Presidential Candidates Want to Reform Social Security. Yay! But Their Plans Are Weak. Boo!

 

retirement_savings_seniors_crisis_2020_500x293-e1458572320360So 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.

4) Finally, the plan Biggs proposes:

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.

There are 3 comments.

  1. Inactive

    James Pethokoukis: 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.

    Sounds reasonable.

    I turn 65 this year. Plan on working at least another 7 years. After a lifetime of scratching around to just get by I have a job I love that pays well, is low stress, is unlikely to go away any time in the next 2-to-3 years, and has no heavy lifting. I realize this is close to unique. Landing it 3 years ago after a decade of scrambling around doing contract work was a miracle on the order of the Parting Of The Red Sea. I plan to begin collecting Social Security as soon as I won’t get docked (age 67 I believe, or maybe it’s 70) and save the money. I also plan to work until I fall over dead, or at least age 72, whichever comes first.

    1. All that being said, Social Security, Medicare, and public sector pensions are (to quote the line from Full Metal Jacket) “A great, big, sh*t sandwich, and we’re all going to have to take a bite.” Current beneficiaries must be required to give up something. It doesn’t have to be big, but it has to be meaningful. I would propose cutting the COLA to maybe 75% or even 50% of what it is now (which if I understand it correctly, is something like 100% of some number based on the Consumer Price Index). Low income people will just have to look into other programs that may be available, private charity, or (God forbid) family for help.
    2. There has to be some meaningful guaranteed benefit for younger wage earners. That would be private guaranteed accounts [although I despair of trying to explain to younger wage earners why this would be to their benefit].
    • #1
    • March 21, 2016 at 2:39 pm
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  2. Member

    Yes I’ll take option 4.

    We should consider what any of these programs would look like if they didn’t currently exist and we had to start them from scratch. What problems are we trying to solve and at what costs.

    • #2
    • March 22, 2016 at 1:16 am
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  3. Inactive

    Interesting how few people seem to have any interest in this topic at all. Maybe if it were titled Trump Hitler Salutes Clinton’s Cankles or something.

    • #3
    • March 22, 2016 at 3:15 pm
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