Strategies for Improving Retirement Security in the United States
The United States is in the midst of an unprecedented retirement crisis. According to a recent study by the National Institute on Retirement Security, more than half of all working-age Americans have no retirement savings whatsoever.1 For those who do have savings, the median amount is just $11,000—hardly enough to finance a dignified retirement.2 The problem is exacerbated by the fact that Americans are living longer and healthier lives and thus need to support themselves for more years in retirement.
The traditional response to this crisis has been to advocate for reforms to Social Security, our nation’s primary retirement income program. But while Social Security certainly needs reform, it is not the only—or even the most important—source of retirement income for most Americans. In fact, for many workers, their savings in 401(k) plans and other defined contribution (DC) retirement plans are now a more significant source of retirement income than Social Security benefits.
This paper will explore some of the strategies that workers and retirees can use to improve their retirement security in the face of these challenges. In particular, we will focus on three key strategies: (1) developing a diversified retirement income portfolio that includes both traditional sources like Social Security and 401(k)s as well as non-traditional sources like annuities; (2) using work support programs like the Earned Income Tax Credit (EITC) and the Supplemental Nutrition Assistance Program (SNAP) to supplement their income in retirement; and (3) taking advantage of state-level programs like Property Assessed Clean Energy (PACE) financing to make their homes more energy-efficient and reduce their living expenses.
2. Social Security Strategies: Retirement and the Annuity
Social Security was designed to provide a basic level of financial security for retirees and other individuals who are unable to work due to old age, disability, or death. Today, it is the largest source of income for most older Americans, but its benefits are modest relative to pre-retirement earnings—the average benefit is just $17,532 per year.3 And because Social Security benefits are not adjusted for inflation, they lose purchasing power over time.4 As a result, most experts agree that workers need to supplement their Social Security benefits with other sources of retirement income in order to maintain their standard of living in retirement.
One way workers can do this is by saving in a 401(k) or other employer-sponsored retirement plan. Today, more than half of all workers have access to a 401(k)-type plan through their jobs,5 and these plans have become an increasingly important source of retirement income as traditional pensions have declined in prevalence. However, 401(k)s have several shortcomings that limit their usefulness as a retirement savings vehicle. First, they rely on workers to make voluntary contributions—which many workers fail to do—and second, they expose workers to investment risk because the value of 401(k) accounts can fluctuate based on stock market performance.
Another way workers can supplement their Social Security benefits is by purchasing an annuity. An annuity is an insurance product that allows workers to convert their accumulated savings into a guaranteed stream of income that lasts for the rest of their lives.6 Annuities can be purchased from private insurance companies or from government programs like the federal Thrift Savings Plan (TSP).7
There are two main types of annuities—immediate annuities and deferred annuities. Immediate annuities begin making payments to the annuitant immediately, while deferred annuities allow the annuitant to wait until later in life to begin receiving payments.8 Both types of annuities provide a guaranteed stream of income that is not subject to stock market fluctuations, and both can be used to supplement Social Security benefits.
3. The New Work Support System
The new work support system will lift the living standards of employees; this has resulted from the fact that currently, many workers have lost vast sums of money to politicians. The senator representing Wisconsin Ron Johnson stated that the government gives out $99 in benefits for every $1 in taxes it collects, this is an alarming number as it means that for every worker in America, only one-third of their taxes are used to finance government operations. It also means that two-thirds of the tax revenue is redistributed through entitlement programs, which creates a massive burden on future generations who will be stuck paying off the debt incurred by these programs. Given this unsustainable trajectory, it’s imperative that we take action to reform our entitlement programs and put them on a path to solvency.
The first step is to devolve more responsibility to the states. As it stands, the federal government oversees most of our entitlement programs, and it has done a poor job of reigning in costs. Part of the problem is that when federal politicians make promises about entitlement spending, they are often doing so with other people’s money—money that will be collected from future taxpayers. This “heads I win, tails you lose” dynamic creates an incentive for politicians to spend recklessly, and it has led to our current situation where entitlement spending is on an unsustainable trajectory.
One way to address this problem is to devolve more responsibility for funding and administering entitlement programs to the states. Under this approach, each state would be responsible for funding its own share of entitlement spending, and it would have more flexibility to tailor its programs to meet the specific needs of its citizens. This would create a stronger incentive for state politicians to be fiscally responsible, because they would know that they would have to bear the consequences if they make promises they can’t keep.
Another way to address theEntitlement spending is on an unsustainable trajectory unsustainable trajectory of entitlement spending is to institute work requirements for low-wage workers. Currently, there are more than 17 million Americans who receive cash assistance benefits from one or more entitlement programs.9 Of these beneficiaries, 4.8 million are able-bodied adults without children (ABAWDs),10 and most ABAWDs do not work.11 If we were to institute work requirements for ABAWDS, we could save billions of dollars each year and reduce dependency on government assistance.12
There are a number of ways we could structure work requirements for ABAWDs. One approach would be to allow ABAWDs to continue receiving cash assistance benefits as long as they are working or looking for work.13 Another approach would be to institute a work requirement but exempt ABAWDs who are caretakers for young children or elderly relatives.14 Still another approach would be to make all ABAWDs ineligible for cash assistance benefits unless they are working or participating in
a work-related activity like job training.15
4. Devolution: Personal Responsibility and State-Level Policy Choice
The devolution of entitlement programs to the states would create a stronger incentive for state politicians to be fiscally responsible, because they would know that they would have to bear the consequences if they make promises they can’t keep. This would also give each state more flexibility to tailor its programs to meet the specific needs of its citizens. In addition, devolution would allow states to experiment with different approaches to funding and administering entitlement programs, and we could then learn from these experiments to develop best practices that could be applied at the federal level.
There are a number of reasons why devolution is preferable to the status quo. First, it would promote personal responsibility by requiring ABAWDs to work or participate in a work-related activity in order to receive cash assistance benefits. Second, it would increase state-level policymaking by giving states more flexibility to tailor their programs to meet the specific needs of their citizens. And third, it would reduce dependency on government assistance by making ABAWDs ineligible for cash assistance benefits unless they are working or participating in a work-related activity.
5. Work Requirements for Low-Wage Workers
Work requirements for low-wage workers are a necessary step to reduce our nation’s unsustainable entitlement spending. Currently, there are more than 17 million Americans who receive cash assistance benefits from one or more entitlement programs.16 Of these beneficiaries, 4.8 million are able-bodied adults without children (ABAWDs),17 and most ABAWDs do not work.18 If we were to institute work requirements for ABAWDS, we could save billions of dollars each year and reduce dependency on government assistance.19
There are a number of ways we could structure work requirements for ABAWDs. One approach would be to allow ABAWDs to continue receiving cash assistance benefits as long as they are working or looking for work.20 Another approach would be to institute a work requirement but exempt ABAWDs who are caretakers for young children or elderly relatives.21 Still another approach would be to make all ABAWDs ineligible for cash assistance benefits unless they are working or participating in a work-related activity like job training.22
6. Low-Income Workers Making the Transition from Welfare to Work
Many low-income workers are stuck in a cycle of dependence on government assistance. They rely on government programs like food stamps and Medicaid to make ends meet, but these programs provide little incentive for them to find work and become self-sufficient. As a result, they stay trapped in poverty and their children grow up without ever knowing what it means to be middle class.
We need to break this cycle of dependence by helping low-income workers transition from welfare to work. There are a number of ways we can do this, but two of the most important are providing child care assistance and transportation assistance. Child care assistance helps low-income parents afford quality child care so they can work or participate in job training. Transportation assistance helps low-income workers get to and from their jobs or job training programs. These forms of assistance provide a critical safety net for low-income workers making the transition from welfare to work.