This year marks the 125th anniversary of Germany’s establishment of the first old-age social insurance program under Chancellor Otto von Bismarck. Over time, the revolutionary development of Bismarck’s scheme has shaped the way the world thinks about retirement policy and has had a profound impact on the US by helping to inspire the Social Security system we have today.
This year also marks nearly 80 years since Social Security was established when the US was in the throes of the Great Depression. In response to the tremendous economic insecurity confronting millions of families, and particularly older Americans, President Franklin Roosevelt proposed creating a “social insurance” system based on the idea first adopted by Chancellor Bismarck.
President Roosevelt, along with Congress, established a system of wage insurance financed by dedicated payroll taxes called Social Security. Upon signing the Social Security Act, President Roosevelt said the intent of the law was to “give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.” The Social Security program has been modified over the years and expanded to help other classes of people, including people with disabilities, but its basic structure remains.
Social Security keeps 22 million Americans out of poverty, including 40% of those aged 65 and over THE THREE-LEGGED STOOL
The retirement system in the US has often been described as a three-legged stool of Social Security, private savings and employer-provided pensions. Unfortunately, the legs of that stool are breaking down, and the US is facing a retirement crisis.
Today, half of Americans have less than $10,000 in savings, and only 14% are “very confident” they will have enough money for a comfortable retirement. The retirement income deficit – the difference between what people have saved for retirement and what they should have at this point – is between $6.6 trillion and $14.4 trillion.
Social Security remains the bedrock of the US’s retirement system. Nine out of ten Americans aged 65 or older receive Social Security benefits, and in July 2014 alone, Social Security paid more than $52 billion in benefits to more than 41 million seniors. Social Security’s old-age benefits are modest – on average slightly more than $1,200 per month.
US Senator Tom Harkin
Senator for Iowa since 1985, Tom Harkin is chairman of the Senate Committee on Health, Education, Labor and Pensions. Senator Harkin (D) has long been a leader on issues related to retirement security and spearheaded efforts to ensure that both employers and employees understand the fees they are being charged in defined contribution retirement plans.
He also fought to protect older workers from age-discriminatory pension benefit changes. Due to retire in 2015 after five terms in office, he ran for presidential candidate in 1992 and spent 10 years in the House of Representatives as the first Iowan Democrat in Congress since the end of the Great Depression. A graduate of Iowa State and the Catholic University.
Harkin was a naval pilot in active duty between 1962 and 1967. A father of two and grandfather to three, he lives with his wife Ruth in Cumming, Iowa,in the house in which he was born.
Nevertheless, according to the Center on Budget and Policy Priorities, Social Security keeps 22 million Americans out of poverty, and if it wasn’t for Social Security 40% of Americans age 65 and older would have incomes below the federal poverty line. For this reason, Social Security is extremely popular. According to the American Association of Retired Persons, 92% of people believe it is one of the most important government programs.
Social Security was always supposed to be supported by a private pension system and personal savings, but unfortunately those two pillars of the retirement system have eroded. For that reason, I believe the retirement crisis is directly attributable to the fact that the private retirement system is not doing enough to prepare people for retirement. This is in large part the result of the fact that only half of American workers have access to a workplace retirement plan.
Among those who do have a workplace retirement plan provided through their employer, the vast majority have just a 401(k), not a pension. To be sure, 401(k)s can be a good way to help people put a little money aside to supplement their pension, but 401(k)s were never intended to replace pensions.
Furthermore, personal savings rates are too low, and, for those who do save, there’s no simple way to convert those savings into a stream of retirement income they can’t outlive.