Free Republic
Browse · Search
News/Activism
Topics · Post Article

Skip to comments.

Social Security Reform: A Conservative Plan; Strengthen safety net, build private savings on top.
National Review ^ | 11/04/2015 | by ANDREW G. BIGGS

Posted on 11/04/2015 7:13:16 AM PST by SeekAndFind

Social Security's financial health has deteriorated significantly over the past eight years, with multi-trillion-dollar funding shortfalls posing a threat to retirees and taxpayers alike. But if Social Security is to thrive in the 21st century, the next president needs to do more than simply adjust its tax and benefit rules. Instead, Social Security needs a new paradigm for how individuals and government programs contribute to retirement security.

Social Security receives scant attention compared to many other policy issues, large and small. But Social Security is an important program, both in its impact on Americans' lives and in what it says about the political parties' philosophies. The scale of Social Security's reach is enormous: It is the biggest federal-government program, the largest tax most American workers pay, and the largest source of retirement income for most households. Americans interact with Social Security from the day they enter the workforce as teenagers to the day they die, and Social Security affects how much they work, whether they become disabled, when they choose to retire and, some research shows, even how many children they choose to have. How the political parties deal with the program -- with its day-to-day functioning, with its $10 trillion–plus long-term deficit, and with how Americans save for retirement on their own -- says a lot about their governing philosophies.

Americans have not yet been so co-opted by the welfare state that they embrace progressive activists' model of an expanded Social Security program supplemented by government-run savings accounts, a model in which most Americans could eventually receive the vast majority of their retirement income from government programs. But Americans have gone far enough down that road that a conservative agenda on Social Security reform has to be about more than simply cutting benefits. Whatever the conservative policy approach may be, on a program as large and important as Social Security, there has to be a philosophy of governance behind it.

The philosophy under which Social Security was founded in 1935 states, "A program for the poor is a poor program." President Franklin D. Roosevelt explicitly wished to distinguish Social Security from what then was called "relief” and what we today would call "welfare.” Participants must work ten years just to qualify for benefits, and benefits increase with the worker's earnings. Benefits are progressive, but a worker earning the maximum taxable wage of $118,500 still receives a benefit 3.5 times that of a worker in the bottom fifth of the earnings distribution.

"Earned benefits” unquestionably strengthen Social Security's political support, and were affordable in a time of favorable demographics. By demographics I mean not simply the ratio of workers to beneficiaries, which was much higher in Social Security's early decades than it is today, but also the fact that most households were composed of a married couple in which an adult male regularly worked.

When the population ages and the ratio of workers to beneficiaries falls -- as it has, from about 16-to-1 in 1950 to less than 3-to-1 today -- paying generous benefits to middle and high earners is expensive. Over one-third of all Social Security benefits are paid to households in the top lifetime-earnings quintile, and nearly two-thirds flow to the top two quintiles. Much of the increase in Social Security's costs comes from paying higher benefits to higher-earning households.

Just as important, old-age poverty in the 21st century has different causes than it had in the past. An individual who works at a low-wage job every year of his life -- a person who in reality is quite rare -- will retire with a Social Security benefit that, while certainly not opulent, will keep him out of poverty and enable him to maintain his pre-retirement standard of living. In reality, though, most people retiring poor today had only sporadic attachment to the labor force during their working years. The highest earning quintile of workers retires with roughly twice as many average years of work as those in the bottom quintile. As a result of their short work histories, nearly one-fifth of the poorest quintile of retirees fail to even qualify for Social Security, and nearly one-third of those who do qualify receive a benefit below the poverty line. The poorest retirees can fall back on the Supplemental Security Income program, but this means-tested welfare plan also pays a sub-poverty-level benefit and effectively prohibits recipients from working their way out of poverty.

The result is a poverty rate among the elderly of 10 percent, despite Social Security spending sufficient to pay every American over age 65 a benefit roughly 12 percent above the poverty threshold. This is a very expensive way to not protect against poverty.

So far, most presidential candidates in both parties are sticking with the old script. On the Democratic side, Senator Bernie Sanders wishes to expand Social Security, raising taxes substantially to do so. But his plan would still leave someone who had worked and paid Social Security taxes for just under ten years with no entitlement to benefits. In fact, under Sanders' plan, households in the top lifetime-earnings quintile receive percentage benefit increases almost as large as those in the poorest quintile.

As for the Republicans, the general philosophy seems to be "keep doing what we've been doing, just less of it.” Governors Chris Christie and Jeb Bush have proposed combinations of retirement-age increases, means-testing on upper earners, and adjustments to various benefit formulas, producing a system that, while more financially sustainable, would be vastly more complex and still lacking a safety net adequate to inspire confidence among Americans. And without the confidence that they will not fall into poverty in retirement, many middle and high earners will not accept the benefits reductions needed to restore Social Security to solvency.

#share#But there is a new paradigm that rejects the "program for the poor is a poor program” credo in favor of a different philosophy: that if government provides a solid, reliable safety net against poverty in retirement, retirement saving on top of that base should largely be entrusted to individuals investing in private-market accounts that they, not the government, would control.

New Zealand, the United Kingdom, and Australia have all evolved in the same direction: The government provides a guaranteed minimum retirement benefit of about $1,000 per month. New Zealand pays this benefit to all residents, the U.K. scales it based upon the number of work years, and Australia means-tests the benefit based upon other income. But in all cases, the government aims at providing a solid base income to keep retirees out of poverty, not generous benefits for middle- and upper-income households.

On top of that base, individuals participate in 401(k)-type defined-contribution retirement plans. In Australia, participation is mandatory, though only the employer must make contributions, of 9.5 percent of worker wages. In New Zealand and the U.K., workers are automatically enrolled but may withdraw if they choose. In those countries, both workers and employers contribute, and the government provides a modest match.

I have proposed a similar reform for the U.S. Social Security program. Beginning immediately, Social Security would pay every long-term U.S. resident a minimum benefit pegged at the poverty threshold of $950 a month, regardless of the retiree's work history or earnings. This minimum benefit would take the place of both the redistributive aspects of Social Security and the Supplemental Security Income program, but do so with greater protections against poverty and no prohibition on work and saving. In fact, the Social Security payroll tax would be eliminated at age 62 to encourage longer work lives.

But over several decades, the maximum Social Security benefit would be scaled down so that eventually every retiree will receive the same flat dollar benefit from the government. For the bottom third of retirees, benefits would increase, but for middle and upper income Americans, benefits would decline relative to currently promised levels. This makes sense. At any given time, higher-income Americans are less dependent upon government than lower-income households. As incomes rise over time, Americans should gradually become less dependent on the government for income in retirement and more able to build their own savings.

To ensure an adequate retirement income, middle- and upper-income Americans would need to save more on top of Social Security. Federal policies should work to help them do so. Currently, around half of employers automatically enroll their employees in 401(k) plans, a policy that dramatically expands participation. Auto-enrollment should be made universal, as a simple best practice for pension administration. To expand pension coverage by small employers, which often find 401(k)s costly to establish, Congress should allow for less-expensive "Starter 401(k)s” and multiple employer-defined contribution plans, as proposed by Utah senator Orrin Hatch. Finally, 401(k) plans should adopt auto-escalation, which gradually increases contributions over time. Again, employees can withdraw, but most don't even notice the increased contributions, and the vast majority choose not to reduce them.

This plan would not cheat Americans out of Social Security benefits they had already earned. But it would change the terms on which Americans earn future benefits, to a paradigm in which government provides a real safety net against poverty -- the ultimate "retirement crisis” -- but treats middle- and upper-income households as adults who can and should generate most of their retirement income through their own saving.

Unlike the actuarial minutiae of conventional Social Security–reform plans, this new approach would give a presidential candidate a compelling agenda to talk about in plain English that ordinary Americans can understand.

Make no mistake: This is a conservative plan, at least as far as cost is concerned. Not only would Social Security be made permanently solvent, but over the long term the program would run a substantial surplus. The reason is simple: guaranteeing Americans against poverty in old age isn't expensive, so long as Social Security doesn't also pay higher-earning households benefits that are two and three times the poverty level. A true guarantee against poverty in old age is a promise that progressives would like to make, but that only a fiscally conservative plan could deliver.

-- Andrew G. Biggs is a resident scholar at the American Enterprise Institute.


TOPICS: Business/Economy; Culture/Society; Government; News/Current Events
KEYWORDS: conservatism; socialsecurity
Navigation: use the links below to view more comments.
first 1-2021-4041-44 next last

1 posted on 11/04/2015 7:13:16 AM PST by SeekAndFind
[ Post Reply | Private Reply | View Replies]

To: SeekAndFind

The incorrect assumption is that “Conservatives” don’t want “their” check from the government.

The only actual conservative solution to Social Security is to end it completely. Stop taking it out of paychecks, stop paying out any money.

If some people can’t make it (and there will be a lot of them), then they are wards of the state based on their need.

Anything short of that is nonsense and a lie, including keeping the current system.


2 posted on 11/04/2015 7:19:33 AM PST by RFEngineer
[ Post Reply | Private Reply | To 1 | View Replies]

To: SeekAndFind
Just take it out of the general fund and put it back into an untouchable fund

I think it would be 3 - 5 years and we'd be solvent again ... even WITH the lack of employment

3 posted on 11/04/2015 7:22:28 AM PST by knarf (I say things that are true .... I have no proof ... but they're true.)
[ Post Reply | Private Reply | To 1 | View Replies]

To: knarf
Just take it out of the general fund and put it back into an untouchable fund

Please, not this meme again.

Social Security is not "in the general fund". Excess Social Security taxes have been LOANED to the federal government, in the same way you loan money to them if you buy US Treasury Bonds.

That loan (which constitutes about $2.7T) is now being paid back, with interest. If it wasn't being paid back, Social Security benefits would have been reduced in 2010 and later -- because the payroll tax wasn't sufficient to fund benefits.

I think it would be 3 - 5 years and we'd be solvent again ... even WITH the lack of employment

Social Security is in serious trouble. The SSA has been telling you this for at least the past decade, if you had been paying attention. But, since you haven't -- I'll quote this year's report:

https://www.socialsecurity.gov/oact/tr/2015/tr2015.pdf

For the combined OASI and DI Trust Funds to remain solvent throughout the 75-year projection period: (1) revenues would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 2.62 percentage points (from its current level of 12.40 percent to 15.02 percent, a relative increase of 21.1 percent); (2) scheduled benefits during the period would have to be reduced by an amount equivalent to an immediate and permanent reduction of 16.4 percent applied to all current and future beneficiaries, or 19.6 percent if the reductions were applied only to those who become initially eligible for benefits in 2015 or later; or (3) some combination of these approaches would have to be adopted.

These changes would have to be made NOW. If nothing is done, here's what you can expect: around 2034, the Trust Fund will be exhausted. Social Security benefits will be reduced about 21%, BY LAW -- because Social Security can't borrow money.

4 posted on 11/04/2015 7:41:50 AM PST by justlurking
[ Post Reply | Private Reply | To 3 | View Replies]

To: RFEngineer

Government shouldn’t be making disability payments, because there is no incentive for government to turn anyone down. Bureaucrats know that someone above them will just cave and give people what they want, so why bother?

The Social Security disability program is rife with fraud.


5 posted on 11/04/2015 7:42:50 AM PST by Pining_4_TX (All those who were appointed to eternal life believed. Acts 13:48)
[ Post Reply | Private Reply | To 2 | View Replies]

To: justlurking
I've been listening and to the extent I'm able, paying attention

Correct me if I'm wrong;

My SS check is backed by present day FICA witholdings from workers

thus;

My check comes from a worker (I know, more than one ... KISS) from his last month's labor

If he contributed to FICA (the SS part) more than what I needed, the fed got to use it ... "general fund"

6 posted on 11/04/2015 7:52:12 AM PST by knarf (I say things that are true .... I have no proof ... but they're true.)
[ Post Reply | Private Reply | To 4 | View Replies]

To: RFEngineer
The only actual conservative solution to Social Security is to end it completely. Stop taking it out of paychecks, stop paying out any money.

While this might be the only way to end it completely, it's politically impossible. Everyone alive today has had payroll taxes collected from them for their entire working career, and made it difficult or even impossible for some to invest for retirement on their own.

The truth is that the inter-generational transfer of income was always doomed to fail. Progressives thought the party would never end -- population and wage growth would continue indefinitely and keep the Ponzi scheme alive. But, then reality set in.

It never occurred to them that population growth was largely because parents had lots of kids in the hope that at least one would survive accidents and disease and be sufficiently successful in life to take care of them. Take away the need for lots of kids (by providing old-age support), and the birth rate dropped like a rock. Right now, it's BELOW replacement rate in the US. Immigration is the only thing that keeps our population growing, and that's depressing wage growth.

A transition to an asset-based system like Australia and New Zealand (and Chile and Singapore) is the only long-term solution that won't be perpetually in crisis. But, the transition will be tricky: current and near-future retirees will have to accept a cut in benefits, while several generations will have to contribute payroll taxes to fund those reduced benefits without any return on investment -- all while saving for their own retirement.

7 posted on 11/04/2015 7:54:39 AM PST by justlurking
[ Post Reply | Private Reply | To 2 | View Replies]

To: knarf
If he contributed to FICA (the SS part) more than what I needed, the fed got to use it ... "general fund"

The federal government BORROWED it. It's actually part of the deficit, although they don't always make it obvious.

The problem with your original assertion: Just take it out of the general fund and put it back into an untouchable fund

It is in an "untouchable" fund. That's why Al Gore's "lock box" meme was laughable... it's always been that way.

The Social Security Trust fund is invested in the equivalent of US Treasury Bonds. They pay dividends that are equivalent to long-term US Treasury Bonds. You can look at the balance sheet in the report I cited above and see that: $98.2B on a balance of $2.76T in 2014.

That same annual report also shows that benefits paid exceeded taxes collected. That why the Trust Fund only increased $25B last year: because $73B was withdrawn to pay benefits. In the next few years, the Trust Fund balance will start to decrease as withdrawals increase.

Finally, I'll answer the question many people ask: why US Treasury Bonds? The truth is: until Obama screwed the pooch by threatening to suspend dividend payments, US Treasury Bonds were considered the safest investment in the world. But, consider what would have happened if the SSA had invested in equities or corporate bonds: it would have been crony capitalism at its worst. Congress would have never let the SSA choose investments based on value or safety -- there would have been all kinds of prohibitions and "earmarks" to pay off political favors.

8 posted on 11/04/2015 8:05:28 AM PST by justlurking
[ Post Reply | Private Reply | To 6 | View Replies]

To: justlurking

“the transition will be tricky: current and near-future retirees will have to accept a cut in benefits, while several generations will have to contribute payroll taxes to fund those reduced benefits without any return on investment — all while saving for their own retirement.”

Tricky indeed. This is precisely why you just end it. The government need not be involved in creating asset-based retirement plans, in fact, they ought NOT be involved.

Once you start shifting the sacrifice to the future, it will never stop. “I get mine now, and folks who can’t vote pay but don’t get a thing” is a winning political strategy every time. “conservatives” here would vote for it.

End it, deal with the social welfare ramifications now, and don’t pretend that the party can roll on. It can’t and it won’t.

You’re right that it is politically impossible - right up until it’s fiscally impossible to pay another dime. Then and only then will folks understand.


9 posted on 11/04/2015 8:09:37 AM PST by RFEngineer
[ Post Reply | Private Reply | To 7 | View Replies]

To: RFEngineer
The government need not be involved in creating asset-based retirement plans, in fact, they ought NOT be involved.

I won't disagree with that, but it's not likely to happen.

You’re right that it is politically impossible - right up until it’s fiscally impossible to pay another dime. Then and only then will folks understand.

That won't happen. The worst that will happen is benefits will be cut to what can be sustained with the current payroll taxes. That's about 79% of currently legislated benefits with the current payroll taxes, around 2034. Of course, the date and percentage will likely be different by then -- it's been getting worse year by year.

10 posted on 11/04/2015 8:49:59 AM PST by justlurking
[ Post Reply | Private Reply | To 9 | View Replies]

To: justlurking

What then, did Johnson do in ‘65 ?


11 posted on 11/04/2015 8:50:54 AM PST by knarf (I say things that are true .... I have no proof ... but they're true.)
[ Post Reply | Private Reply | To 8 | View Replies]

To: justlurking

For the government to borrow from itself has about as much meaning as me borrowing from myself.


12 posted on 11/04/2015 8:59:19 AM PST by jdege
[ Post Reply | Private Reply | To 4 | View Replies]

To: knarf
What then, did Johnson do in ‘65 ?

You tell me. I'm tired of people repeating this meme with no evidence.

I showed you evidence that it's not true. You can go back and look at the prior annual reports, and see the same line items.

13 posted on 11/04/2015 9:00:03 AM PST by justlurking
[ Post Reply | Private Reply | To 11 | View Replies]

To: justlurking
I apologize I HAVE been lazy

Why ISN'T an actual account generated ?

14 posted on 11/04/2015 9:05:57 AM PST by knarf (I say things that are true .... I have no proof ... but they're true.)
[ Post Reply | Private Reply | To 13 | View Replies]

To: jdege
For the government to borrow from itself has about as much meaning as me borrowing from myself.

Have you ever borrowed from one credit card to pay off another? It's a dumb thing to do, but many people do it all the time.

If you don't cut spending, you eventually will run out of options when you hit your credit limit. But, the federal government can raise it's own credit limit.

However, the question here isn't whether the government is acting wisely. The usual claim is that the government "stole from Social Security". They didn't. Every dollar that was borrowed is accounted for, and is earning interest.

And the real issue is: it doesn't matter. Using the relatively safe assumption that every dollar borrowed from Social Security is paid back: It won't be enough!!!

This is what I'm trying to get you, knarf, and all of the other mis-informed people on FR to understand: Stop whining about non-existent and trivial problems with Social Security.

Social Security has a real problem, but it's not the piddling crap that you complain about. Even if you were somehow able to magically wave them away, Social Security is still in trouble. By focusing on the non-existing and trivial problems, you are ignoring the elephant in the room:

Social Security cannot indefinitely pay the current level of OLD AGE benefits with the existing payroll tax rate.

There are no little "tweaks" that can fix it at this point. We passed that decades ago. We are now looking at a lot of pain for beneficiaries, taxpayers, or both. And the longer we wait to address it, the worse it will get.

15 posted on 11/04/2015 9:12:41 AM PST by justlurking
[ Post Reply | Private Reply | To 12 | View Replies]

To: SeekAndFind

[[Social Security Reform: A Conservative Plan; Strengthen safety net, build private savings on top.]]

Here’s a better plan. STOP sending hundreds of billions of dollars to terrorist nations, Stop the $150 BILLION that we are going to pay Iran, stop spending billions on USELESS special interest groups, stop giving hundreds of billions to ILLEGALS, and then RETURN the money that was stolen from SS!

Problem solved!


16 posted on 11/04/2015 9:15:11 AM PST by Bob434
[ Post Reply | Private Reply | To 1 | View Replies]

To: justlurking

“the federal government can raise it’s own credit limit”

The real credit limit isn’t how much the government has said is the max it will borrow, it’s how much its creditors are willing to lend.

And the sad truth is we hit that limit years ago.


17 posted on 11/04/2015 9:16:29 AM PST by jdege
[ Post Reply | Private Reply | To 15 | View Replies]

To: justlurking
Got it

You obviusly have information I can use

IF we suddenly stopped paying out SS ... CAN we recover to SS solvency, and if so ... when

I'm sure it's an academic excersize, but ... can it be done ?

18 posted on 11/04/2015 9:16:54 AM PST by knarf (I say things that are true .... I have no proof ... but they're true.)
[ Post Reply | Private Reply | To 15 | View Replies]

To: RFEngineer

Just a couple of points...as I see it, one reason we do not have enough workers contributing is that we have aborted generations of potential contributors in the name of “Woman’s right to chose”. Secondly, how does pegging the SS benefit to about what one could make flipping burgers help the elderly stay out of poverty? Do we not see many of these fast food workers demonstrating for a “living wage”?


19 posted on 11/04/2015 9:17:08 AM PST by Texas Patriot61 (Gun control is being able to hit your target.)
[ Post Reply | Private Reply | To 9 | View Replies]

To: justlurking

[[Social Security cannot indefinitely pay the current level of OLD AGE benefits with the existing payroll tax rate]]

Let’s put this in perspective-

We can afford to pay between $400 BILLION and $600 BILLION dollars every single year for illegals, but we can’t find the hundreds of billions that our government STOLE from SS?

There4 are still more people paying in to SS that are actually around to collect it in the end- (or at least all of what they payed in) so that would still mean a surplus (which apparently also gets stolen)-

“Is this Social Security’s worst financial report ever?

Far from it. In the late 1970s and early 1980s Social Security ran deficits. Trust fund insolvency loomed in July 1983. With mere months of solvency left, Congress acted to bolster finances on April 20, 1983. SSA still operates under the 1983 funding arrangement, generating surpluses every year since.”

http://www.marketwatch.com/story/exposing-the-social-security-solvency-hype-2013-06-12

“I keep hearing that Social Security is about to go broke. What do the numbers show?

The Trustees’ Report presents these data:
•Social Security has $2.73 Trillion in trust fund reserves.
•Social Security reserves are still growing and will continue to grow through 2020.
•Beginning in 2021, program costs are projected to exceed income, shrinking the trust funds.
•The trust funds will be exhausted in 2033, the same year projected in the 2012 report.
•After 2033, income will cover 77% of scheduled payments”

As stated before though, things can be done to ‘fix’ the problem before 2030 (some now think it will be solvent out till 2040 or so)


20 posted on 11/04/2015 9:26:55 AM PST by Bob434
[ Post Reply | Private Reply | To 15 | View Replies]


Navigation: use the links below to view more comments.
first 1-2021-4041-44 next last

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

Free Republic
Browse · Search
News/Activism
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794
FreeRepublic.com is powered by software copyright 2000-2008 John Robinson