In the aftermath of the Great Recession, a debate over
Social Security, is heating up. This debate raises fundamental questions about
what kind of society Americans wish to live in. So far, the debate has been
between those deficit busters who say Social Security must be trimmed back to
reduce government indebtedness, and others who want to maintain it as is.
But the New America Foundation just released a study
that I authored that proposes a different approach: doubling the current
Social Security payout, and making it a true national retirement system.
Creating a more robust system of "Social Security Plus" not only would be good
for American retirees, but also would be good for the greater macro
economy.
Here's the dilemma that the U.S. faces. Since WWII,
retirement has been conceived as a "three-legged stool," with the three
legs being Social Security, pensions, and personal savings centered around
homeownership. But today most private sector employers have quit providing
pensions, and state and local government's public pensions are drastically
underfunded.
In addition, a collapsed housing and stock market,
combined with increased inequality even before the Great Recession, have
drastically reduced Americans' personal savings. In short, the "retirement
stool" no longer is stable and secure, and suddenly Social Security, which
always has been viewed as a supplement to private savings, is the only leg left
for hundreds of millions of Americans.
Studies show that people in the bottom two income
quartiles depend on Social Security for 84 percent of their retirement income, and
even the second richest quartile depends on Social Security for 55 percent of
its retirement income. Only the richest 25% of Americans don't rely
heavily on Social Security.
But the real problem with Social Security is not, as its
critics say, that it is underfunded. Contrary to gloomy predictions the program
is on solid financial footing, with the Congressional Budget Office projecting
that Social Security can pay all scheduled benefits out of its own tax revenue
stream through at least 2037.
The bigger problem is that Social Security's payout is so
meager, which is problematic since it has been thrust into this new role as a
de facto national retirement plan. Currently it replaces only about 33 to 40
percent of a worker's average wage from the year prior to retirement (compared
to Germany where it replaces 70 percent). That is simply not enough money
to live on when it is your primary -- perhaps your only -- source of retirement
income.
Doubling Social Security's individual payout would cost about
$650 billion annually for the 51 million Americans who receive benefits. Here
are some ways to pay for it.
First, lift Social Security's payroll cap that favors the
wealthy. Currently Social Security only taxes wages up to $106,800 a
year, and any income earned above that is not taxed. The net result is that
poor, middle class, and even moderately upper middle class Americans are taxed
12.4 percent (split between employee and employer) on 100 percent of their
income, but the wealthy pay a much lower percentage. Millionaire bankers
effectively pay a paltry 1.2 percent.
Making all income levels pay the same percentage --
that's how Medicare works - is popular with Americans and would raise
about $377 billion.
Second, with all Americans receiving Social Security
Plus, employer-based pensions would be redundant so businesses no longer would
need the substantial federal deductions they currently receive for providing
employees' retirement plans. These deductions total a whopping $126 billion
annually.
Those two alone would provide three-fourths of the
revenue needed to double Social Security's payout. Other possible revenue
streams exist, such as reducing or eliminating other unfair deductions in the
tax code which currently allow the top 20 percent of income earners to reap
generous deductions that most low and moderate income Americans cannot enjoy.
These include deductions for private retirement savings, homeownership, health
care and education. For example, individuals who have enough income to divert
for savings or investment are allowed considerable tax deductions for their
401(k)s, IRAs and pensions. Similarly the homeownership deduction for mortgage
interest only benefits people with sufficient income to buy a home. But the
poor and working class rarely can take advantage of these since they don't make
enough to itemize deductions.
These personal deductions were enacted by Congress in
part as a means to incentivize savings. While a certain number of
moderate income Americans benefit from these, if we enacted Social Security
Plus they would no longer need to rely on these deductions as vehicles for
retirement savings. Instead of buying a home as part of their retirement
plan -- which as we have seen is a risky investment -- they could put their
money into Social Security Plus. In 2010 the mortgage interest deduction alone
will amount to about $108 billion.
We also could implement this in stages, targeting first
those who are most in need. We also could allow active seniors who have not yet
reached full retirement age to take a half-pension and work at half-time
without losing their right to a full pension upon their retirement.
An expansion of Social Security -- one of the most
successful and popular social programs in American history, currently
celebrating its 75th year -- would be good for the macro-economy as well
because it would act as an "automatic stabilizer" during economic downturns,
keeping money in retirees' pockets and stimulating consumer demand. Benefits
would be portable when changing from one job to another.
It also would help American businesses trying to compete
with foreign companies that don't provide pensions to their employees, since
those countries already have generous national retirement plans. And it would
be broadly fair, since even those higher income Americans who are losing their
tax deductions would see part of it returned to them in the form of a greater
Social Security payout.
In short, Social Security Plus would provide a stable,
secure retirement for every American and contribute greatly toward a solid
foundation from which to build a strong and vibrant 21st century U.S.
economy.
