Slash Social Security? No – Double It

ss checkIn the aftermath of the Great Recession, a debate over Social Security is heating up. So far, the debate has been between those deficit busters who say Social Security must be trimmed back to reduce government indebtedness, and others who want to maintain it as is.

But the New America Foundation just released a study that proposes a different approach: doubling the current Social Security payout and making it a true national retirement system. Creating a more robust system of “Social Security Plus” not only would be good for American retirees, but also would be good for the greater macroeconomy.

Here’s the dilemma that the U.S. faces. Since World War II, 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, has drastically reduced Americans’ personal savings. In short, the “retirement stool” no longer is stable and secure. 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% of their retirement income, and even the second-richest quartile depends on Social Security for 55% of its retirement income. Only the richest 25% of Americans don’t rely heavily on Social Security.

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% of a worker’s average wage from the year prior to retirement (compared with Germany, where it replaces 70%). 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 taxes wages  up to only $106,800 a year. Any income earned above that is not subject to the tax. The net result is that poor, middle-class and even moderately upper-middle-class Americans are taxed 12.4% (split between employee and employer) on 100% of their income, but the wealthy pay a much lower percentage. Millionaire bankers effectively pay a paltry 1.2%.

Making all income levels pay the same percentage – that’s how Medicare works – is popular with Americans and would raise about $377 billion.

Second, with all Americans receiving Social Security Plus, employer-based pensions would be redundant – so businesses would no longer need the substantial federal deductions they currently receive for providing employees with retirement plans. These deductions total a whopping $126 billion annually.

Those two savings 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 that currently allow the top 20% of income earners to reap generous deductions that most low- and moderate-income Americans cannot enjoy. We also could implement this in stages, targeting first those who are most in need. And we could allow active seniors who have not yet reached full retirement age to take a half-pension and work a half schedule without losing their right to a full pension upon their retirement.

An expansion of Social Security – one of the most successful and popular social programs in American history, currently celebrating its 75th year – would be good for the macroeconomy as well because it would act as an “automatic stabilizer” during economic downturns, keeping money in retirees’ pockets and stimulating consumer demand. Benefits would be portable when changing from one job to another.

It also would help American businesses trying to compete with foreign companies that don’t provide pensions to their employees, because those countries already have generous national retirement plans. And it would be broadly fair, because even those higher-income Americans who are losing their tax deductions would see part of them 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
New America Foundation

Steven Hill has recently published Europe’s Promise: Why the European Way is the Best Hope in an Insecure Age

Originally published in the New York Daily News. Republished with the author’s permission.

Published by the LA Progressive on September 22, 2010
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About Steven Hill

Steven Hill is Director of the Political Reform Program at the New America Foundation, which seeks to identify and develop the best opportunities for political and electoral reform, educate opinion leaders and the public about electoral alternatives, and encourage the formation of a broad-based coalition for reform. Mr. Hill is the former senior analyst and cofounder of the Center for Voting and Democracy/FairVote. He is author of the recently published Ten Steps to Repair American Democracy (PoliPoint Press, May 2006). His previous books include Fixing Elections: The Failure of America's Winner Take All Politics (Routledge Press, 2002) and Whose Vote Counts (co-author, Beacon Press, 2001). Mr. Hill's articles and commentaries have appeared in The New York Times, The Washington Post, Los Angeles Times, The Wall Street Journal, Christian Science Monitor, The San Francisco Chronicle, The Chicago Tribune, Houston Chronicle, and other leading publications. Mr. Hill has appeared on national and local radio and television programs, and has lectured widely in the United States and Europe. He was campaign manager in San Francisco for the successful effort that passed instant runoff voting for electing local offices, and was one of the organizers of successful efforts to pass public financing of elections for local campaigns. Mr. Hill received a B.A. from Yale University.