Public Sometimes Knows Better Than Experts

May 16, 2001

The Employee Benefit Research Institute, the American Savings Education Council (ASEC) and Mathew Greenwald & Associates released this week the 2001 Retirement Confidence Survey (RCS) detailing changes in savings patterns and confidence in retirement programs. In general a beneficial piece of research, the RCS did contain one finding that indicates the public may know more about Social Security than the "experts." According to the RCS:

Many workers greatly underestimate the amount they will receive from Social Security when they retire. Twelve percent of workers who plan to retire state they will get nothing from Social Security, even after being probed as to whether they really believe they will get nothing or whether they think it will only be a small percentage of their preretirement income. Another 17 percent think they will get less than 20 percent of their preretirement income from Social Security (15 percent of those with house-hold incomes of less than $50,000 think they will receive a percentage in this range). Thirty-two percent (27 percent of those with household incomes of less than $50,000) expect that between 20 percent and 39 percent of their preretirement income will be replaced by money from Social Security. On average, older respondents expect that Social Security will replace a larger share of their preretirement income than younger respondents do.

Admittedly, those who think they will get nothing from Social Security are pessimistic. As a pay-as-you-go system, Social Security could continue to pay something for as long as it functioned.

But that something may not be very much. As the RCS points out, the SSA says Social Security should replace about 40 percent of preretirement earnings. But will it? Not for younger workers, according to current law and current financing. Under law, Social Security can pay out only what it has in the trust fund. And unless taxes are increased, Social Security will have enough to pay only about 75 percent of promised benefits.

An average-wage worker retiring at age 65 in 2039, the year following trust fund insolvency, would receive Social Security benefits equal to about 27 percent of his preretirement earnings. Social Security promises him more (i.e., it "should" provide an approximately 37 percent replacement rate) but it cannot afford to keep its promise. A low-income worker earning 45 percent of the average wage (about $16,000 today) and retiring at the same time would receive a replacement rate of around 36 percent, and a high-income worker earning twice the average wage would receive around 22 percent. In line with what the respondents believe, younger workers will receive lower replacement rates than older ones, as Social Security's funding problems will worsen as time passes.

The mistake the RCS poll makes is assuming a solvent Social Security system over the long-term where one does not actually exists. There are many things Social Security should do, among which is provide adequate income replacement in retirement. After all, financial planners say that retirees need between 70-90 percent of their preretirement earnings to avoid hardship. But what Social Security promises is different from what it can produce, and workers and prospective reformers should focus on the current system as it is.

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