Forbes post, “It’s Time To Go Big On Social Security Reform”

Originally published at Forbes.com on February 7, 2019.

 

Is retirement back on the agenda?

Two weeks ago, Rep. John Larson reintroduced his Social Security 2100 Act (which I discussed previously), with great hopes that under a Democratic-controlled House, the bill would progress forward in a way that hadn’t happened in prior years.

And yesterday there were not just one but two hearings in Congress about retirement, the first at the Ways and Means Committee, on the topic of “improving retirement security for America’s workers,” and the second at the U.S. Senate Special Committee on Aging, ““Financial Security in Retirement: Innovations and Best Practices to Promote Savings.”  At the (livestreamed) Ways and Means hearing, the discussion was wide-ranging, including Social Security itself, private savings, the impact of the so-called “gig economy,” multi-employer plans, and more, and representatives from both sides of the aisle affirmed their desire to deal with the multiple issues at play.

But here’s the challenge.

On the one hand, there are calls to increase the extent of Social Security benefit provision; Larson’s bill, for example, increases Social Security benefits for all participants by a flat 2%, above and beyond other changes.  Other proposals call for increases in benefits for survivors, the addition of caregiving credits, and the like.

On the other hand, Andrew Biggs of the American Enterprise Institute observed, both in his written testimony and in person, increases in pension benefits for the middle class are correlated with decreases in personal savings, rather than an overall increase in retirement provision.

Diane Oakley’s testimony as the Executive Director of the National Institute on Retirement Security pointed to low levels of retirement savings among Millennials.  Biggs responded that (paraphrased), it’s simply not true that 100% of the population needs to save for retirement 100% of the time, because low-income folk see good income-replacement levels from Social Security and Millennials choosing to repay student loans might be making reasonable decisions relative to their financial situation.  (Incidentally, the data on the level of retirement savings turns out to be murky, with different sources producing different answers.)

And many of the Congressmen and witnesses alike invoked the defined benefit plans of the past without due recognition that this system only benefitted those who were lucky enough to work a full career at a single, large employer, and that it was an unsustainable system in any event.

What’s the solution?  We need to Go Big in Social Security reform.  These discussions repeatedly reveal the design flaws of Social Security itself.  In any other situation, we wouldn’t hesitate to say that an 84-year old system could be overhauled.  FDR was not a saint who created a system under divine inspiration, nor a genius whose insights our intelligence is too limited to surpass.

Too many pundits and politicians want Social Security to accomplish two goals:  to keep the elderly out of poverty, and to ensure that middle-class retirees can maintain their standard of living.

We are already moving towards a recognition that making savings easier is a key ingredient in solutions to the latter problem.  In fact, one of the witnesses was a small business owner, Luke Huffstutter, who was one of the first participants in OregonSaves and was enthusiastic about its success in helping his employees save.  While I’ve shared my concerns with these programs in the past, the overall objective is sound:  to increase the degree to which workers save for retirement even if their employer doesn’t provide access to retirement savings.  There are efforts, too, through defined contribution multiple employer plans, to reduce employers’ administrative costs to increase the feasibility of plan offerings.  What’s missing are innovations to help American workers understand how much they need to save, given their individual situations, and solutions to help them spend down their money so as to avoid either outliving their assets or over-reducing their standard of living in an effort to stretch their savings unnecessarily much.

All too often, and even at the hearing itself, we still hear that employers are not meeting their responsibility to provide for their share of their workers’ retirement benefits.  But we need to abandon the idea of the three-legged stool once and for all, or at least discard the notion that Social Security, employer, and personal savings income sources are interchangeable stool-legs.

The economic system of the 1930s no longer exists.  And Social Security’s design, and its “stool” concept, is a relic of a time when industrial America was imagined simply to continue to grow, when employers and the Social Security Administration alike would benefit from the same literal pyramid effect of high birth rates and comparatively low post-retirement life expectancy, when individual employers would likewise only continue to grow their workforce, once the temporary economic conditions of the Depression were behind us.   (Incidentally, many low-fertility countries, such as Germany, are now forecast to have inverted-pyramid population distributions, and the U.S. may follow suit depending on immigration levels.)

Instead, we need to refocus Social Security on the first of these objectives, ensuring retirees are protected from poverty, and, to reach that goal, it would be an entirely fair trade-off to reduce Social Security provision for middle-class income and above, in order to ensure that Social Security meets its objective of keeping American elderly out of poverty/near-poverty.  That might be through a simple flat-dollar benefit for everyone, or a means-tested benefit that phases out at higher retirement income levels, or a hybrid benefit.

Then we can work out the best means of ensuring middle-class Americans are able to save for retirement and are able to spend-down their savings in retirement appropriately.

Only in this way can we move past the same old, tired debates about benefit cuts vs. tax hikes and, increasingly benefit increases, debates that never make progress because the terms of the debate are so ossified.

(And, yes, if this sounds familiar, this is indeed, in broad outlines, my own pet Social Security reform proposal.)

 

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.