December 3, 1971
Page 44614
ECONOMIC IMPACT OF RETIREMENT
Mr. MUSKIE. Mr. President, Nelson Cruikshank has had a long and distinguished career, serving the best interests of the elderly. After holding various posts in Government, Mr. Cruikshank served for 10 years as director of the AFL-CIO Social Security Department. He is now president of the National Council of Senior Citizens, an organization that is in the forefront of the battle to secure greater justice for older Americans. In the November issue of Social Action, Mr. Cruikshank eloquently and succinctly discusses the economic impact of retirement.
Mr. Cruikshank reveals that despite the best efforts of the citizens themselves and major programs such as social security and medicare, retirement for too many of our senior citizens is an introduction to poverty. As revealed by the Subcommittee on Aging, of which I am a member, today 4.7 million persons 65 and older fall below the poverty line, nearly 100,000 more than in 1968. More than 2 million older Americans are on welfare. And 60 percent of all elderly persons living alone are classified as poor or marginally poor.
Unlike most people, Mr. Cruikshank not only knows the problem but offers a solution. As Mr. Cruikshank observes, we must abandon the myth that social security provides only a "basic floor of protection." For most Americans the social security system is their only source of income during their retirement. This will continue to be true in the future. Therefore, if we are to provide true economic security and dignity for our elder Americans, there must be substantial and massive increases in social security benefits. I have long maintained that such increases can be achieved only by general revenue financing. Mr. Cruikshank shares this conclusion by noting in his article that the entire cost of an adequate system of old-age security should not be borne as it now is by a payroll tax. To quote Mr. Cruikshank:
There is every sound economic reason for the cost to be shared not only by employers and employees but by contributions from general revenues of the government.
General revenue financing will, of course, cost money, but the present system has a cost far greater than dollars. Our present system places an increasingly regressive tax on the working American, while failing to provide economic security for an increasing number of elderly Americans.
So that Senators may have the benefit of Mr. Cruikshank's observations, I ask unanimous consent that his article be printed in the RECORD.
There being no objection, the article was ordered to be printed in the RECORD, as follows:
THE ECONOMIC IMPACT OF RETIREMENT
(By Nelson H. Cruiksbank)
The American worker born in 1906 reaches the normal retirement age, 65, this year. He was 23 years old and was getting started in his life work, preparing to assume the responsibilities of a family, when the 1929 crash triggered the complex chain reaction he learned to know in the next few years as the great depression.
If he had harbored the typical dreams and ambitions of most Americans of that time, the events of those years brought a rude awakening. Hard work, industry, savings, and prudent investment no longer were the sure road to success and security. He saw all around him older people, who had obeyed all the rules and lived up to all the precepts, suddenly deprived of the promised rewards and forced to seek assistance from whatever source they could – even the government.
By the time he reached the age of 30 he had learned the hard way some of the tough economic and political facts of life. Gradually, with his fellow citizens, he worked his way out of the depression, aided in no small measure by the massive government spending incident to World War II as well as by the changing attitudes with respect to government's responsibility for the general welfare – changes he himself helped develop as his own notions about such matters shifted.
Gradually the dream of individual success as entertained in the days of his innocent youth was replaced by another – the dream of a comfortable and relaxed retirement. He passed the 50-year mark in 1956 – not a very good year in our economic history. But his children were grown or would soon be on their own. In a few years the house would be paid for. There was Social Security and his company was instituting a pension plan. He had even managed to lay aside a small nest egg: some government Savings Bonds and a modest amount in a savings and loan association. Fifteen more years of work and he could retire. No more getting up at the clang of the alarm clock, grinding through traffic with his car pool to report at the factory at 8 o'clock or at the office by 9. He could buy a little place on the lake or in Florida or California, do all the fishing and hunting he liked. He and his wife would spend their golden years in leisure. Every week would be one long weekend. What a life!
And now comes 1971 and age 65. Will the dreams of middle and later life be shattered as were those of his early 20s? For many, tragically, they will.
TRADITIONAL ROUTES TO OLD-AGE SECURITY
It's been a long time since the average worker looked to the traditional pattern of family security characteristic of an earlier agrarian society. Our modern worker remembered his grandparents who developed 160 acres of midwest farmland, raised and educated their family from its proceeds and their labor, and retired on the homestead in comfort and dignity with one of the sons taking over most of the work while the old man supplied the wise management out of years of experience. But our modern worker knew this was not for him. Among other things, his was a city way of life. When the great depression started there were over 6,000,000 farmers in the United States. Now there are only about one-third that number.
To save enough
Nor was our typical worker ever really convinced that he could save enough out of his earnings to meet the needs of retirement on a kind of do-it-yourself basis. Suppose he had tried, and suppose at retirement he was earning $8,000 per year. Considering the tax advantages arising from a smaller income and the special exemptions for the elderly, assume he was willing to settle for half that gross income. To buy an annuity that would yield $4,000 a year for the rest of his life and the same amount for his widow after his death, he would need better than $50,000 cash at the time of retirement. Even if he had been foresighted enough to start saving 25 years ahead of time, he would have had to make monthly payments of $166 all those years to accumulate such an amount. But remember, our typical worker would have been 40 years old in 1946 and at that time he was making not $8,000 a year but $5,000. His children were still in school, the home wasn't paid for, and there were always more calls on his paycheck than he could meet. Obviously he could not set aside nearly half his take-home pay to meet the needs of retirement 25 years in the future.
To allow for rising costs
Besides, our worker had no way of knowing then that his living standards and his earnings would rise in the 25 years ahead to the point where he would need as much as $4,000 a year to maintain a moderate standard of living.
One thing that he could not have foreseen was the dramatic rise in the cost of living that was going to take place in his later working years. From the 1957-59 base, the Consumer's Price Index for all items has risen by nearly 40%. But many of the items that most directly affect older people have seen even sharper rises. Physicians' fees, for example, have risen by 76.8%, property taxes by 47.3%, property insurance rates by 61.7%, maintenance and repairs by 60.3%. Local transit fares have doubled, and hospital daily service charges have more than tripled in that period.
PROTECTION THROUGH MEDICARE
Six years ago passage of the Medicare law improved security in old age by covering the greater part of the most unpredictable and burdensome threat to retirement budgets, namely, the cost of a hospitalized illness and high doctor bills.
In fiscal year 1969, the average annual medical bill for aged persons was $692, but the average older person's out-of-pocket outlay was only $163 according to Social Security Administration figures.
Hospital care constituted by far the largest health expenditure for the aged – approximately $6.5 billion in fiscal year 1969. Medicare paid $4.3 billion, or 66%, and an even higher proportion of large bills for individual cases. The program also paid about 72% of the $2.1 billion spent for physicians' services for the elderly.
Gaps in the program
There are still, however, large gaps in the program that constitute a heavy burden for people living on retirement incomes. The deductible and co-insurance features constitute a barrier to medical care, especially for the elderly poor. Out-of-hospital drugs, which are not covered, are frequently a costly item. Many drugs which older people use are of the most expensive kind, and frequently the elderly need these drugs in treating such disabilities as heart disease, diabetes, and arthritis – not just occasionally, but regularly. Their cost represents a steady drain on low incomes. Furthermore, unless the attending physician agrees to the assignment method of payment under which the amount paid by Medicare is accepted as the total payment (minus the 20% co-insurance), the doctor is free to charge any amount he thinks he can get over and above the amount Medicare procedures establish as "reasonable" in terms of the going rates and past practice. So the elderly person is faced with an 87 % increase in monthly premiums for Part B. Medicare since the start of the program, plus the burden of increasing charges by physicians over and above the insured amount.
PRIVATE PENSIONS
By the end of 1968, 28.6 million wage and salary workers were covered by private pension and deferred profit sharing plans. This represented nearly half (47.8%) of all wage and salary workers. However, the degree of protection afforded by these plans is in many respects illusory.
Shortcomings
In the first place, pension payments vary widely. The sample of 100 plans under collective bargaining published by the U.S. Bureau of Labor Statistics shows pensions as low as $13 per month for workers making $400 per month at retirement. Others range as high as $565 a month for workers retiring after 30 years of service who were earning $7,800 per year. Both of these. of course, are extremes – not at all typical.
Many plans require long unbroken service with a particular employer with no vesting provision (an equity in the plan for those not meeting service requirements). Some have been terminated when the employer went out of business, leaving workers stranded with no protection or with a fraction of the benefits they had expected. Frequently there is no protection for the worker who quits or is laid off just prior to the time he would become eligible.
While the total number now working under the provision of some private retirement plan is impressive, there are many more who are totally without such protection. The Senate Committee identified 40,592,000 such individuals including the currently unemployed, family workers, employees of local governments, self-employed, and agricultural workers; 26,187,000 were in private, non-agricultural, industries having no supplementary pension program.
Reduction of income
Even for those fortunate workers who are under liberal, solidly financial plans backed by major industries and supported by powerful unions, the reduction in income at time of retirement can be quite a shock.
Take, for example, an auto worker earning $9,000 a year. This would put him in the distinctly higher wage group. On retirement, if he and his wife were both 65, and he had been steadily employed over the years, they would together draw $306.80 a month social security benefits. His auto worker's pension would be $183. His annual combined income would therefore be $5,878.
This seems liberal, but it represents a 23.50% reduction in income taking into account that even on his $9,000 working income he had only $7,684 left after taxes and social security deductions.
This is an example of the more favored worker at the time of retirement. There is, of course, an almost infinite variety of circumstances that determine a worker's economic situation in retirement. In the example both man and wife had reached age 65. If the wife were younger by three to five years (as is usually the case), the couple either would have a reduced social security benefit or would have to postpone one-third of the benefit for the number of years it takes the wife to reach 65.
Our example also assumes that both husband and wife were living during the period of retirement. Actually, in the vast majority of cases the wife outlives the husband by several years, and the typical private pension plan makes little or no provision to protect the surviving widow.
Social security is also deficient in this respect. Under present law if the wife dies the surviving husband continues to draw 100% of his primary benefit. But if the husband dies his widow draws only 82% of the primary. H.R. 1, passed early this summer by the House and now awaiting action by the Senate, would correct this inequity.
COMPARISON OF BENEFITS
There appears to be no comprehensive up-to-date study of private pension plans with respect either to their overall benefit structure or to survivor's benefits. The Bureau of Labor Statistics Digest of 100 selected pension plans under collective bargaining gives some indication of the better plans. An analysis of this study by the Special Senate Committee shows that only 44 of the 100 plans had any provision for survivor's benefits and most of these benefits were very meager.
Sixteen provide monthly payments after the death of the primary beneficiary for periods of 6 months to 5 years. Eleven of them pay back the worker's direct contributions plus interest – not very significant since most plans do not require workers' direct contributions. The indirect contribution workers make to plans, through a reduction in potential wage payments resulting from the institution of a pension plan, are never refunded. Nine of the plans pay lump sum death benefits ranging from $400 to $7,500 but only two pay amounts above $3,200. Only two of the plans continue the full benefit to the survivors after death of the beneficiary. Six more pay a percentage of the primary benefit.
SOCIAL SECURITY AS THE BASE FOR RETIREMENT SECURITY
The statistical information on private pensions, while meager, gives reason to believe that the outlook will not improve greatly in the immediate future. The Senate Committee on Aging reports this major finding: Projections to 1980, using relatively liberal assumptions with respect to increases in benefit levels under both social security and private pension plans, indicate that about half the couples and more than three-fourths of the unmarried retirees will receive less than $3,000 in total pension income.
There is also abundant evidence of the inadequacy of the overall protection we have afforded the elderly through all our efforts so far, including savings, pensions, home ownership, insurance, and social security. A study issued by the Senate Special Committee on Aging in 1969 showed that three out of ten people 65 and over were living in poverty in 1966. Though there have been substantial improvements in social security payments in the last 5 years, the rapid rise in living costs has kept about the same proportion below the poverty line. Older people living alone or with non-relatives were the worst off financially. In 1967 half of such persons had yearly incomes below $1,480 and a fourth had $1,000 or less. The study also showed that most of the elderly now in poverty had been able during their working years to keep themselves and their families out of poverty in the typical American self-reliant fashion. Poverty came only with old age.
Policy changes required
It now seems clear that if we are ever to make possible a reasonable degree of assurance of economic security for the great majority of working people, we are going to have to make some basic changes in policy. First, if we are going to continue with the assumption – an assumption that has proven to be largely a myth – that social security is to provide only a "basic floor of protection" with personal savings, investment, and private pensions supplying the main part of the structure, we are going to have to take actions at the government level to see that these programs, in fact, fill that need. To do this would require mandatory vesting and portability of rights, and standards controlling the level of benefits. Coverage would also have to be made universally compulsory.
If we were to go that far in controlling private pension programs, we might just as well improve our basic social security system to the point where it could do the whole job. For most people it is already their chief reliance in old age. The only trouble is the benefits are too low. For the middle and upper wage and salary groups particularly, the ratio between benefits and past earnings is far too low – much lower than for the lower income groups. For example, a worker retiring at age 65 in 1971 with an average monthly wage of $200 is entitled to a primary benefit of $128.60 or 64.8% of his past wage. But a worker with an average wage of $800 a month has a primary benefit of $204.50 per month – only 25%.
Surely we would not wish to lower the benefits for the low-income workers. But we need to improve very substantially those for the middle and high paid workers simply because other means of economic security have been found seriously defective.
Paying the bill
All this, of course, is going to cost money – a great deal of money. But so do highway systems, schools, hospitals, and humane welfare programs and all the other necessary and desirable things – not to mention unnecessary and undesirable things like a big war in Southeast Asia. Nor should the entire cost of an adequate system of old-age security be borne, as is our present Social Security program, by a payroll tax. There is every sound economic reason for the cost to be shared not only by employers and employees but by contributions from general revenues of the government. It will be a huge and costly program but that consideration has not, throughout our past history, deterred America from doing whatever she really wants to do.