Social Security and Medicare are emerging once again as seemingly untouchable third rails of politics despite their looming insolvency, and economists say the reason is obvious.
Surveys show that a majority of Americans will rely solely or mostly on the programs for support in their retirement because they have not saved adequately.
That was not the way it was supposed to be. Social Security originally was intended as a supplement to retirement income such as corporate pensions and personal savings — one leg of a so-called “three-legged stool” of retirement support.
For most Americans, however, it’s the only leg of the stool left standing because of paltry personal savings and depleted corporate pension plans, prompting people to reflexively oppose any changes in the social programs.
More than half of all workers in the United States have less than $25,000 in total savings and investments, according to Federal Reserve surveys, and the average balance for someone approaching retirement was just $78,000. That amount leaves the average retiree with about $3,100 a year or a little more than $250 per month — not enough for even basic expenses.
The average Social Security check, by contrast, is about $1,200 a month.
“Most households have no retirement plan other than Social Security, and the average American family has not saved enough to maintain its standard of living in retirement,” said David Wyss, chief economist at Standard & Poor’s Corp.
This is why the “relatively minor tweaks,” such as nudging up the retirement age, needed to make Social Security solvent, and the more major overhaul needed to restore solvency to Medicare have been so hard to accomplish politically, particularly when it involves asking retirees to pay more for their health care, he said.
Estimates of the value of Medicare benefits for retirees range from $7,000 to $11,000 a year on average.
“Shifting the costs onto the retiree seems a likely reform,” said Mr. Wyss, “but unfortunately runs against the fact that retirees already have too little to retire on now.
“Society needs to make a choice about the cost and timing of retirement as well as the extent to which the public should be responsible for retiree income and health care,” he said.
But the politics of Social Security and Medicare are so touchy that he expects Congress to keep avoiding the issue until a crisis occurs.
A survey this year by MetLife found that nearly four in 10 American workers expect to rely solely or mostly on Social Security in retirement, and another 30 percent expect Social Security to be an important source of retirement income.
Thirteen percent of working Americans don’t think Social Security will be available for them in retirement, though for the most part that has not prompted them to save more themselves.
Baby boomers are in the worst shape, as they are now at or approaching retirement age without adequate savings.
The survey found that more than 60 percent of boomers are behind schedule in saving for retirement and nearly 70 percent are worried about outliving their retirement savings and not having enough money to cover medical costs in old age.
Younger generations have mimicked their parents’ procrastination about savings.
Nearly two-thirds in every age group expect to have to work full time or part time to make ends meet after they reach retirement age.
“It’s distressing that this many workers are relying heavily on Social Security,” said Pamela Villarreal, a senior analyst at the National Center for Policy Analysis.
While many Americans think of Social Security as a kind of giant trust fund that has set aside years of their Social Security contributions for retirement, Ms. Villarreal said, it is really more like a “Ponzi scheme.”
Contributions have been spent by the federal government, and the benefits provided to retirees are paid out of current workers’ payroll taxes, not the retirees’ earlier contributions.
While not saving adequately has become a trademark of the American lifestyle, the housing crisis made matters worse, especially for baby boomers approaching retirement age.
Many people loaded up on debt through various creative mortgage financing schemes and now many live in houses with huge mortgages that are worth more than their house.
“At a time when they should be free of significant financial burdens such as mortgages, many pre-retirement households still have high levels of debt,” Mr. Wyss said.
A recent survey by the American Institute of Certified Public Accountants found that 40 percent of Americans believe they will never be able to afford to retire — “and they’re probably right,” said Mr. Wyss, who just announced his own retirement from S&P and plans to teach college courses for a while before full retirement.
Another reason Americans have come to depend so heavily on Social Security is that only about half of the nation’s workers even participate in a retirement plan where they work, according to a recent report by the Government Accountability Office.
People working for large businesses are more likely to have a corporate pension than the majority of Americans who work for small businesses or are self-employed.
Only one-third of firms with fewer than 25 employees sponsor retirement plans, compared with about 80 percent of firms with 100 or more employees.
Moreover, the generous tax incentives Congress has provided for workers who participate in 401(k) plans — the most common corporate pension benefit named after the section of the tax code that make contributions tax-exempt — are skewed toward higher-income workers who are in higher tax brackets and “do relatively little to help lower income workers save for retirement,” the GAO found.
The financial outlook is fragile even for those who have joined company plans and managed to accumulate some retirement savings.
Workers with heavy debts or lost jobs increasingly have tapped into their retirement savings to meet expenses, depleting their nest eggs.
Many workers’ 401(k) plans got hammered during the financial crisis and are now diminished in value. Moreover, about a third of employers that offered a 401(k) have reduced or eliminated their contributions during the financial crisis, though many are starting to restore benefits.
“The recent recession has had a huge impact on employees’ retirement preparedness,” said Liz Davidson, chief executive of Financial Finesse, a financial education firm.
“Many employers were forced to freeze pensions, cut retirement-plan matches and reduce raises and bonuses. This forced many employees to take loans and hardship withdrawals from their retirement plans.”
Ms. Davidson and other financial advisers typically refer to the state of retirement preparedness in the United States as a “crisis” because so many people have no other consistent source of income and support other than Social Security and Medicare.