Over the past week, Andrew Biggs of the American Enterprise Institute—and friend of the Foundation—and Michael Hiltzik of the Los Angeles Times have engaged in a debate over whether Social Security contributes to the federal deficit. The debate started over comments made by former Treasury Secretary Timothy Geithner in his new book Stress Test. Specifically over his disagreement with the White House over the statement that shortfalls in Social Security doesn’t add a dime to the deficit. The former said it does; the latter said it doesn’t. Andrew Biggs, in a number of posts—here, here, and here—provides evidence as to why shortfalls do impact the federal deficit.
Senator Marco Rubio (R-FL) this past week released a proposal to fix some of the problems with Social Security. He laid out three goals:
- Make it easier for Americans to save for retirement;
- Insure the long-term financial stability of the Social Security;
- Save Medicare.
Too the surprise and consternation of many on the Left and Right, Senator Rubio’s proposal doesn’t call for the privatization of Social Security. Rather, his objective is to put Social Security on a more stable financial footing in order to preserve it for future generations. Reihan Salan at National Review writes: “Rubio made it extremely clear that he doesn’t just begrudgingly accept Social Security as a concession to political reality that he would eliminate if he could. He makes an affirmative case for Social Security, which he characterizes as a central element of the American dream.”
The senator’s reforms include: (1) allow workers who don’t have an employee pension plan to enroll in the federal government’s Thrift Savings Program; (2) eliminate the payroll tax on those workers who reach retirement age; and (3) end the Retirement Earnings Test, which in affect is a 50 percent marginal tax rate on wages.
One of the best ways to reduce the mounting future liabilities of Social Security is to increase the retirement age—a proposal that faces stiff opposition in Congress. Yet as anyone who has taken an economic course knows is that incentives matter. Senator Rubio’s latter two proposals gives workers the financial incentive to work longer if they choose.
Charles Blahous comments on the recent push to expand Social Security benefits. He provides ten factors to keep in mind when thinking about changing the program. He writes in conclusion:
But there are good reasons why such proposals have not been supported by mainstream Social Security analysts to date. Not only would such a benefit expansion render it still more difficult to maintain Social Security solvency without large, economically damaging tax increases, it would worsen many existing program inequities, depress worker living standards, and further undermine low-income individuals’ ability and incentive to put aside savings of their own. Though such proposals may bear a superficial political attraction for some, the policy consequences of their actual enactment would be hugely damaging.
A recent post linked to an article which discussed the upcoming cost-of-living-adjustment (COLA) which the Social Security Administration will apply to retiree benefits in January 2014. The article was negative in nature in that it implied that seniors’ benefits have not kept paced with inflation. Continue reading
Last Friday, Slate.com, New America Foundation, and Arizona State University hosted a series of panels discussing the implications of increasing life expectancy on public policy, retirement, and family planning.
Savings defaults, auto-enrollment, and financial literacy were hot topics. Nudges, “guardrails,” and redefining “retirement” are discussed at length.
Life Expectancy Rate and Impact on Retirement (~40 minutes)
Yesterday, while the Senate as a whole was waiting out Senator Cruz during his negotiated “filibuster” to move forward the continuing resolution to fund the government past September 30th, the Senate Special Committee on Aging took a little more than an hour and half during the afternoon to reexamine the increasing concern among Baby Boomers that they won’t be able to retire at age 65, or if they do, not at the standard of living that they’ve grown accustomed to during their productive years.
Baby Boomers find themselves nearing the Social Security full-benefit retirement age much less financially prepared than they hoped they’d be. The percentage of Boomers carrying debt ages 51 to 62 has risen six percentage points to 70 percent since the early 1990s, and the average debt has risen four-fold to $28,300 — all while the changing landscape in company provided retirement benefits has left many unexpectedly working into years they’d previously set aside for leisure.
There was surprisingly little mention of the dire situation that the Social Security Trust Fund currently finds itself in, or that since the 1950s the average American worker is actually retiring earlier- now 62 years old compared to 68 y/old. Not to mention life-expectancy has risen from 72 y/old to early 80s for workers retiring now–meaning Baby Boomers are expecting to spend approximately a third of their adult life in retirement. Although the remedies offered up for securing Baby Boomers’ golden years were nothing new– greater financial literacy, mandatory life insurance plans, auto-enrollment in company sponsored savings plans, and modifications to Social Security– the discomfort in addressing our own notions of what retirement should be was obvious.
“We’re coming to some tough conclusions here… Work longer is one conclusion. That certainly wasn’t the way it was in the previous generation,” said Chairman Bill Nelson, Senator from Florida.
Today is the anniversary of the implementation of the Social Security program, first implemented in 1935 in an effort to provide security for the elderly as the moved out of the workforce and into retirement. In the intervening years, there has been much debate over both the wisdom and the efficacy of the program, yet throughout it has remained the metaphorical “third rail” of politics, something you simply don’t touch.
Today, however, the future of the program is in doubt, as rising deficits and a lower birth rate threatening to drive Social Security into bankruptcy. In light of this, many have argued that the program needs reform, with reduced benefits, means testing and even privatization being offered as solutions to preserve benefits for future generations.
From the other side of the political spectrum, Social Security garners high praise, and attempts to limit benefits are viewed as mere partisan politicking. Instead of cutting Social Security, these analysts argue, it should be expanded by removing the income cap and increasing contribution rates.
It is good that reform is at least being talked about, although neither side can agree on which path to take. The one thing we can all agree on is that the status quo is unsustainable, and without some sort of reform in the near future, Social Security is in serious danger of collapsing under its own weight.
Senator Schatz from Hawaii has, in cooperation with Senator Tom Harkin from Iowa, introduced a bill to expand Social Security benefits while changing the way in which inflation is calculated under the program to better reflect the costs of living faced by seniors.
This will amount to an increase in benefits of about $65 per person per month, and will remove the current Social Security wage cap.
Social Security reforms are currently being pulled in two different direction by those who believe the program needs strengthening to ensure a comfortable retirement for seniors and those that fear the program is already insolvent and that increased benefits will merely hasten its collapse. As such, any legislation on the issue is destined to face fierce opposition and debate, with results unlikely to be forthcoming in the near future.
Peter Ferrara at The Heartland Institute presents a way for the federal government to transition Social Security from a pay-as-you-go system to one of personal accounts owned by each worker. The policy brief is entitled: Social Security Personal Accounts: Prosperity for All. Ferrara’s suggestion is relevant in the wake of the bankruptcy filing in Detroit and the likelihood that many other state and municipal governments will do the same in the coming months. Continue reading
In response to a declining federal budget deficit, Democrats have begun to push for expansions in Social Security benefits, rather than simply opposing cuts. President Obama’s proposal to use Chained-CPI as a measure for inflation, a move that would have resulted in an effective benefit cut, has been replaced by a new measure known as CPI-E, a system which supposedly adjusts for inflation based on the different ways in which seniors spend money, and which would amount to a benefit increase.
The requested expansion would put a strain on an already insolvent program, but Democrats have proposed paying for the benefits by removing the income cap on the Social Security FICA tax, which currently kicks in at $113,700 of income a year.
The plan is being floated by Senators Tom Harkin and Mark Begich, and is expected to meet heavy opposition from the Republican side.
Australia has repeatedly been cited as an example of a retirement savings system done right, with American policy makers attempting to integrate ideas from the country into our own ailing system. Now, Larry Kotlikoff is pointing to another Pacific Rim country for ideas on Social Security reform-New Zealand.
Kotlikoff, who rose to prominence giving Social Security tips on PBS, insists that the inherent complexity of the Social Security system is one of the main obstacles to its success. Retirees in America are often unsure of how much money they can actually expect in benefits, as all of the various rules and exceptions involved can be difficult for the average person to calculate, much less understand. This uncertainty leads to errors in saving behavior, where workers expect more in benefits than they will actually receive, and so do not put enough money away to ensure a comfortable retirement.
In speaking of alternatives to so complex and uncertain a system, Kotlikoff offers the following as a counterexample.:
It’s New Zealand, which features a very stable democracy with a social security system that has only one rule (ours has thousands). Their rule is this: When you reach 65, you receive the same amount in benefits as everyone else 65 and older who enjoys the same marital status and living arrangement.
A simplification of America’s Social Security program could be a major factor in ensuring its solvency and increasing retirement security and certainty for the retiring Baby Boomer generation.
The unfunded liabilities of Social Security get a lot of attention, with both to cut benefits and expand funding, as well as other more comprehensive efforts at reform, but few remember the vastly underfunded Disability Insurance program also run through the Social Security Administration, and expected to run out of money entirely by 2016.
Disability payments have been skyrocketing over the past several decades. Theories as to why are varied, but the salient point is that there is simply not enough funding to handle the influx of claims, and when it runs out cuts will have to be made in other areas. What this likely means is dramatically reduced benefits, not just for the disabled, but for retirees in general as the SSA is forced to raid the general fund to pick up the slack on its other liabilities.
Higher taxes to help pay for these shortfalls are also a real possibility that would effect everyone, not jut retirees or those collecting disability benefits. Reform is badly needed if we are not to expect drastic and sudden cuts that will leave millions out in the cold, but whether that means changes to eligibility requirements, greater protection against waste and fraud, means testing or alternative revenue remains to be seen.
This helpful article from the Wall Street Journal’s Marketwatch outlines ten things the Social Security Administration won’t tell you. In addition to offering some useful advice for retirees, it also points out inherent weaknesses in the system and and underscores the dangers of putting off real reform any longer. Among the most alarming facts are the following:
– The SSA is taking in less in taxes than it is paying out in benefits
– Increases in disability claims are draining the trust fund faster than expected
– Payroll taxes are higher and benefits are lower than they were a generation ago
– Social Security benefits can be subject to taxation if you have substantial income from other sources
– Cost of living adjustments understate the expenses faced by seniors
The fact that these concerns point both to the seemingly contradictory issues of shrinking benefits for retirees and looming insolvency for the program as a whole is telling. There are clearly deep structural problems with Social Security that need to be addressed, and sooner rather than later.