Chapter Overview

1. How has the economic status of the aged changed over recent decades?
For most of the twentieth century, being old meant facing a high risk of being poor. In the past three decades, however, poverty among the aged has declined faster than it has for other age groups. Today's elderly have benefited from improved living standards in the post-World War II era and are better educated than their parents' generation. These factors coupled with improvements in Social Security benefits mean that the postretirement income decline is the lowest ever recorded. Now low income is more closely linked to household type than to phase of the life course.

2. What is the present status of the Social Security system, and what is its future?
Under current projections, the Social Security system will become insolvent in 2034. That means there will be insufficient income coming in from payroll taxes to fully fund the benefits people have been promised. The much-publicized concerns about the long-range solvency of the trust fund has undermined public confidence in the program, and considerable disagreement exists over how to solve the problem.

3. What measures might be taken to ensure the viability of the Social Security system for future generations?
One proposal would restore the trust fund's long-range solvency through a package of modest changes including raising the retirement age, reducing benefits, and raising revenues. Each of these options has advantages and disadvantages but none is a solution in and of itself. More radical options also are being proposed that would fundamentally alter the nature of Social Security. One proposal is to means-test benefits. Means-testing is likely to raise political opposition, because it would discourage personal saving and undermine political support for Social Security. Privatizing Social Security has also received a good deal of media attention. Privatization transfers the risk of income security in retirement from the government to the private sector. One risk of privatization is that some people might invest poorly and have little or nothing when they reach old age. Another problem is that the stock market might be in a slump when people are ready to retire.

4. What is the difference between a defined benefit plan and a defined contribution plan?
Many retirees supplement their Social Security benefits with income from pensions. One type of pension is called a defined benefit. Workers receive a monthly benefit based on their years of service to the firm and their prior earnings. Because defined benefit plans have been subject to a number of problems, the government has passed laws regulating them. The Employee Retirement Income Security Act of 1974 required companies to establish minimum vesting standards, set more stringent funding requirements, and establish better methods of reporting plan benefits and finances to workers. An increasing proportion of the labor force is covered by defined contribution plans. Under defined contribution plans, workers and/or employers make contributions into a fund, which is invested on behalf of the worker. Benefits in retirement are based on the level of contributions and the success of the investment decisions.

5. How do personal savings contribute to the support of the aged?
Personal savings currently pay for only a small proportion of retirement income. In the past two decades, however, congress has passed many tax rules that encourage people to save money for retirement. Although most Americans recognize the need to save, few have saved enough, a problem that is especially apparent among young people.