In-depth Social Security Advice
MARTHA SHEDDEN
Tell me what inspired you to study economics and become interested in retirement research?
ALICIA MUNNELL
When I was growing up, I wasn't interested in school. I was mainly interested in parties and boys. I did get into Wellesley, and I remember meeting with the dean in my sophomore year. She asked me what I wanted to major in. I was a little flip at the time, and I said I'd major in history. She said, "Well, you're a sophomore. This is your first history course.” I asked, "How about philosophy?" She said, "They only take a small number of people, and I don't think they're going to take you." I said, "All right, I'll major in math." She said, "Well, you didn't do very well on your last calculus exam." So, I said, "Fine, I'll major in economics," and it was settled. Then I went to the Brookings Institution in Washington, after I graduated, as a research assistant and worked on a book about Social Security. Then I went to Harvard to get a PhD and wrote my thesis on Social Security.
MARTHA SHEDDEN
In your various career positions, you've been able to personally influence top political decision makers. When it comes to Social Security and the way the government addresses retirement, do you feel the Center for Retirement Research studies make a high-level impact on policy?
ALICIA MUNNELL
You'd have to be awfully smug to think that something you write has a direct impact, but I do feel we repeat messages year after year over decades, like working longer is a good way to have a secure retirement. People do listen and are supportive of the Social Security system and know the importance of saving through retirement plans and working longer. All those thoughts get into the mainstream ethos somehow, and I hope we contribute to sensible recommendations. You don't write one article saying you ought to do it this way, and the world spins towards your direction.
MARTHA SHEDDEN
You recently wrote an opinion piece on Social Security being the nation's most valuable program. Congress needs to fix it. Can you explain your perspective and what you feel makes it the most valuable program in the country?
ALICIA MUNNELL
It's a social insurance program. People have written that programs for poor people are generally poor programs. Programs for everyone are well-designed. We all pay into Social Security and then we all get some benefits out of it. That means it's designed in a way that keeps it up to date over time with the growth of wages. It keeps benefits up to date after retirement with the growth of prices. It provides benefits for families. It meets the needs of Americans in terms of serving as a base for retirement income.
MARTHA SHEDDEN
Do you think politicians will fix it? Or will it be like the ‘80s where we didn’t do anything until we were on the brink of losing benefits?
ALICIA MUNNELL
I can't believe any politician wants to be responsible for people seeing a 20% cut in their benefits. I think politicians have a strong interest in solving this problem, but it's not clear how far in advance of the precipice they're going to act. I wish they would do it sooner rather than later, just because it would give everybody peace of mind. When these trustees’ reports come out each year saying that the trust fund is going to be depleted in 2033-34, it makes people nervous they're not going to get their benefits. It pushes them into retiring earlier than they should because they feel like if they're under the gate, they'll be in and may not be exposed to these benefit cuts. There is nothing but destructive fallout from having this sort of financial precipice in the future. I wish more than anything Congress would address it.
We have promised benefits that exceed revenues. Right now, we have a pile of money we're using to bridge that gap, and that pile of money runs out in the early 2030s. You're going to have this gap between benefits and money on hand. By law, Social Security can't pay out benefits if it doesn't have the funds, and so it'll be forced into cutting benefits. Social Security is too important and too popular to ignore these issues. Older people like it and younger people appreciate what it does for their parents and grandparents. Both Republicans and Democrats like it. Everyone supports it and should be willing to pay for what is needed to keep the benefits at their current level.
MARTHA SHEDDEN
Back in 2014, you wrote the book Falling Short: The Coming Retirement Crisis and What to Do About It. What changes have you seen since then?
ALICIA MUNNELL
I haven’t seen many changes. We needed to fix Social Security and we needed to extend coverage of private retirement plans. We’ve made a little progress through state programs on the coverage issue. My book talked about how we needed to make 401(k)s fully automatic, which still hasn’t happened. In upcoming legislation, there are some proposals to do that, at least for new plans.
I did see some progress before the pandemic. People were working longer and recognized the beneficial effects of that. If you work longer, you get a higher monthly Social Security benefit, and your 401(k) plan is a little bigger. You don't have as many years where you must support yourself through your savings. Progress has been made; however, we still must sort out Social Security’s financing and we need to have some second tier of retirement saving.
MARTHA SHEDDEN
I heard you say in 2012 that we needed to fix Social Security and make the 401(k) system work better. You said everyone needs to be covered and people need to recognize their house is a major retirement asset. I'm a huge proponent of home equity conversion mortgages. I try to educate my clients on those. Because they’re called reverse mortgages, they seem to be summarily ignored and people are afraid of them. It’s sad because they recently rolled out a home equity conversion mortgage for people who are 55 and up. They’re a retirement tool. Many of us have a huge amount of equity in our homes that can be used.
ALICIA MUNNELL
In Massachusetts, we have very high property taxes, and so one thing that we have been trying to argue for here is a broad property tax deferral program. If you were 65 and you got your property tax bill, you could simply check a box and say, "I don't want to pay my property taxes." That would put a lot of money into the hands of people that they could use for heat and medical care and a lot of other stuff. Then when they move, sell their house, or die, the loan to the government would be repaid with interest. It's not complicated. There's a general feeling of enthusiasm. There's this modest program like this in Massachusetts already, but only for people with very low incomes. I think it'd be a great program for everyone.
MARTHA SHEDDEN
As far as the 401(k), if employees were automatically enrolled in those, would they replace the defined benefit pension plans that have disappeared?
ALICIA MUNNELL
Pensions have disappeared from the private sector. They still exist at the state and local government level. I don't think we can go back to them in the private sector. They put all the risks and responsibilities on the employer, and that doesn't make sense. On the other hand, these 401(k)s put all the risk and responsibilities on the employee, but at least it means that if people join, they do have some assets when they approach retirement. I would like to see everybody automatically enrolled in these plans.
There are initiatives in California, Oregon, and Illinois that will do this. They say if you're an employer and you don't provide a plan for your employees, you must automatically enroll them in an IRA and make contributions through the payroll to their IRA account. Like 401(k)s, people can opt out of this program, but at least there's an automatic mechanism that puts them where they need to be. To make the savings more accessible for lower-income people, these IRAs are set up as Roth IRAs, so if they get in trouble, their car breaks down or they need a new roof, they get their own contributions from these plans without penalty. I think having some cash so you don't feel right up against a wall would be helpful for many households. People are not good at opting in. We need to be put where we're supposed to be, and then if we really don't like it, we can choose to get out.
MARTHA SHEDDEN
The whole individual retirement plan is not working like it was supposed to. In 2012 you said half the households will not be able to maintain their current standard of living. Besides saving more, what can people do to make sure their living standard continues?
ALICIA MUNNELL
Unfortunately, your options are saving more, consuming at a lower level in retirement, working longer, or some combination of all three. Working longer seems like the most plausible, accessible, and achievable. If you plan in your 50s, you make clear to your employer that you're going to be there for the next 15 years, that you want to be considered for promotion, new jobs, or more training. That makes it a realistic option for you to keep working up to at least 67, so you get your full monthly Social Security benefit. Some people point out that some workers can’t do this because they have horrible jobs and health problems. I recognize those people can’t do it. I’m talking about the majority of people who can.
MARTHA SHEDDEN
Early in your career, when you worked at the Federal Reserve Bank in Boston, you were advocating for taxing benefits, contributions, and private pension plans. Was that very outdated? I know it affected your appointment to one of your career positions later.
ALICIA MUNNELL
I did several things that affected appointments in my career positions. This was aimed at the old-fashioned defined benefit pension plan, and we tax that on a deferred basis. So, you put your money in, or your employer puts your money in, you earn the income tax-free, and then you pay tax on the money when it comes out. That's a big benefit to individuals, but were people saving more because of that? Based on research, they weren’t. It was costing the government a lot of money, however, and I thought, "Well, let's change that taxation." Then a group formed and chased me around the country. There was a New York Magazine article called “Alicia in Wonderland.” I received a lot of general harassment.
That was nothing compared to the study I did on discrimination and mortgage lending when I was at the Fed. We had all these bank records, and you could see if you took everything into account that race did enter the decision. No one was doing this on purpose, but people treat others who are like them better than others who are not. So, the system was being more favorable to white people. What you write does have an impact. Generational wealth is central to what I’m talking about. Owning a home is how most people build wealth, and entire groups of people are excluded or limited in that respect. They have difficulty getting financing and that really impedes the growth of household wealth over time.
MARTHA SHEDDEN
I've looked at all the proposals for improving Social Security, and one of them did mention taxing. I thought improving Social Security was about having pensions and money to contribute to the Social Security fund.
ALICIA MUNNELL
There's a cookbook of all the proposals that have ever been put together that the Social Security actuaries update each year and put out. All the solutions should be putting more money into the program. The benefits aren’t too generous. They can’t be cut back. So, I’m always thinking of new ways to raise revenues because the conventional way of raising taxes is off the table right now because the president said he won’t raise taxes on households with incomes under $400,000 a year. That means increasing the payroll tax rate is not a general option currently on the table, but I would increase it a little bit, and increase the tax base. One way to increase the tax base is to include employer contributions to health plans. That is a great idea because that is how your employer compensates you. Why not fit it in the compensation package and in the payroll tax base?
I liked the 2019 bill proposed by Rep. John Larson a lot. It was aimed at closing the entire financing gap, which has gotten a little bigger over time. I'm not sure what they can do in this political environment when the commitment's been made not to raise taxes on those with incomes under $400,000. This shouldn’t be about politics. It’s not about liberal versus conservative or Republican versus Democrat. It’s not old versus young. This program helps everyone.
MARTHA SHEDDEN
It sounds like increasing the taxation is one of the provisions you favor to keep Social Security solvent.
ALICIA MUNNELL
Yes, in raising the base and increasing the rate. We've written some stuff about putting equities in the trust fund. We have some plans to separate out the legacy costs and maybe pay for that some other way, but all things are on the revenue side.
MARTHA SHEDDEN
When I look at that list and I see the amount that would decrease the shortfall, it's surprising how some of them have a very minor effect, but others are significant. I was surprised because I'm a proponent for increasing the maximum taxable earnings.
ALICIA MUNNELL
I am too. You only need to do a little. If you put in health insurance, then increase the max, and then you increase the rate, you get a lot of money without doing anything dramatic on any front. The payroll tax used to cover about 90% of total earnings, with the remaining 10% of earnings above the maximum taxable level. Now, though, the payroll tax only covers 83% of total earnings. That needs to change.
MARTHA SHEDDEN
Yes, it does. Thank you for sharing your insights.