Social Security – A Modest Proposal
Although I’m really sick of this topic, I didn’t want to quit without considering a positive approach and making a fair effort to reconcile the different perspectives that I’ve seen reflected in the media and, more immediately, in the comments and emails received here at EA. I’m not a believer that there’s any kind of “crisis” in Social Security – or at least, not one that demands attention ahead of the real financial crises looming in Medicare and the general budget – but it seems clear that the program could use some shoring up, both in terms of financial and political capital.
Let’s start from a few shared goals and assumptions:
- Although Social Security is, by political design and necessity, a universal entitlement, its primary goal is to insure retirees who are at risk of poverty rather than allow upper middle class seniors to feather their nests.
- It’s important to our long-term financial security to increase the national savings rate, increasing the amount available for investment and reducing our dependence on foreign investment.
- It would be nice to be able to improve on the low returns of the Social Security trust fund, which is based exclusively on T-bill holdings.
- Allowing younger workers some flexibility as to how and where they invest their retirement money is not a bad thing, so long as it does not put workers at risk of ending up below a livable floor of benefits or incur outrageous transition costs.
- The payroll tax that funds Social Security is regressive. Raising the payroll tax limit puts the entire burden of funding on labor (albeit well-paid labor), while reducing it at the margins is likely to have a stimulative effect on the economy and a positive effect on household wealth.
- Demographics indicate that people are living longer, and any change that encourages productively-employed seniors to defer collection of benefits contributes to the systemic health of Social Security.
- Reducing benefits or the formula for calculating benefits for current or near-term retirees dooms any proposal from a political standpoint.
These points are where I’m coming from. My goal is to improve on a well-managed system for maximizing social and economic good for current workers and retirees across the economic spectrum, whether through direct government involvement, market forces or some combination of the two. So here’s my idea:
- Lower the SS payroll cap to $65,000 and reduce benefit payouts accordingly. Setting the cap lower means payouts will remain the same for everyone making less than $65,000 (since their contributions will remain the same), but the maximum monthly Social Security check that high-wage workers will be eligible for will be a lot lower. The rationale here is that for folks who make between $65-90K, the marginal value of the additional SS benefit doesn’t make much of a difference, so why not put that FICA tax back in their pocket? This better aligns SS with its real purpose, which is to provide a retirement income for people too poor to save much on their own, while keeping it as a broad-based program that provides a floor level of retirement benefits for every working American. Those making $65K+ are probably also at less risk of making unwise or unsophisticated investment choices (and if they do, they will still be sufficiently insured by the full Social Security benefit they will receive). This eliminates one of my primary objections to privatization, which is that it exposes and encourages risk among those who are least equipped to deal with it. Of course, lowering the payroll tax cap reduces revenues going in to the Social Security system, making the financial problems worse, so I propose in addition that we…
- Expand ROTH/IRA provisions to encourage savings. Allow workers to save up to 10% of their income over $65K in ROTH/IRA-like accounts (That is, if you make $110K, you could put away $5500/year in this plan). An initial 12.4% flat rate would be assessed on money going into the account, but all subsequent capital growth would then be tax free. The 12.4% would go directly into the SS budget, not the general fund, to replace the lost revenues from the payroll tax. High-income workers would probably love this, as their retirement savings would be taxed at a much lower rate than their income bracket, which almost certainly ensure that voluntary participation would completely cover the gap and add to Social Security revenues. Participants would also have complete choice of financial institutions and investment options, without the government overhead in management costs or regulation. Since they already receive the maximum level of SS benefits on their pre-$65K income, they wouldn’t be betting the milk-money, but could definitely benefit from better returns using the financial vehicles of their choice while the public and the market benefit from higher investment and savings. Those making less than $65K/year (or who desire to save more than the maximum allowed under the new plan) could of course still use their existing tax-deferred IRA accounts.
- Scale retirement age by income. Currently, I believe anyone is eligible to begin collecting partial SS at age 59.5. Instead of making that a blanket policy (which is really hurting the financial health of the system, by increasing the number of years that people collect benefits), phase in the ability to collect SS by income, lowest to highest. That is, those making the lowest incomes can retire with full benefits sooner, while those eligible for higher benefit levels (by making higher incomes) would have incentives to continue working until age 67 or later. This lets low-income folks, who are more likely to have shorter life-expectancies, retire from low-paying jobs at an age where they can still collect their benefits and enjoy some good years of retirement, while keeping productive, high-wage workers in the workforce longer and deferring high-benefit payouts.
The way I see it, this proposal has something for everyone.
- Low-income workers would still enjoy the full guaranteed benefits of the current Social Security system (now totally solvent), with the additional ability to retire earlier at higher benefit levels.
- Middle-income workers ($65-90K) get a break from the payroll tax (in exchange for accepting a lower SS benefit when they retire – a good deal if you make this much anyway), still receive a guaranteed Social Security benefit at the highest level, and would have a great incentive to invest a portion of their savings in their own account with tax-free growth.
- High-income people and those who currently avoid FICA taxes by taking income as dividends rather than wages (e.g., business owners) would have incentive to participate more fully in the system because of the enormous advantages in being able to shelter wage income in the new accounts.
It helps the system by dramatically by bolstering finances (through the up-front tax on the savings account contributions). It provides the complete freedom and flexibility of private accounts without government intervention or transition fees. It will certainly increase national savings. And it preserves Social Security as a universal entitlement and a safety net for workers who can’t (or don’t) save much on their own.
I’m not an economist, so I’m certain that there are huge pitfalls and hidden costs here somewhere. This is just a back-of-the-envelope idea. But it seems on the surface to address many of the major concerns of everyone in the debate – assuming (wrongly in some cases, I’m sure) that even privatization advocates are acting in good faith. I welcome comments and also invite readers to spread this idea around for a wider range of input.
9:17:53 AM 
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