Great Recession demonstrated nation can’t afford cuts to Social Security

Older workers have taken an unprecedented one-two punch from the Great Recession. 

The left jab: a decline in their financial portfolios just as Boomers were hitting retirement age.  The nature of today’s retirement system left them more exposed to declines in the value of equities and real estate than previous generations.

The right hook: more job losses among late-career workers than ever before.  Unlike earlier generations that tended to stay in one job for most of a career, today’s on-the-move older workers are not able to count on their employers’ loyalty to avoid layoffs.  The asset market collapse led many workers to plan for a later retirement, only to find the labor market did not accommodate these plans.  Jobless spells lasted longer than ever before, encouraging a record number to lock in low incomes from early Social Security claims or disability benefits.

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The long-term prognosis is even more of a concern. Those who lost a job face the possibility of permanently lower earnings, less generous retirement and health benefits in a new job and a higher probability of another layoff should the recovery take a turn for the worse.  Even those who retained their jobs or retired on their own terms will be hurt; persistently low interest rates make living off one’s savings difficult and the collapse of home values means that less equity will be available to make up for shortfalls in retirement accounts.  In addition, economy-related stress, as well as inconsistent health insurance coverage, may shorten lives.

This depressing assessment suggests that policymakers should be very careful about cutting back on Social Security retirement benefits.  Our research, recently published in the Annals of the American Academy of Political and Social Science, shows that Social Security not only muted the impact of a collapsing economy on retirement consumption but also served as an escape valve for older workers who could not find jobs.  And Social Security disability benefits acted as a backstop for impaired workers forced out of the labor force.

The goal of “entitlement reform” still enjoys broad political support, but recent events suggest the tide may be turning against any type of reform that actually cuts benefits.  A recent Public Policy Polling survey indicates that nearly two-thirds of voters in key districts now support expanding, not contracting, Social Security benefits. 

After all, no one is getting rich off Social Security and it would be hard to consider most 50-plus Americans privileged these days. The average retiree receives about $1,400 per month.  Claiming benefits early reduces the monthly check – and many do, because jobs for older people are scarce and many are too unhealthy to continue working.  Moreover, rising Medicare premiums eat into this amount and an increasing share of households pay taxes on their benefits.

So voters across the political spectrum are starting to question any type of “reform” that means less reliable income in retirement.   And their representatives in Washington are starting to listen: the debate in the U.S. Senate over Social Security now includes suggested reforms that actually increase benefits.  

Actual reform of Social Security may be nowhere in our immediate political future, given the nature of today’s congressional gridlock.  But lawmakers need look no further than the experience of the Great Recession to see how vital Social Security is to older Americans during difficult economic times, and how cutting Social Security benefits would be a considerable blow to the nation as well as retirees.

Munnell is the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management and the director of the Center for Retirement Research at Boston College.  Rutledge is a research economist at the Center for Retirement Research at Boston College.