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Pensions and Social Security are programs designed to provide some measure of financial security to people during their retirement years. A variety of policies and programs have developed over time to address the kinds of problems faced by many, although not all, of the elderly. The situation can be particularly challenging for those widows and widowers who seldom worked and thus depend on resources acquired by their spouses.

To address the problem of many elderly losing their savings and jobs during the Great Depression, a variety of new social welfare programs came into existence under Franklin D. Roosevelt's New Deal, including a new system of old age insurance, Social Security. It offered some federal aid for traditional local means-tested public assistance measures, such as assistance for the elderly and children, but it also provided a social insurance system for those 65 and over, regardless of financial need. Unlike European systems, which used general tax revenues to finance old age security, the U.S. approach stressed the combined assets of the private sector and its employees. In 1939, the addition of survivors insurance provided benefits to widows and other surviving dependents of a worker who died prematurely.

Originally, the act excluded domestic and agricultural workers, many of them African Americans, due largely to pressure from southern legislators. Eventually, however, most workers were brought into the system and, today, nearly all retired people receive Social Security benefits. Expansion of coverage reflected a shift in the philosophy and financial principles of Social Security. Whereas the government originally stored contributions and paid them back with interest to those over 65, current workers now pay the benefits of those already retired. This shift of current obligations to future workers has led to predictions of crisis in the system, including a recent forecast that, given the rapidly aging population, Social Security will run out of funds by 2042.

The idea of a social security crisis is not new. Fears about Social Security's insolvency arose in the late 1970s and early 1980s, when various factors led to a decline in the program's trust funds. Responses included an increase in payroll taxes, a gradual rise in the age at which individuals could first receive benefits, and taxation of benefits received by taxpayers with incomes over certain levels. Although policymakers hoped these changes would shore up the system for the next 75 years, the latest labor force and demographic data suggest that the reserve fund will be depleted in about 40 years. Today, about 1 of every 8 people in the United States is age 65 or older. The change in the dependency ratio between workers and beneficiaries is changing dramatically. In 1936, 15 workers supported each retiree. By 2025, the ratio may fall to 2.25 to 1. Even though baby boomers are earning more and have better private pension packages than their parents, a sense of crisis remains.

Various solutions to the Social Security problem have been suggested in more recent years. President Ronald Reagan promoted tax-exempt Individual Retirement Accounts (IRAs) as a way to build retirement income. Another approach, the use of employerbased retirement savings programs, or 401(k) plans, grew rapidly in the 1990s. In the latter, employers supplement workers' contributions, although a specific benefit is not guaranteed. These plans are essentially supplements to Social Security benefits, not a replacement, so funding remains an issue.

In 1996, a special Social Security Advisory Council appointed by President William Clinton recommended a radical approach to shoring up retirement income: investing funds in the stock market instead of just low-interest government Treasury bonds (where the government lends itself money). It suggested this be done either by the government or by workers themselves. Critics argued that not everyone has the skills and knowledge to invest money wisely and that this approach lacks protection against stock market failures. Furthermore, government decisions about investments could be politically charged.

President George W. Bush supported adding a private investment element to Social Security. His special commission, consisting solely of people in favor of private investment accounts, recommended legislation to partially privatize the system. Met by a firestorm of criticism from congressional Democrats, organized labor, and other groups, the legislation failed. The president renewed his push for private accounts in his State of the Union address in 2005, adding new details to the plan. He proposed that workers should be able to place as much as 4 percent of their taxable earnings in the accounts. However, congressional Republicans were unenthusiastic, and Democrats were almost unanimously opposed. This attempt to change Social Security also failed.

Public and private company pensions, another source of income for older Americans, have been eroding since the 1980s. Formerly, pensions were guaranteed income; if you worked long enough, you could depend on a predetermined and steady stream of income upon retirement. However, in recent years, many large companies have either cut back on their pension plans or gone bankrupt, unable to honor their commitments to retired workers.

In 1983, more than two thirds of households headed by a worker age 47 to 62 included someone earning a pension. In 2001, only half did, and in 2005, only 20 percent of all U.S. workers were covered by traditional pensions. Some companies either never had pensions or simply stopped providing them. Those who retained pension programs often changed them from defined-benefit plans (which guarantee a predetermined monthly income after retirement that is generally based on salary and numbers of years worked) to defined-contribution investment plans such as 401(k)s. In these plans, employees set aside part of their pay for retirement tax deferred, with the company contributing a partial match. Upon retirement, employees get whatever is in the investment account; thus their retirement money depends on the ups and downs of the stock market. In addition, there is no restriction blocking employers from reducing or terminating their contributions to employees' 401(k)s if business declines.

The federal government backs up pensions through the Pension Benefit Guaranty Corporation (PBGC), which collects premiums from corporations and uses the money to help workers when companies cannot fulfill their pension obligations. However, the recent bankruptcies of large companies--particularly in the airline, automotive, and steel industries--have taken a toll on the resources of the PBGC. United Airlines is a good example. Declines in passenger travel and increasing fuel costs led the company to declare bankruptcy in 2003. It won the right in bankruptcy court to terminate all four of its employee pension plans. United Airlines' $3.2 billion in obligations was shifted to the PBGC. Similarly, General Motors tried to slash costs in 2006 by dismissing many workers and reducing the benefits of those who remained. When Bethlehem Steel shut down its pension plan, it was up to the PBGC to meet the company's $3.7 billion in obligations to retirees.

The status of pension funds for public sector employees has also become precarious. These employees, including policemen and teachers, were generally guaranteed retirement benefits much higher than private pensions, but elected officials often failed to set aside the money necessary to cover benefits. A dramatic example was the New York City transit workers' strike in 2005, which brought the city to a standstill. The walkout was precipitated largely by the Transportation Authority's proposal that all new workers contribute 6 percent of their wages toward their pensions, compared to the 2 percent paid by current workers. The proposal was a response to the tripling of pension costs in the previous 3 years.

In 2006, Congress passed a major pension bill that made pension plans more expensive for many companies, requiring 100 percent funding rather than the previous 90 percent level. This legislation may temporarily aid a troubled pension system, but it is a far cry from preserving it for future generations and may even lead to some companies dropping their pension plans altogether. Some analysts predict that the defined-benefit pension approach is coming to an end and that most workers today will only receive retirement benefits through a self-contribution plan like the 401(k).

References:

1) Achenbaum, Andrew W. 1978. Old Age in the New Land. Baltimore: Johns Hopkins University Press.

2) Berkowitz, Edward D. 1991. America's Welfare State: From Roosevelt to Reagan. Baltimore: Johns Hopkins University Press.

3) Berkowitz, Edward D. 1997. "The Insecurity Privatization Would Bring." Washington Post National Weekly Edition, January 6, p. 23.

4) Carlson, Elliot. 1996. "Panel Floats Ground Breaking Ideas on Investing SS Money." AARP Bulletin 37(April):4-5.

5) Haber, Carole. 1983. Beyond Sixty-Five: The Dilemma of Old Age in America's Past. Cambridge, England: Cambridge University Press.

6) Krugman, Paul. 2006. "The Great Revulsion." New York Times, November 10, p. 23.

7) Orloff, Ann Sola. 1993. The Politics of Pensions: A Comparative Analysis of Britain, Canada, and the United States 1880-1940. Madison, WI: University of Wisconsin Press.

8) Popple, Philip and Leslie Leighninger. 2007. The Policy-Based Profession: An Introduction to Social Welfare Policy for Social Workers. Boston: Allyn & Bacon.

9) Popple, Philip and Leslie Leighninger. 2008. Social Work, Social Welfare, and American Society. 7th ed. Boston: Allyn & Bacon.

10) Walsh, Mary Williams. 2004. "Healthier and Wiser? Sure, but Not Wealthier: As Pensions Slip Away, Retirees May Take a Fall." New York Times, June 13, Sec. 3, pp. 1-2.

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