Prior to Social Security, enlightened employers sought to provide older employees with pensions, rather than just discard them at the end of their work lives. Providing old age pensions is not just good for the retired employee. It helps businesses thrive. Older workers who retire with adequate income allow younger employees to advance, and demonstrate to those younger workers that, after a lifetime of hard and loyal work, they too will be secure in old age.
However, the reality has always been that individual employers, on their own, are generally unable to provide their retired workers with guaranteed and secure income sufficient in amount to allow those workers to maintain their standards of living throughout their retirement years. Prior to the enactment of Social Security, employer-sponsored pensions were rare and generally insecure. Indeed, in 1925, just two companies ‚ÄĒthe Pennsylvania Railroad System and the New York Central Lines‚ÄĒemployed 40 percent of all employees covered by private pensions. Moreover, between 1929 and 1932, almost 10 percent of all existing pension plans were discontinued, closed to new employees, or suspended.
Social Security changed the face of retirement. Prior to the enactment of Social Security, the verb ‚Äúretire‚ÄĚ did not mean what it means today. It was generally used to mean to withdraw temporarily, as, for example, to retire to the bedroom at the end of the evening. The first known usage of the word ‚Äúretiree,‚ÄĚ according to the Merriam-Webster dictionary, was in 1935, the year Social Security was debated in Congress and enacted into law. It was only in the 1940s, once Social Security started to pay monthly benefits, that the word ‚Äúretiree‚ÄĚ became commonly used.
The evolution of the ‚Äúretirement‚ÄĚ language is not hard to understand. Social Security made the possibility of retiring from work in old age something that all workers could imagine. Social Security provides a secure, independent retirement, with guaranteed monthly income. It replaces wages throughout the retirement years, until death, no matter how long one is fortunate to live.
But Social Security benefits have never been large enough to allow workers to maintain their standards of living without supplementation. Unfortunately, employer-sponsored supplemental plans have serious shortcomings that Social Security does not have. So-called defined benefit plans are expensive and complicated for employers to administer, because plan sponsors must satisfy minimum funding rules, comply with reporting requirements, and be subject to fiduciary responsibilities. Moreover, employers shoulder the investment risk and are responsible for funding shortfalls in these arrangements.
Those complications, expenses and risks are among the reasons that private-sector defined benefit pension plans are disappearing. While so-called defined contribution plans (such as 401ks) do not have those disadvantages, they have other serious disadvantages. Under those arrangements, where the worker bears the investment risk, market downturns at retirement age can be devastating. For this and many other reasons, retirement savings plans have proven to be inadequate for most workers.
Social Security has the advantages of both defined benefit and defined contribution arrangements with none of the disadvantages. It is excellent for employers and employees alike. It is easy for employers to administer, requiring only the collection and transmission of contributions. Yet its benefits are guaranteed and cannot be outlived.
Employers match their employees‚Äô Social Security contributions dollar-for-dollar. In recognition of this fact, past employers appropriately claimed credit for the Social Security benefits their employees earned. Like other fringe benefits they offered, past employers astutely listed Social Security‚Äôs life insurance, disability insurance, and joint and survivor retirement annuities as benefits their employees would earn during their employment years.
Unlike in the past, today‚Äôs employers generally fail to claim credit for Social Security, but they should. Taking credit for this valuable and extremely popular employment benefit is not only accurate, it would provide an important educational role, since Americans are often unaware of Social Security‚Äôs survivor and disability protection unless and until they need them.
In addition to taking appropriate credit, employers should join the fight to expand Social Security. The Democratic Party has recognized that Social Security‚Äôs modest benefits should be increased in conjunction with restoring the system to long-range actuarial balance. In the next Congress, Representative John Larson (D-CT), will chair the Social Security Subcommittee of the Ways and Means Committee. He plans to hold hearings on expanding Social Security. There is a high likelihood that expansion legislation will pass the House of Representatives, providing momentum for action in the Senate.
Legislation to expand Social Security and restore it to long range balance will undoubtedly require some increase in employer contributions, but employers should encourage its enactment. Its benefits will far outweigh its costs.
The nation is facing a looming retirement income crisis where workers will be unable to retire and maintain their standards of living. Age discrimination laws properly prohibit employers from firing older workers simply because of their age. An expanded Social Security will provide those older workers with greater opportunity to enjoy some leisure after a lifetime of work. It will also lower employer costs, since older workers are often the most expensive, and allow younger workers to move forward in their careers.
Moreover, retirees are consumers. As they age, they tend to stop saving and start spending what savings they were able to accumulate during their working years. The goods and services they purchase are essential for a strong economy. A report published a half-decade ago found that Social Security‚Äôs combined payments in 2012 resulted in the production of approximately $1.4 trillion in economic output, the creation of over 9.2 million jobs, and an increase in the tax revenues of local, state, and federal governments that exceeded $222 billion. And that was a half-decade ago. Those positive effects are substantially larger today. And an expanded Social Security would produce even greater returns.
Back in the 1930s, visionary business leaders like Eastman Kodak‚Äôs Marian Folsom understood the importance of Social Security. They supported its enactment and expansion. They recognized that providing workers with a foundation of economic security, an earned benefit to which both employers and employees contributed, was in the best interest of both. As Folsom explained, ‚ÄúThe social security system is a keystone in the economic security of millions of individuals and of the country as a whole.‚ÄĚ
That is still true today. Enlightened business leaders should seize the opportunity to support the expansion of Social Security, following in the footsteps of their predecessors.