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The GOP Needs a New Vision of Social Security Reform — and It’s Not Privatization
Recently I wrote about some conservatives who think Republicans should talk less about entitlement reform. Too gloomy. Too much “root canal” politics. But at least when it comes to Social Security reform, there is a path other than cut, cut, cut. It would make the program fiscally sustainable, create a reliable anti-poverty safety net in retirement, and encourage more Americans to save for retirement. AEI’s Andrew Biggs in National Review:
Beginning immediately, Social Security would pay every long-term U.S. resident a minimum benefit pegged at the poverty threshold of $950 a month, regardless of the retiree’s work history or earnings. This minimum benefit would take the place of both the redistributive aspects of Social Security and the Supplemental Security Income program, but do so with greater protections against poverty and no prohibition on work and saving. In fact, the Social Security payroll tax would be eliminated at age 62 to encourage longer work lives. But over several decades, the maximum Social Security benefit would be scaled down so that eventually every retiree will receive the same flat dollar benefit from the government.
For the bottom third of retirees, benefits would increase, but for middle and upper income Americans, benefits would decline relative to currently promised levels. This makes sense. At any given time, higher-income Americans are less dependent upon government than lower-income households. As incomes rise over time, Americans should gradually become less dependent on the government for income in retirement and more able to build their own savings.
To ensure an adequate retirement income, middle- and upper-income Americans would need to save more on top of Social Security. Federal policies should work to help them do so. Currently, around half of employers automatically enroll their employees in 401(k) plans, a policy that dramatically expands participation. Auto-enrollment should be made universal, as a simple best practice for pension administration.
To expand pension coverage by small employers, which often find 401(k)s costly to establish, Congress should allow for less-expensive “Starter 401(k)s” and multiple employer-defined contribution plans, as proposed by Utah senator Orrin Hatch. Finally, 401(k) plans should adopt auto-escalation, which gradually increases contributions over time. Again, employees can withdraw, but most don’t even notice the increased contributions, and the vast majority choose not to reduce them.
This plan would not cheat Americans out of Social Security benefits they had already earned. But it would change the terms on which Americans earn future benefits, to a paradigm in which government provides a real safety net against poverty — the ultimate “retirement crisis” — but treats middle- and upper-income households as adults who can and should generate most of their retirement income through their own saving. Unlike the actuarial minutiae of conventional Social Security–reform plans, this new approach would give a presidential candidate a compelling agenda to talk about in plain English that ordinary Americans can understand
And for those who desire international confirmation, Biggs points out that “New Zealand, the United Kingdom, and Australia have all evolved in the same direction.”
Now the basics of Biggs’s plan are already out there, and I can’t understand why all the GOP 2016ers haven’t flocked to it. This is a very different vision than what many Democrats are proposing, which is “an expanded Social Security program supplemented by government-run savings accounts, a model in which most Americans could eventually receive the vast majority of their retirement income from government programs.” Some on the right are still clinging to privatization/personalization where money would be diverted from the current system.
But here are two explanation from Biggs on why they should give up the dream. First, in a podcast with me:
When the personal accounts were proposed in the mid-1990s through to when President Bush pushed them around 2005, Social Security was running surpluses equal to around 2% of payroll, collecting a 12% tax, but the cost to the system was only 10% of your wages, leaving extra money. The government takes that money, spends it, and credits it to the Social Security Trust Fund. There’s no saving going on.
People proposed personal accounts funded at around 2% of the payroll. You could take that money, put it into the account, and save it to pay benefits in the future. The surpluses that funded the accounts have mostly turned into deficits partly due to an aging population, but partly due to the weakness of the economy, fewer people are working and paying taxes. Letting people take some money out for a personal account, at least in the short-term, makes that deficit worse. Transition costs come about where you have to come up with the extra money to fund these accounts.
And Biggs in National Review:
Published in EconomicsOne problem for the Bush administration’s reform drive in 2005 was that many congressional Republicans had bought into the idea that accounts reduce or eliminate the need for tax increases or benefit cuts. Finding out they don’t may have taken some wind out of their sails. … President Bush’s 2001 Commission to Strengthen Social Security (on which I was a staffer) wrote that once the program began to run payroll-tax deficits — something that happened this year — policymakers would face difficult choices to raise taxes, cut benefits, reduce other programs, or increase the budget deficit. … With personal accounts, we face the same choices, only sooner.
If workers invest part of their Social Security taxes in personal accounts, they could indeed earn higher returns and generate higher benefits without taking more risk. But 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.
Ugh, isn’t that the base of the Republican Party? Electoral victory requires to some degree putting a chicken in every pot but certainly not taking the chicken out of the pot of the folks you expect support from. How is that supposed to be a winning approach?
On second thought, if it doesn’t effect current retirees, only future retirees, perhaps – and only perhaps – the base won’t mind.
I still think there is a way to allow the people more control over their Soc Sec, certainly more than what is in place now. I also think we can solve the worker-to-beneficiary ratio by implementing means testing. That’s right Warren Buffet, you want a tax system that targets the wealthy and transfers that revenue to the poor, then here’s your plan. That also requires that we categorize all income the same no matter how it is made and is thus susceptible to the payroll tax. It would in effect simplify the tax code some because you have have income taxes, payroll taxes, and medicare/medicaid taxes. Not very “Conservative” I know but if we can’t get people to buy into privatization then maybe we can get people to buy into the idea of scrutinizing how taxes are collected and how the money is spent. If you are paying into a system knowing you are not going to get anything out of it–which according to long term projections people my age and lower have good chance that is already the case–then you are going to want to know if the Soc Sec disability folks are actually in need or not. It’s just a thought.
I like this approach, and hate the idea of “means-testing”. My parents have worked hard their whole lives, and lived well below their means in order to save for retirement. Why should they get less benefits than those who didn’t save? It creates a terrible disincentive. Under this plan, those who payed more still get more, though it eventually turns into a flatline. It keeps the incentive to save while reducing future outlays, while keeping the safety net for older folks to live above poverty.
Manny I think if you target the means testing to the very upper income earners then the rest of the Middle and upper Middle earners won’t mind so much.
The only way this works is to admit the payroll tax is a regressive tax that goes to the general fund and stop calling it FICA. Change the name to “Basic Tax” and we have the basis for a flat tax for 50% of the people.
I read this stuff and it makes me realize I don’t have enough bullets.
Oh yeah, but I bet that doesn’t generate much revenue for the system.
Continue Social Security for those currently retired. For those not yet retired simply pay back what they have paid into Social Security over their working lives (yes, this would be a huge, albeit one time massive deficit), all of which would go into a 401(k) account. Those people within 10 years of retirement could have the option to chose one, or the other.
Going forward you could have mandated 401(k) contributions. I would also do away with all pensions, public and private, which would also all go into 401(k) accounts (since pensions are all Federally insured, we’re on the hook when they fail, like Social Security will).
Post-great recession I don’t think this is palatable to the public, and post-Obama I don’t think we can afford the interest on this debt.
I’m 61, and I would happily settle for just getting my Social Security taxes back as a lump sum. I would have happily opted out of the Ponzi scheme up until my 50s with no payback at all.
Unfortunately you are probably right.
This is a viable suggestion. Pay them back the special trust receipts and hopefully that induces more people to care about balanced/surplus budgets.
This approach is effectively a means test.
Not that I oppose means testing. I’m in favor of basically any tangible cuts to entitlements that we can get.
What I meant by “means test” is reducing social security benefits to the rich below what other people get. I’m ok with a reduction in benefits overall. Basically I want the benefit curve to either go up with wealth or be flat, not slope down.
Robert: Is your argument is that as soon as you reach a majority on the left-side of the income distribution curve, the wealth of those on the right of the line is fair game? That definition of “means testing” is just me deciding when you got enough and when I need it more.
We are still not on the same page, as the plan in this piece does reduce benefits to the rich below what other people get.
Yeah we’re definitely not on the same page. Could you show me where you see that? My impression was that the rich get less than they were promised under the current system, but still more or equal to others in absolute dollars.
Someone define “rich”.
Everyone that has $1 more than me or you. And if they have a newer car they are shallow and materialistic.
The pastor at a Church I attended for years did a great sermon about this.
There are presently many small business plans, including the Simplified Employment Plan (SEP) and the Simple IRA. The Fidelity website also shows a Self-Employed 401K plan. Any of these could be used (especially the Simple IRA) or modified to accomplish much of the “Starter 401(k)s” discussed above.
Let’s all quit buying into the FDR ruse that this welfare project was an “insurance plan.” That was cynical ploy that he (brilliant devil) thought would bind us to the argument that we keep having to this day (and this thread). He stated that as long as everyone thought that they have “paid in” and were “due” benefits there would never be the political will to trash it.
All we can afford is a welfare program that provides a decent floor for those who, for whatever reason, just can make it. That should be “means tested” and the benefits and threshold should be agreed upon by the 60% of us who will pay it. That is very different from the “means test” that is agreed to by the 60% who will receive it from the 40% who will pay it.
No Republican candidate should do anything more between now and election day than dispense platitudes about “keeping the system sound for now and the future.” Any move toward reform will be painted by the Left as the candidate throwing grandma off a cliff into a snow bank with no food or medicine, then micturating onto her over the edge while lighting a big cigar with a $100 bill and laughing manically.
After the election, get to work and say “I promised to keep the system sound, and here’s how we’re going to do it.”
What I’d like to see happen is meaningful reform with a few basic principles observed:
What I expect to see happen is that the Left will fight on bloody stumps like Leonidas at Thermopylae to prevent any reform. The Republicans will be too busy stroking their cronies to engage the issue with any seriousness. So we’ll muddle along until the system collapses.
Good points, Nick. #2? $2500 or $25000.
I would rather see an inflation-adjusted floor to benefits instead of any COLA, which would result in a small benefit cut every year as we inflate our way out of this mess.
The favorable tax treatment of SS benefits should be eliminated. If the SS benefits are the total income there is not any significant tax liability now. There is no reason to treat SS benefit income different from other income as the marginal rates increase with AGI (adjusted gross income) which could result in a high-income tax payer effectively returning 39 % of the benefit back to the Treasury. ( I know this is already the case for most SS payments but some is still sheltered)
It’s hard to tell. We only tax the first 120K for Soc Sec so if we lifted the cap and means tested the benefits it might go a longer way than what we have now.
I don’t have a scientific formula for what I am talking about, but if Warren Buffet wants to bloviate about how he isn’t paying enough in taxes then I say let’s give him what he wants and shove that money to others who might be helped with it. He obviously wants to give it away. How about “means testing” defined as “if you make multi-millions a year in any way and you advocate for higher income taxes while all you pay is capital gains, then you get a good chunk taken away and it will be given to someone else.” I’m basically wanting to use the state as a hammer against moron super rich who want to raise my income taxes by making really stupid arguments about their secretaries.
Warren Buffet and his “raise my income taxes when I really only pay capital gains taxes.”
For most retirees, 85% of the SS received is taxed anyway, even for many in the 15% marginal (< 75K for a couple) bracket! You could increase it to 100% is taxable, but it wouldn’t help that much, and would piss off retirees who have paid the maximum their entire working career.
Sorry to say this, but try again.
I have no particular objections to the workings of this proposal, but how would it not be privatization? Of course it’s not complete privatization, but that hasn’t stopped other partial privatization plans from being vilified as privatization. Am I missing something?
Years ago, I heard a sermon in which the preacher quoted the following statistic (He was a Baptist preacher, so it must be true, right?) –
When asked how much money a person would need to be “happy,” respondents of all income levels, rich to poor, came back with a number that was approximately 15% more than they were currently earning. The sermon point was that we all think we can purchase happiness, and of course, we can’t. But it was an interesting bit of data.
On the other side of the coin, a friend of mine once quipped, “It’s true that money can’t buy happiness. But it sure can smooth out the bumps in the Road of Life.”