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.
But this expansion of Social Security would make both tax-favored employer-based pensions and tax-favored individual-savings vehicles less necessary, allowing the government to reduce or eliminate federal tax breaks for those private programs.
Expanding Social Security doesn't have to be a massively expensive proposition. The overall retirement system, including not only Social Security but also private components such as disbursals for the employer and individual retirement plans, currently consumes about 13 percent of the nation's gross domestic product. Our proposed expanded Social Security system, combined with a smaller private savings component, would use up an estimated 12.4 percent of GDP. That might sound like a small difference, but in a $14 trillion economy, it amounts to about $80 billion in potential annual savings.
So this double-decker public system would spend less of our nation's wealth on retirement than the current public-private mix. And it would make the system as a whole much more efficient, fair, and stable. A version of this system already is being used successfully in other countries, such as Canada, Japan and Luxembourg, which have both a basic flat public pension and a public defined-benefit program based on earnings.
In addition to increasing the retirement security of most Americans, Expanded Social Security would have other benefits for the broader macroeconomy. It would make each individual's retirement plan portable from job to job, so that a worker would be able to pay into his or her retirement no matter who the employer is. It also would act as an "automatic stabilizer" during economic downturns, keeping money in retirees' pockets and stimulating consumer demand, especially among low- and middle- income individuals who are more likely to spend an extra dollar on goods and services than are affluent individuals.
And Expanded Social Security would help American businesses trying to compete with foreign companies that don't have to provide pensions to their employees, since those countries already have national retirement plans.
In reforming America's retirement security system, we should build upon what has worked, rather than cutting existing programs, as President Obama is preparing to do. Expanding the ever-popular Social Security would provide a more stable and secure retirement for every American and contribute greatly toward a solid foundation for a strong, vibrant 21st century economy.