So let me give you four options for reforming Social Security.
1) There’s the Clinton-Sanders approach. Basically this would expand benefits and pay for them through higher taxes on higher-income Americans. Effective top marginal tax rates would rise by 12 percentage points. My colleague Andrew Biggs makes two big points regarding their plans. First, a large chunk of the benefit increases in both plans flows to folks in the top two-fifths of households — 21% under the Clinton plan and 44% under the Sanders plan. Second, neither plan would fix Social Security’s long-term financial problems despite those sizable taxes increases.
2) Then there’s the Trump plan, which would count on faster economic growth to shore up Social Security. But as the Urban Institute’s Richard Johnson and Karen Smith note recently, “faster economic growth puts the system on the hook for much higher benefit payments. As the economy grows faster and people earn more, they eventually receive more Social Security benefits once they retire.” Plus you are doing nothing to actually reform the system so that it (a) better delivers benefits to those who need it most, and (b) better supports economic growth. And you are assuming the rest of Trump-onomics would indeed produce faster growth.
3) The Cruz plan calls back to GOP plans in the late 1990s/early 2000s that would have meant partial privatization, allowing workers to divert a portion of their payroll tax payments into private accounts. But as Biggs has noted in the past, “diverting taxes to accounts leaves the program short of what is needed to pay benefits to today’s retirees. To cover these ‘transition costs,’ we would need to generate new revenues for the program, either by raising taxes, cutting other programs, or borrowing.” So, again higher taxes or more debt. And no deeper reform.
Americans don’t want Scandinavian levels of taxation and certainly not, in Mr. Sanders’s case, to pay higher benefits to mostly higher-income households. A well-designed but fiscally conservative Social Security reform could compete with either plan. For instance, a flat poverty-level retirement benefit paid to all, coupled with expanded access to 401(k)s, could eliminate poverty in old age, increase retirement saving, and make Social Security solvent at almost one-third lower cost than Mr. Sanders’s plan, eliminating the 12.4% payroll tax on retirees who continue to work.
So a flat benefit plus universal savings accounts that would make Social Security long-term solvent, reduce work disincentives, and target resources better to poor retirees.