Tag: 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.

Originally published at Forbes.com on June 6, 2018.

The latest Social Security Trustees Report was released yesterday, and, really, there was nothing remarkable about it.  It reports on the same trajectory towards Trust Fund depletion and the system’s subsequent inability to pay promised benefits, as in prior reports.  But one item that is striking is the insistence of various pro-Social Insurance advocacy groups that, not only is Social Security, and, indeed, the entire system of Social Insurance, in good health, but this demonstrates that it’s entirely appropriate to expand the generosity of the system.

Here’s the advocacy group Social Security Works:

The most important takeaways from the 2018 Trustees Report will be that (1) Social Security has a large and growing surplus, and (2) Social Security is extremely affordable. At its most expensive, Social Security is projected to cost just around 6 percent of gross domestic product (“GDP”). Indeed, in three-quarters of a century, Social Security will constitute just around 6.17 percent of GDP. . . .

The report will show that Social Security is fully and easily affordable. The question of whether to expand or cut Social Security’s modest benefits is a question of values and choice, not affordability. Indeed, in light of Social Security’s near universality, efficiency, fairness in its benefit distribution, portability from job to job, and security, the obvious solution to the nation’s looming retirement income crisis, discussed below, is to increase Social Security’s modest benefits. . . .

Moreover, expanding Social Security not only addresses the retirement income crisis, it also is part of the answer to growing income and wealth inequality and the financial squeeze on working families. Expanding, not cutting, Social Security while requiring the wealthiest among us to contribute more – indeed, their fair share – is the best policy approach to addressing these challenges while restoring Social Security to long-range actuarial balance.

The group then spends the remainder of this “backgrounder” making the claim that Social Security is, all things considered, in good financial health:  they write, for instance, that “Social Security is fully funded for the next decade, around 93 percent funded for the next 25 years, around 87 percent funded over the next 50 years, and around 84 percent funded over the next 75 years.”

And their message is repeated by others who decry those worried about the system as nothing more than Chicken Littles.

In fact, their statement about the small size of Social Security as a percent of GDP is deceptive.  Social Security taxes, based on present law, remain low, but this has no relationship to the degree to which Social Security’s actual benefits, as defined in present law, are “affordable” because the only reason why this 6% of GDP projection is true year after year is that, according to current law, when the Trust Fund ends, benefits will be cut to the degree necessary to be able to pay them from incoming FICA taxes, a benefit cut of (based on current projections) 23%, as Social Security Works acknowledges.  In fact, this oft-repeated statement, that Social Security will only be able to pay out 77% of benefit, is itself misleading as this figure, too, changes over time:  immediately upon depletion of the Trust Fund, in 2034, FICA taxes will be sufficient to cover 79% of promised benefits, but at the end of the 75-year projection period, in 2092, this drops to 74% due to changing demographics, and that’s, again, based on the assumption, as with the prior year’s report (and discussed separately here) that fertility rebounds from its current low level to a more usual 2.0 children per woman, which may or may not happen.  If fertility remains low, benefit cuts will be harsher.

I will also remind readers that Social Security is only one piece of the overall question of an aging America.  Add in Medicare and all of the other programs of government support to the elderly, and we’re looking at a projection that as early as 2046 we’re looking at government spending on the aged at nearly 30% of GDP.  And I am skeptical of easy answers like asking the “millionaires and billionaires” to “pay their fair share,” because any such new tax revenue (besides being wholly outside the international norm for how one runs Social Insurance programs) has to compete will all manner of other spending priorities.

There is not an easy answer.  And such answers as there are connect together Social Security with a whole constellation of related issues around health care, improving the well-being of the elderly, the economy and working life.  But the current tactic among various advocacy groups to claim that there’s nothing wrong with Social Security (that a tax hike can’t fix, anyway) is worrisome.

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.

Originally published at Forbes.com on March 11, 2018.

It will surely not surprise readers that, like seemingly everyone else these days, I’ve got a plan for a reform of our retirement system.  (Eyeroll.)  It’s got a clunky title—the “purpose-based retirement plan”—and it’s either far more visionary or far more delusional than everyone else’s plans.  But hear me out.

Here’s the background: As it happens, my first foray into the world of public discussions around retirement policy was round about eight years ago, in the form of a paper my husband and I submitted for the “Retirement 20/20″ project sponsored by the Society of Actuaries, titled “A Purpose-Based Retirement Plan.”  Since then, I’ve tinkered with it at my first blog, but, as you can tell by the fact that (but for the most loyal of readers) you’ve never heard of it, it didn’t get much traction; in fact, in general, public discussions around retirement reform seemed to have died down.  But these discussions are emerging again.

Our basic idea was this: we re-imagined Social Security and the retirement system in general as a three-tranche/three-tier system, with three different types of benefits for three different purposes; hence the label “purpose-based.”  The first tier is a flat, pay-as-you-go, general-revenue-funded poverty-level benefit to keep seniors out of poverty.  The second is a pre-funded account-based benefit, based on a mid-level income tranche, to replace lost income.  And third is a supplemental voluntary savings option similar to our existing 401(k) system.

What’s the point of making such changes, and what do I mean by “different purposes”?

Fundamentally, Social Security tries to do two things, but does neither of them well:  it wants to be an anti-poverty program for the poor, and it wants to be an income-replacement program for the middle-class.  To meet the first objective, it provides 90% pay replacement up to the first “bend point,” $10,740 in annual income.  And that’s great — but 9.3% of seniors (over 65s) still have income (counting Social Security as “income”) below the poverty line, because of low wages over their working lifetime, and use a patchwork of programs such as SSI and SNAP to supplement their Social Security benefits.  Doesn’t it make more sense to simply provide a flat benefit to all recipients?  And it makes more sense to fund such a benefit out of general revenues than to tax the poor, with FICA, from the first dollar of income earned, then effectively refund that income, to some extent, through the Earned Income Tax Credit.

The second objective of Social Security is (partial) middle-class pay replacement.  But the pay replacement above the first bend point is only 35%, up to $64,764, and 15% thereafter to the maximum pay level, hardly a princely sum.  What’s more, the progressive nature of the formula, however well-intentioned it is in providing a disproportionately generous benefit level to lower-income recipients, makes it more difficult for middle-class recipients to really understand how Social Security fits into their retirement future, or identify how much they really need to save.  Back in the heyday of Defined Benefit pension plans, this was not an issue because the plan formulas typically had a “Social Security offset” or had two different accrual levels, but Social Security is much harder to integrate into Defined Contribution plans.  And don’t get me started on the lack of meaningful pre-funding for the system!

Our proposal tried to remedy these issues.  The first tier is straightforward, though we didn’t prescribe any specifics about what the benefit level or retirement age should be, except that the latter should be set at the age at which the average American can no longer reasonably be expected to work, with a wholly-separate (hopefully-)reformed disability benefit, as well as perhaps unemployment insurance more generous in duration for near-retirees, replacing reduced early retirement benefits.  The benefit is funded from general revenues, which can mean anything from an across-the-board income tax hike to the usual sort of tinkering with marginal tax rates at various income levels.

As to the second tier, the idea is this:  all American workers would be required to participate in retirement accounts, with contributions of 10% of pay.  I’m indifferent on whether this is all employer-paid, employee-paid, or a split, since, in principle, it doesn’t matter.  The key, though, is that the contributions would only apply after a certain income threshold coordinated with the flat-dollar benefit, and would cut off at some higher income level.  Funds would accumulate over one’s working lifetime like a 401(k) account but would be converted into a cost-of-living-adjusted annuity, which we estimated, back in the day, would produce a cost-of-living-adjusted pay replacement of 50% on that tranche of income, which produces a weighted-average pay replacement greater than 50% when the “100% of pay” the first-tranche benefit is taken into account.  Originally we envisioned that employers would administer the benefit, similar to a cash balance plan, and I suppose it’s indicative of how much has changed in the pension world that we even considered this.  At this point, what makes more sense is some sort of pooled solution, in which there might be some sort of return smoothing mechanism and some protection from the risk of outliving assets.  And it goes without saying that, because the funds would be privately managed, this would be a true funded system.

Would these accounts be “owned” by individuals in the same way as other funds we own in bank accounts?  Would they simply be government benefits like any other?  It seems to me that we’d have to really conceptualize this as something in-between, to avoid battles over whether it’s “fair” for the government to limit investment choices or require annuitization, or whether the government can require participation in the first place.  It also makes sense to transition to the new system by providing the old Social Security benefit as a minimum while participants’ accounts build up, and one of the benefits of a complete redo of the whole system is that it reduces the risk of getting trapped in arguments about winners and losers.

Finally, our plan included a continued voluntary tax-favored supplemental savings component, not only to provide a lump-sum pot of money for other needs and wants in retirement, but, to some degree, to serve dual-duty as a rainy-day fund, since we are increasingly aware that many Americans lack the basic savings for emergencies that would keep them afloat in the case of medical expenses, home or car repairs, or the like.  We know that tax deferral or Roth-style untaxed earnings systems have come in for criticism because the benefits disproportionately accrue to higher earners, since they’ve got higher tax rates and are more likely to save in the first place, but it is in the nature of the tax code to deem some income as not subject to taxation, and the label “tax deduction” is a motivator of behavior even if the net impact on one’s finances is small.

Is a complete revamp of Social Security impossible?  Are we stuck tweaking the margins?  I hope not.  However promising our specific plan may or may not be, it simply doesn’t make sense to be so fatalistic as to believe that Social Security’s benefit formula is fixed in perpetuity.

***

Follow-up/bonus article:  “News Flash: The U.K. Adopts My Social Security Reform Proposal.”  Also published March 11, 2018.

Well, sort of.  And it’s a bit “old news” by now, but still important to know about.

I wrote in my prior column that it’s a mistake to view our Social Security system as forever unalterable, and I wrote that a flat-dollar benefit, paired with a system of real, funded individual accounts, would solve many of the difficulties of our present system.

Well, the United Kingdom, whose pension system, prior to 2016, was fairly similar to that of the U.S., implemented a variation of the “purpose-based retirement plan.”  No, I don’t claim that their parliament reads obscure American blogs for reform ideas, but rather that this demonstrates that change is, in fact possible.

Here’s what they’ve done:

The U.K. system consists of two components.  As with the “purpose-based plan,” there is a flat-dollar, or, rather, of course, flat-pound State Pension benefit, of, at present, about GBP 8,000 annually.  The system phases in gradually, and once it is fully in place, to get the full benefit requires 35 years of participation in the system, either with qualifying employment during the year or credits due to parenting, providing unpaid care for a disabled person, or unemployment with documented job-seeking.  Prorated benefits are available after at least 10 years of participation, and it’s possible to pay voluntary contributions if needed due to gaps in one’s earnings record.

Now, to be sure, GBP 8,000 isn’t a lot of money, but it replaced a prior system which combined a lower flat benefit level and a supplemental pay-related benefit, the latter of which was tied into employer-provided benefits via a system of “contracting out,” where employers were able to substitute their own pensions for the supplemental state pensions.  But, just as in the United States, employers in the United Kingdom are closing their pension plans to new entrants, so that this prior system no longer worked.

And similar to, though not identical to my proposal, there is a mandate that all employers who don’t otherwise offer an equivalent benefit themselves, must facilitate the participation in retirement savings accounts, called NEST, or National Employment Savings Trust, through autoenrollment and must contribute to the plans, with minimum employer contributions growing from 2% to 8% of pay by 2019, paid partly by employers and partly by employees, on the tranche of income from £5,876 to £45,000, with those earning less than GBP 10,000 able to request participation.  Unlike the Jane Plan, workers can opt out, in which case they forgo their employer’s contribution but are likewise not obliged to contribute themselves, and, also unlike the Jane Plan, they are not obliged to annuitize their benefit at retirement age.

How is the plan working out?  At this point, the contribution requirements are small, with only a 1% employer and 1% employee contribution required, and about 9% of eligible participants have opted out of the plan.  The first of the increases in contribution levels begins in April of this year, to 2% employer, 3% employee, and opt-outs may increase at that time, although each time an employee opts-out, they are required to re-opt-out or be again automatically enrolled in three years’ time.

The current options for taking your money out of NEST focus on making the most of relatively small pots. That’s because NEST is only a few years old, so our members haven’t been saving with us for very long. We’re now developing new options for how people with larger pots will be able to take their money out in the future.

So hooray for the U.K. And if they can update their state pension system to reflect new realities, why can’t we?

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.

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.