The lack of political will to address a
looming Social Security funding crisis is prompting some people to get creative
with ideas for making the system last longer or having the private sector be
more involved.
"A major reform should focus on
retirement security writ large," said Shai Akabas, director of economic
policy at the Bipartisan Policy Center in Washington. After a special
commission formed by the center spent 2014 and 2015 looking at the U.S.
retirement system, "the main lesson I learned is that a Social Security
package full of benefit cuts and tax increases will be almost impossible to
sell," Mr. Akabas said.
Increasing benefits for vulnerable populations
and improving other elements of the American retirement system, including
defined contribution accounts, lifetime income options and tax credits, among
other ideas, "provides a much more attractive narrative and it will also
produce better results by looking at the system holistically," he said.
Failing U.S. retirement
system needs to be fixedGAO report says American
retirement system not providing adequate securityStraight talk on tax deferral
and retirement savingsState programs essential for
workers' retirement securityLegislation introduced to
guarantee Social Security benefits for public workers
The crisis is real.
By 2021, the Social Security trust funds for
retirement and disability insurance will begin drawing down assets to pay
benefits. The trust funds will be out of money by 2034. At that point, Social
Security revenue will only cover 77% of benefits promised, gradually
decreasing to 73% by 2091. Over the next 75 years, Social Security will owe $12
trillion more than it is projected to take in, according to the latest
trustees' annual report issued in July.
That means all Social Security recipients at
the time of insolvency will get 23% less, or the payroll taxes split between
workers and employers to fund it would have to immediately increase to an
estimated 15.2% from the current 12.4% of payroll.
Under the middle path of several scenarios
modeled by Social Security actuaries in the report, payroll taxes will hit 17%
in 2037 and stay there for several decades, before going higher.
Actuaries and lay people alike know the main
culprits are the record number of baby boomers retiring now or soon, with fewer
young people to take their place in the workforce and pay those taxes.
Unless current tax revenue increases, an
exhausted the trust fund also means that when it comes to income replacement in
retirement — measuring Social Security benefits as a portion of pre-retirement
earnings — rates for a typical 65-year-old worker will drop to 27% by 2090 from
39% today and 36% in 2027, when the full retirement age increases to 67, as
dictated by the 1983 reforms.
Political divide
The solutions being floated so far by the few
members of Congress willing to take on the issue illustrate the political
divide.
Rep. Sam Johnson, R-Texas, who chairs the
House Ways and Means Subcommittee on Social Security, has proposed to match
benefit payments to revenue by cutting benefits three ways: raising the full
retirement age to 69, trimming benefit levels for higher-income people, and
imposing smaller cost-of-living adjustments for all, with none for people who
now earn more than $85,000.
Rep. John Larson, D-Conn., the subcommittee's
ranking Democrat, would keep, and even slightly improve, benefit formulas while
getting the trust funds solvent by raising revenue, including increasing the
current 12.4% payroll tax by 0.1 percentage point per year until 2042, when it
would stop at 14.8%. His proposal would also raise the taxable maximum of
$127,200, with even higher levels for people earning $400,000 or more.
Yet, as Mr. Akabas of the Bipartisan Policy
Center noted: "The only way we're going to get a fix anytime soon is if
it's done on a bipartisan basis. As we've seen from prior experiences, if
there's not broad buy-in, the attack ads are just too easy to write."
Retirement advocates beat the drum that it is
easier to fix Social Security sooner than when insolvency is here, "but
the reality is, that's not true," said Andrew Biggs, a resident scholar at
the American Enterprise Institute in Washington who worked on Social Security
reform ideas during the administration of President George W. Bush. "It's
not easier for the person in office to make that decision. The easier thing is
to pass the buck."
Launched a challenge
Tired of waiting for Washington, AARP in 2016
launched an Innovation Challenge to solicit ideas for improving Social
Security, and worked with the Urban Institute to assess the impact of the
ideas.
One idea calls for mandatory add-on savings
accounts that would allow people to delay claiming Social Security benefits.
These START (Supplemental Transition Accounts for Retirement) accounts would be
funded by employees, employers, and for low-income workers, the government.
With some resemblance to the Secure Choice
programs being worked on in a handful of states, START funds would be
professionally managed in a low-fee, pooled account with a board overseeing
asset management decisions. Workers would have to exhaust their START accounts
before claiming Social Security benefits, but could take them out in lump sums
when they reach full retirement age. By the time they reach age 70, they would
have to take the lump sum or roll it over to other retirement accounts.
On mandating START accounts, said Gary Koenig,
vice president of financial security for AARP's Public Policy Institute and one
of three authors of the START proposal, "we think that's how it works
best."
Under another idea for protecting retirement
income replacement rates that would harm lower-wage workers and older workers
with inadequate savings, people could make voluntary "catch-up"
contributions to Social Security of less than 2% of salary starting at age 40
or 3.1% at age 50.
Workers would invest in a risk-free asset
yielding a 3% real return. Proponents Teresa Ghilarducci, Anthony Webb and
Michael Papadopoulos from the New School for Social Research in New York and
economics professor Wei Sun from Renmin University in Beijing debated the
merits of a voluntary contribution vs. a mandate in their proposal.
A voluntary contribution might be more
acceptable politically, but a mandate reduces the risk of opt-outs by
vulnerable groups and keeps high earners in the program to make it sustainable.
A third idea presented in the AARP challenge
would create lump-sum incentives to get more people to delay claiming Social
Security until age 70, which only 10% of the eligible population now does, said
Olivia Mitchell, professor of insurance and risk management at the Wharton
School of theUniversity of Pennsylvania in
Philadelphia, and executive director of the Pension Research Council.
Another "doable" idea, MIT Professor
Emeritus Peter Diamond said at the same event, is to have the Social Security
trust fund borrow from the U.S. Treasury against future revenue. Republicans
would support that idea and Democrats will find a way too "because the
other alternative is too politically unacceptable," said Mr. Diamond, who
first consulted with Congress on Social Security in 1974 and has studied
pension systems all over the world.
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