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Abstract
The inadequacy of the current U.S. public and private pension systems may warrant the establishment of a universal pension system (UPS), which would cover all workers—full-time and part-time—and require them to contribute at a level that can help provide them with adequate incomes when they retire. This paper develops options for a system of individual accounts to which, starting in 2007, each employee or self-employed worker would be required to contribute 3 percent of covered payroll (i.e., 3 percent of up to $97,500 in 2007). The UPS we describe would raise the total “replacement rate” for average wage men to 49.0 percent of final wages—provided Social Security is fixed—or 39.8 percent if not
Introduction
A confluence of demographic and economic pressures is challenging the ability of the U.S. retirement system to deliver the standard of living in old age that retirees have come to expect. The major pressures are various and include increased longevity in retirement, lower birth rates, shorter career spans, unsustainable growth in benefits relative to contributions, the current era of low interest rates, and heightened global competition. Employers have been curtailing benefit promises to workers since the early 1990s, and while lawmakers have yet to bring the mushrooming federal benefits scheduled in law into line with the projected financing available, most believe that some form of benefit cuts is inevitable. Absent a rise in overall contributions to the retirement system, the economic security of future retirees is in question.
Our retirement system can be thought to have four pillars. Each pillar contributes to an overall standard of living for households throughout their retirement. The first pillar, Social Security, will be unable to pay full benefits as scheduled in law without additional financing after 2041. The second pillar, employer-provided pensions, currently covers less than half of U.S. workers, and the extent to which these pensions will replace career wages in the future is uncertain. Meanwhile, private wealth, the third pillar, is being called upon to stretch over longer and longer spans of life spent in retirement. Retiree health care (taking federal and employer benefits together) is the fourth pillar and has the most precarious financing situation of all, raising the prospect that future retirees will have to pay much more out of pocket for their health care. If nothing changes, workers and their families will increasingly assume more of the risk and direct cost in providing adequately for their own retirement.
In a nutshell, the present retirement system threatens to fall short in providing the aged with security just as we call upon it to do more than it ever has before. A broad recasting of the nation’s present social insurance programs is needed to address the breach between the retirement Americans desire and the retirement that current systems can finance. A key element of this greater reform could be the establishment of a universal pension system (UPS), to ensure that all workers are covered by a pension and are able to save more during their working years to provide them with adequate incomes when they retire. Additionally, this kind of universal pension system could provide needed retirement income for millions of employees of small and medium-size firms that currently do not offer pension plans.
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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
