To mark the 75th anniversary of Social Security, the Next Social Contract Initiative of the New America Foundation has published a provocative new study by Steven Hill, a leading expert in comparative social policy. Noting that, in the wake of the Great Recession, most Americans are even more dependent on Social Security for most of their retirement income, Hill calls for reforms to strengthen and expand the program, including a proposal to DOUBLE the average pay-out, as well as viable ways to pay for this increase.
"New solutions are needed to provide retirement security to retiring Americans, now and in the future," says Hill. "An expansion of Social Security -- one of the most successful and popular programs in American history -- that converts it into a more robust retirement system would build upon the most stable components of the current system."
See a link to the full report here.
With the collapse of both private employer-provided pensions and homeownership and personal savings (especially in the aftermath of the Great Recession), Social Security becomes the primary leg of the fragile "three-legged stool" of retirement security for most Americans. Yet, despite Social Security's new role as a de facto national retirement plan, many budget deficit hawks are calling for cuts to it to decrease America's indebtedness. But that would only make things worse for retiring Americans, says Hill.
The real problem with Social Security is that its payout is so meager. It provides only a small fraction of the money needed for retirement, estimated to replace only about 33 to 40 percent of a worker's average wage from the year prior to retirement. So this study has identified three major revenue sources (plus some ancillary ones) for doubling the Social Security payout and proposes a new system called Social Security Plus. The three major revenue sources are:
First, lift Social Security's payroll cap. 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 wealthiest Americans 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 -- would be a popular reform. Polls show 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 payout.
Second, eliminate the employer tax deduction for providing retirement. With all Americans receiving a more robust pension via Social Security Plus, employers would be freed from providing retirement for their employees. Since employer-based pensions would be made redundant by Social Security Plus, businesses no longer would need to receive the substantial federal deductions they currently accrue for providing employees' retirement plans. These deductions total an estimated $126 billion annually.
Third, reduce or eliminate other unfair deductions in the tax code that allow higher income people to reap generous deductions that low and moderate income Americans can't enjoy. These include deductions for private retirement savings, homeownership, health care and education. For example, individuals who have enough income to divert for savings or investment are allowed 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 low and moderate income Americans rarely can take advantage of these since they don't make enough to itemize deductions. Consequently, the majority of these benefits go to the top 20 percent of income earners; in 2010 the mortgage interest deduction alone will amount to about $108 billion.
These three revenue streams -- lifting the payroll cap, eliminating the employer tax deduction for providing retirement, and capping or eliminating various wealth deductions -- would raise 100 percent of the revenue needed for doubling the payout of Social Security Plus, which would cost an estimated $650 billion annually for the 51 million Americans who receive benefits. Since all three of these involve tax schemes that favor higher income Americans over poor, working-class and middle-class Americans, it is literally true that Tax Fairness = Retirement Security. Social Security Plus could be implemented in stages, targeting first those who are most in need.
The "debate" over Social Security mostly has been between those who say it is necessary to trim it back and others who want to maintain it as it is. No one has proposed expanding Social Security, much less a doubling of its payout. This study published by the New America Foundation makes a unique contribution to the ongoing debate because it shows that expanding Social Security is viable and indeed is the only way to provide retirement security to Americans going forward. There really is no other choice. A more robust retirement system already has been put in place by most advanced OECD countries. Social Security Plus would provide a stable, secure retirement for every American and contribute greatly to a solid foundation from which to build a strong and vibrant 21st century economy.
Bold, innovative and certain to provoke controversy, Hill's ground-breaking study can be read in its entirety at this link: Secure Retirement for All Americans: Guaranteeing the American Dream with Expanded Social Security.
For interview requests, please contact Liz Wu at Wu@newamerica.net and (510) 295-9859 or Kate Brown at 202-213-7051 or email@example.com.
About the New America Foundation
The New America Foundation is a nonprofit, nonpartisan public policy institute that invests in new thinkers and new ideas to address the next generation of challenges facing the United States.