My focus was on Social Security and retirement. While the plan I propose has many details, I’ll focus here on a big one: shifting Social Security from an “earned benefits” basis to a something closer to a true social insurance program. On its face, this is about the most unpopular reform idea possible, not because of what it implies for the mechanics of the Social Security program but what it represents for our values. We like the idea that everyone should pay into Social Security, that it rewards work and contributions and that it’s not a “welfare program.” All of those things have helped maintain political support for Social Security even as the public loses faith in other government programs.
But earned benefits” come with a downside. While Social Security’s benefit formula is progressive, benefits are based on earnings and they rise with earnings. Unlike almost most other social insurance programs, the majority of Social Security benefits go to middle and higher earners.
This has both political and policy effects. Politically speaking, the perception that benefits have been earned make participants reluctant to accept reforms, even if those reforms are necessary. And even if those participants haven’t truly earned their benefits. Just because you’ve paid into the system all your life doesn’t mean you’ve paid enough to finance all the benefits you’re expecting. After all, if we’d all truly paid for our benefits Social Security wouldn’t be going broke.
But it’s not just politics. Earned benefits affect high and low earning households differently. For a middle or high earning household, Social Security retirement benefits are really just another form of retirement income. And there’s a great deal of evidence, both from the U.S. and other countries, that when the government offers more Social Security benefits middle and high earning households save less on their own, which is perfectly rational for them to do. The research finds that these households reduce their personal saving by about two-thirds of the amount they expect to get from Social Security. That means that personal saving, which helps the economy by providing investment capital, is displaced by taxes, which hurt the economy by reducing incentives to work. Less work and less saving isn’t what we need when a smaller population of workers will have to support larger populations of retirees.
So Social Security is a wash for middle and upper income households, but how those households react to Social Security is a loss for the economy.
For lower income households it’s a different story. Millions of the working poor are helped by Social Security’s progressive benefits. At the same time, though, a work- and earnings-based pension system doesn’t do much to help people without a lot of work and earnings. And these days, poverty in retirement is often a function, not of a long career at low wages, but simply of sporadic attachment to the labor force. Those with short work histories will receive lower Social Security benefits and, sometimes, don’t qualify for benefits at all. In the bottom fifth of the population, about 20 percent don’t even qualify for Social Security benefits at retirement. And of Americans who do qualify, about one-third receive a benefit that’s below the poverty line.
So overall, we’re displacing a lot of private savings and charging higher taxes than we have to for a program that’s not helping the truly poor as much as it could. About 10 percent of older Americans currently live in poverty, despite spending roughly $700 billion on Social Security retirement benefits. We could provide a poverty-level Social Security benefit to every retiree for about half of what the current program costs.
And that’s basically what I propose, to gradually shift from our earnings-based Social Security model to something similar to the retirement programs in New Zealand and the new program in the United Kingdom, with some similarities to the programs in Canada and Australia as well. Over time, Social Security would transition to paying a universal, flat dollar benefit to every long-term US resident. The benefit would be set at the single, over-65 poverty threshold, which is currently about $850 per month. No one would get below this amount, and the over 65 poverty rate would almost immediately go from about 10 percent to something close to zero percent. This flat benefit would increase benefits for about the bottom third of Social Security beneficiaries. The benefit level would be indexed to wage growth, so it would maintain poverty protections relative to the living standards of the day.
Yet while no one would receive a benefit below the poverty line, no one would get a benefit above the poverty threshold either. Once phased in, everyone would receive that same benefit. So while the bottom third would receive benefit increases, the top two third would receive benefit cuts, at least relative to what Social Security has promised. Cuts would be modest for people at the middle of the earnings distribution, but substantial for people with very high earnings.
Those middle and higher income households would need to save more on their own, and we would implement policies to facilitate that saving. For instance, all employers offering 401(k) plans should automatically enroll their employees, a step that can dramatically increase participation. Likewise, small businesses should be allowed to band together to run 401(k)s, a step that would lower the fixed costs and regulatory burdens that cause many small employers not to offer retirement plans.
While I’m not outright opposed to supplemental retirement savings plans being proposed by state governments in California, Illinois and other states, these are a second-best solution: these so-called “Secure Choice” plans have low contribution limits and no employer match, so the typical savings each year would be less than half what the typical 401(k) participant puts away. Plus, to be frank, I don’t totally trust state governments that have made such a hash out of their own public employee retirement plans.
As I said, these benefits changes would be made gradually, not overnight. And here I was guided by a simple and fair concept: to not reduce the Social Security benefits that Americans have already earned. Pension law governing the private sector says that an employer can alter the rate at which employees earn future benefits, but the benefits employees have already earned must be paid. A similar principle should govern with Social Security. It’s one thing to say that we must change the rate at which we earn future benefits. People understand that the system isn’t financially sustainable and that we either must increase tax rates or change the rates at which we pay benefits in the future. But Americans resist the idea that a benefit that they’ve already earned will be taken away from them. So I calibrated the phase-in of the transition to the flat benefit in such a way that, at least to a decent approximation, Americans will not have Social Security benefits they’ve already earned taken away from them.
This flat benefit approach would effectively eliminate poverty in retirement, at least for long-term US residents. Immigrants would receive a guaranteed benefit pro-rated to the time they’ve lived in the country, using the same scale that Canada employs for its own minimum retirement benefit. But higher earners would have to save more and I’m confident they would save more. Overall, this approach would bring Social Security back to sustainable solvency without massive tax increases, while strengthening the safety net and leaving room in the budget for health care, welfare programs and other priorities.
Andrew Biggs is a resident scholar at the American Enterprise Institute. He works on retirement policy, public sector pay and other issues.
(c)2016, Andrew Biggs Used by permission. This column originally appeared in Forbes magazine.
Opinions expressed are those of the author, and do not necessarily reflect the views of ASPPA or its members.
- Log in to post comments