It would be difficult to overstate the importance of Social Security. I don’t say this as a blind loyalist of our largest social program. I’m simply awestruck by how large it looms for all but the wealthiest Americans.
Without this program, America as we know it would not exist. We’re not talking about “security” here. We’re talking about sustenance and survival. We’re talking about the real deal in things that are “too big to fail.”
To be sure, I’ve been aware of how important Social Security is as our social “safety net.” You probably are, too. But a re-reading of an important research paper has added perspective to a column I wrote earlier this year. The paper, “The Composition and Draw-Down of Wealth in Retirement” by James Poterba, Steven Venti and David Wise, examines the financial condition of early retirees — people who were age 65 to 69 in 2008.
What makes the paper unique is that it evaluates Social Security and defined-benefit pensions — things that give us income rights, not actual wealth — as though they were wealth. That way they can be compared to the real wealth that most research examines — to things like retirement plan savings, taxable savings and home equity. The study then shows the distribution of those assets for each decile (each 10 percent) of the population, from the wealthiest 10 percent to the poorest 10 percent. It also shows the differences between single-person households and married households.
The results are shocking. Here are some of the most important findings:
— For most Americans, most wealth is virtual, not real. We’ve known for a long time that Social Security wealth — the rights to income that we build through working — is the only form of wealth (and sustenance) that many people have when they retire. What hasn’t been clear is how important Social Security is far, far up the wealth scale.
You can get an idea of why this happens by considering how much it would cost to buy an inflation-adjusted life annuity to pay the average Social Security retirement check, currently $1,268.51 a month. Using the researchers’ figures for annuity value, it would take about $235,000.
Only the top decile — the top 10 percent of all households — has more in actual financial assets than they have in virtual Social Security wealth. At $643,100, their Social Security wealth is only slightly behind their $711,000 in financial assets.
For the other 90 percent of households, the virtual wealth of Social Security dominates the real wealth in financial assets, often by large multiples. For the fifth decile, or instance, Social Security wealth is six times financial assets. Even at the seventh decile, Social Security wealth is twice as great as financial assets. This means that Social Security provides more income than financial assets provide for a very large majority of Americans.
It also means that anyone who speaks casually about the need to reduce future benefits, by any mechanism, is playing with fire. While Social Security is our social safety net, it also provides a good deal of the cash that supports consumer spending for the most rapidly increasing portion of our population.
— Pensions mean little to most households because most people don’t have them. Pension wealth registers at zero for the bottom 70 percent of all single-person households. It’s at zero for 60 percent for all married households. Since pension plans have been in decline for decades, we can expect that this already thin source of sustenance will be still thinner in the future. It also means that Social Security, a program that transfers income from one generation to another, will be even more important in the future, not less.
Finally, it means that personal saving will be more important in the future, not less, because workers will have to replace income that once came from pensions with income from savings plans.
— Home equity is the dominant form of real wealth for the majority of American households. For four out of five households, home equity is greater than all financial assets, including retirement accounts. So, in spite of all the attention paid to the financial markets and tax-deferred savings plans, the real action is in residential real estate for most Americans. This means access to home ownership will continue to be a major concern.
Bottom line: The wealth and sustenance for all Americans is a lot thinner than we like to think.