With Congressional elections around the corner, Social Security has become part of the anti-big government mantra of Tea Party candidates. So far, the "debate" over Social Security has been between those deficit busters who say it must be cut to reduce government debt, and others who want to maintain it as is.
But the New America Foundation recently released a study (that I authored) that concludes that neither position grapples with the reality of the utter breakdown of America's retirement system that is occurring. A completely new approach is needed, and the study proposes an increase in the Social Security payout to every American as a way of modernizing the U.S. economy and helping American businesses to become more competitive.
Here's the dilemma that the U.S. faces. Since WWII, retirement has been conceived as a "three-legged stool," with the three legs being Social Security, pensions, and personal savings centered around homeownership. But today most private sector employers have quit providing pensions, and state and local government's public pensions are drastically underfunded.
In addition, a collapsed housing and stock market, combined with increased inequality even before the Great Recession, have drastically reduced Americans' personal savings. In short, the "retirement stool" no longer is stable and secure, and suddenly Social Security, which always has been viewed as a supplement to private savings, is the only leg left for hundreds of millions of Americans.
Studies show that people in the bottom two income quartiles depend on Social Security for 84 percent of their retirement income, and even the second richest quartile depends on Social Security for 55 percent of its retirement income. Only the richest 25% of Americans don't rely heavily on Social Security.
But the real problem with Social Security is not, as its critics say, that it is underfunded. Contrary to gloomy predictions the program is on solid financial footing, with the Congressional Budget Office projecting that Social Security can pay all scheduled benefits out of its own tax revenue stream through at least 2037.
The bigger problem is that Social Security's payout is so meager, which is problematic since it has been thrust into this new role as a de facto national retirement plan. Currently it replaces only about 33 to 40 percent of a worker's average wage from the year prior to retirement (compared to Germany and France where it replaces 70 and 75 percent respectively). That is simply not enough money to live on when it is your primary -- perhaps your only -- source of retirement income.
Doubling Social Security's individual payout would cost about $650 billion annually for the 51 million Americans who receive benefits. Here are some ways to pay for it.
First, lift Social Security's payroll cap that favors the wealthy. Currently Social Security only taxes wages up to $106,800 a year, and any income earned above that is not taxed. The net result is that poor, middle class, and even moderately upper middle class Americans are taxed 12.4 percent (split between employee and employer) on 100 percent of their income, but the wealthy pay a much lower percentage. A lawyer making $500,000 a year effectively pays only 2.5 percent, and millionaire bankers pay a paltry 1.2 percent.
Removing the income cap and making all income levels pay the same percentage - which is how Medicare works -- is a very popular reform. Polls show that most Americans think that if they pay Social Security tax on their full salary, others should too. Taxing all income brackets equally would raise about $377 billion, which is nearly sixty percent of the revenue needed to double the Social Security payout.
Second, with all Americans receiving Social Security Plus, employer-based pensions would be redundant so businesses no longer would need the substantial federal deductions they currently receive for providing employees' retirement plans. These deductions total a whopping $126 billion annually.
Those two alone would provide three-fourths of the revenue needed to double Social Security's payout.
Other possible revenue streams exist, such as reducing or eliminating other unfair deductions in the tax code which currently allow the top 20 percent of income earners to reap generous deductions that most low and moderate income Americans cannot enjoy. These include deductions for private retirement savings, homeownership, health care and education.
For example, only those individuals who have enough income to divert for savings or investment have the luxury of enjoying considerable tax deductions for their 401(k)s, IRAs and pensions. Similarly the homeownership deduction for mortgage interest only benefits people with sufficient income to buy a home. But the poor and working class rarely can take advantage of these since they don't make enough to itemize deductions.
While a certain number of moderate income Americans benefit from these, if we enacted Social Security Plus they would no longer need to rely on these deductions as vehicles for retirement savings. Instead of buying a home as part of their retirement plan -- which as we have seen is a risky investment -- they could put their money into Social Security Plus. In 2010 the mortgage interest deduction alone will amount to about $108 billion.
We also could devote an estate or inheritance tax to the Social Security trust fund for anyone with an estate of $3.5 million or more; we could make capital gains and unearned income subject to a Social Security contribution; or direct a small transaction fee levied on all stock market transactions into the Social Security trust fund. Still another possibility would be to use a flexible payroll tax, as Finland has done, in which payroll taxes are increased when the economy is going well and reduced when the country is hit by hard times. This counter-cyclical intervention acts as an automatic stabilizer to reduce the cost to employers of hiring workers during tough times, and during good times creating a buffer fund that would help finance an expansion of Social Security.
In short, numerous tax policy options exist to fund this, and any of them could be implemented in stages, targeting first those who are most in need. We also could allow active seniors who have not yet reached full retirement age to take a half-pension and work at half-time without losing their right to a full pension upon their retirement.
An expansion of Social Security -- one of the most successful, stable and popular social programs in American history, currently celebrating its 75th year -- not only would be good for America's retirees, it also would be good for the broader macro-economy. It would act as an "automatic stabilizer" during economic downturns, keeping money in retirees' pockets and stimulating consumer demand. Most economists agree that low and middle income people are more likely to spend an extra dollar on goods and services than are affluent individuals, because they put much less money aside.
Social Security Plus also 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 generous national retirement plans. Benefits would be portable when changing from one job to another, so working Americans wouldn't be segregated into unequal classes based on whether their employer offers a pension. Every worker could contribute to her or his own retirement pension which would be directed into a Social Security Plus system with investments restricted to Treasuries, instead of handing it over to mutual or pension fund managers who gamble on the volatile stock market with future retirees' money (especially since there is no evidence that the typical fund manager can consistently beat the average return on Treasuries).
Social Security Plus' greater retirement security also would decrease health care costs stemming from having insufficient income to receive timely care for seniors. And it would be broadly fair, since even those higher income Americans who are having some of their tax deductions reduced would see part of it returned to them in the form of a greater Social Security payout.
In short, Social Security Plus would provide a stable, secure retirement for every American and contribute greatly toward a solid foundation from which to build a strong and vibrant 21st century U.S. economy.
Steven Hill is the author of the New America Foundation's report "Secure Retirement for All Americans" and also author of Europe's Promise: Why the European Way is the Best Hope in an Insecure Age published recently by University of California Press.