food services, residential construction and long-term care.

Prior to the election, Rhee and her colleagues calculated that more than half of younger California workers ages 25 to 44 “are going to retire without enough income to meet basic expenses.”

“It’s a social disaster waiting to happen,” she said, “and it’s getting lost in the war against public pensions.”

The long-range results of such policies, Rhee noted, will “increase the need for subsidies and publicly-funded services, exerting strain on the state budget.”

That includes an accelerating number of people, many middle-class professionals among them, who will find themselves having to take Social Security’s early-retirement benefits starting at age 62. Doing so reduces one’s benefits by about 25 percent.

Forced to Take Early Retirement

The financial stress on tomorrow’s seniors and their families will be particularly sharp in ethnic communities, especially if union protections continue their steep decline. In 2011, says the U.S. Bureau of Labor Statistics (BLS), 15 percent of black workers were represented by either public and private unions, compared to 12.8 percent of white, 11.2 percent of Asians and 10.8 percent of Latinos.

Union members or not, as ethnic workers reach their middle or later years, their often lower-end jobs don’t get easier. A 2010 study by Hye Jin Rho at the Center for Economic and Policy Research, “Hard Work in the Public Sector,” revealed that among state and local public employees approaching retirement, about two in five (1.4 million in 2009) worked in physically grinding positions, such as law enforcement, janitorial jobs or bus driving.

Social Security and Obama’s “Grand Bargain”

Currently, too, politicians of both parties are nodding at proposals to reduce benefits in Social Security by raising retirement ages, all in the cause of—as the bipartisan chairmen of President Obama’s 2010 Fiscal Responsibility Commission put it in their proposal—keeping “the promise of America to give our children and grandchildren a better life.”

The aim is to strike a political “Grand Bargain,” the well-known term President Obama has used for the deal. It would trade off partisan bargaining chips like modest tax increases and military spending aimed at pleasing liberals, against cuts in social entitlement programs, a goal of conservatives—before, proponents on both sides hope, the November election.

Some political observers say it’s all partisan showmanship that will never yield a compromise. But there’s a lot of power behind the idea.

As recently as March 15, the Peter G. Peterson Foundation, whose billionaire founder is a long-time critic of Social Security and other entitlements held a Fiscal Summit.

Not just any conference, this one has a speaker’s list including former President Bill Clinton, Speaker of the House John Boehner, Secretary of the Treasury Timothy Geithner and Rep. Paul Ryan, R-Wis. They heard Peterson, their grandfatherly host, declare, “Entitlement reform, therefore, must be part of any serious effort to reduce our long term debt.”

Also on hand was former Sen. Alan Simpson, R-Utah, co-author of the budget-slashing “Simpson-Bowles plan,” grandly titled “Moment of Truth.” It is widely regarded in Washington as the centerpiece of efforts to reduce future government spending—even though Social Security is a self-funded program through payroll taxes that adds nothing to the national debt.

There are other kinds of solutions to the country’s long-term stability, however, that don’t find their way into the debate over budgets.

For example, the 2011 report, Plan for a New Future: The Impact of Social Security Reform on People of Color and the more recent study, Breaking the Social Security Glass Ceiling: A Proposal to Modernize Women’s Benefits, provide background and recommendations for updating the program to be fairer to two of the fastest growing but least advantaged groups of seniors.

According to the latter report, Social Security provides 90 percent of the income for more than half of older unmarried women of color and of Latinos and African-American seniors.

As worrisome as the racial and gender undercurrents of these trends are, most troubling is the relentless obsession of policymakers, pundits and mainstream media with a budget-only approach to what is essentially a human dilemma, one with serious consequences for domestic national security.

Cutting Seniors’ Homelessness and Hunger

The New School’s Teresa Ghilarducci is among numerous economists over the years to design proposals for government-managed individual retirement accounts to supplement Social Security.

The California legislature has shown interest in Ghilarducci’s plan, and in March the New York City Comptroller John C. Liu announced that his office is considering Ghilarducci’s plan for New York City Personal Retirement Accounts in which the city would collect and pool employee and employer contributions—with no public dollars—into retirement funds the city would protect and oversee.

Noting that New York’s homeless shelters have seen about a 25 percent increase in the last two years, Comptroller Liu stated in a media release, “If we don’t help people save for retirement during their working years, the later strain on the city’s social services will be overwhelming.

“We are not, nor do we want to be, a city that lets our retirees go hungry and homeless,” Liu added.

This and other plans need to go through prudent discussion, debate and testing, of course. But so should the one-sided notion that budget slashing alone has intrinsic value. As Americans look at their teetering retirement future, they might ask their political and media leaders, “What’ll these budget cuts do my children and grandchildren when they retire—and our community?”