Senator Marco Rubio (R-Fla.) and Ivanka Trump recently unveiled their “paid family leave” plan. It allows workers to opt for lower and later Social Security retirement payments in order to pay for maternity/paternity leave.
Clearly, Marco and Ivanka won’t be retiring to a trailer park in Yuma, Arizona. But under their plan, today’s young workers will be stuck in those trailer parks 40 years from now.
It’s not a case of robbing Peter to pay Paul. It’s about robbing old Peter to pay young Peter.
On the surface, the plan may look attractive, but several points work against it.
First, many Americans assume Social Security will provide their retirement income. That’s an unfortunate assumption, as Social Security was never designed to be a complete retirement payment. A best-case scenario (assuming the worker has had an income of about $125,000 for decades) has Social Security paying 40 percent or so of a person’s retirement income. This is highly unlikely, of course.
Assuming an average worker receives about 25 to 30 percent of their retirement income from Social Security, the Rubio/Ivanka plan would shrink this percentage. That’s a result of their system of allowing younger workers to reduce their future Social Security payments in order to finance paid family leave.
Second, younger people don’t think about retirement. Paying off student loans is a much higher and immediate priority. Or if student loans aren’t an issue, there’s always saving for a car purchase or a deposit on a home.
To this cohort, retirement is so far into the future, it’s not part of their financial calculus.
Third, many workers have saved little or nothing for retirement. Vanguard Investment’s report on retirement savings states that for 2017, the average 401(k)* savings balance was about $104,000; the median savings balance was only a bit over $26,000.
A refresher on ‘average’ versus ‘median’: to come up with their average savings balance, Vanguard took the total amount of 401(k) savings and divided it by the number of participants. For the median figure, Vanguard ranked savings amounts individually — and $26,000 was in the middle.
Thus, half of 401(k) participants in 2017 had less than $26,000 saved for retirement; the other half had more.
In my opinion, the $26,000 figure is useful when considering the Rubio/Ivanka plan. It tells us that well-paid workers sock away their savings in 401(k) plans (pushing the average number to $104,000). However, workers with lower pay don’t save very much.
Thus lower-paid workers who use the Rubio/Ivanka plan will have fewer resources to use to cover their shortfall in Social Security retirement income.
Further, a worker might not have access to a 401(k) plan. Consider millennials who are self-employed, who work on a contract basis for tiny firms. They need an uncommon amount of discipline to start saving for retirement on their own. They are also a cohort who would use paid family leave.
Bottom line: a worker who gives up part of his/her Social Security benefit to take paid family leave in their twenties or thirties, could have a nasty shock in their later sixties. Their Social Security retirement payment would be less and, as we’ve seen, they won’t have much in retirement savings.
Next stop: that trailer park in Yuma.
Instead of raiding Social Security, why not allow workers to opt-in to a paid family leave insurance program? If structured along the same lines as Medicare Part D (prescription drug benefit), with private insurers competing for customers, the premiums could be low — as their customer base would consist of younger, healthier workers.
But in no case should young Peter rob old Peter. Having a paid family leave program is attractive, but not if today’s unwitting workers are at risk of being impoverished when, decades later, they retire.
*Note: 401(k) plans create retirement savings accounts, whereby a worker’s contributions are deducted from one’s salary with pre-tax dollars. The worker will pay taxes when he/she withdraws the funds in retirement, presumably when the person is in a lower tax bracket.
Joanne Butler, graduate of the Kennedy School at Harvard, was a professional staff member (R) at the House Ways and Means Committee and served in President George W. Bush’s administration.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.