A fierce debate over Social Security is raging between deficit busters who say Social Security is unaffordable and must be trimmed back, and defenders who want to maintain the status quo. On Friday, the White House said President Obama's budget, which will be released next week, will propose that the program reduce cost-of-living payments. A Democratic president proposing any kind of cut to this popular New Deal program is a very big deal indeed, and predictably his plan drew outrage from liberal groups. But it also drew swift rejection by Republican House Speaker John Boehner.
Yet neither the trimmers nor the status quo advocates are facing up to reality. As I wrote here in December, the real dilemma is not the long-term solvency of Social Security but the fact that millions of Americans are facing an increasingly insecure and underfunded retirement. A more realistic assessment makes it clear that the solution to America's retirement crisis lies in expanding Social Security, not cutting it. In December, I suggested doubling the Social Security payout from the current stingy replacement rate of 33 to 40 percent of annual earnings, since most experts estimate that individuals will need at least 70 percent of their annual earnings to maintain their living standards in retirement.
But in a new policy paper that I co-authored, "Expanded Social Security," the New America Foundation proposes a new way to design a more robust retirement system that also decreases the total amount of national wealth expended on today's unstable system.
Here's how it would work.
Just as Medicare already has different components called Medicare A, B, C, and D, the Expanded Social Security program would have two elements: Social Security A and Social Security B. The current Social Security program (to be renamed Social Security A) would remain an earnings-based, defined-benefit plan, in which workers would accrue benefits based on lifetime earnings. The expected shortfall in funding for promised benefits, predicted to occur in the 2030s, would be bridged not with benefit cuts but through revenue increases, such as increasing the current payroll cap, which unfairly results in millionaire bankers paying a far lower share of their income toward Social Security than average wage earners.
Next, this plan creates what we call Social Security B, a universal flat benefit for all older Americans. Combined, Social Security A and B would be set at a level to meet the goal of replacing 60 percent of income for a middle-income earner, indexed to inflation, which would put the U.S. much closer to the income-replacement level of most developed nations.
Social Security B would be funded by revenues other than the payroll tax, such as by reducing or eliminating the substantial tax deductions that chiefly benefit the affluent. This year the government will spend $165 billion to subsidize individual retirement savings, nearly 80 percent of which will accrue to the top 20 percent of earners. In addition, the U.S. government spends about $100 billion per year on the home-mortgage deduction, yet income filers making over $100,000 dollars per year received nearly 75 percent of this benefit in total dollars in 2011. And businesses receive substantial federal deductions in the amount of $126 billion annually in return for providing their employees with retirement plans.