A New Day for Social Security?

SSA-image-3My Comments: As someone who teaches people how to maximize their social security benefits, a major fear that surfaces during a workshop is whether there is enough in the system to guarantee future benefits.

The quick answer is “not without some changes to the system”, which leads to more questions about when it will run out, and what can we do about it.

The last fundamental change came in 1983. At that time, the system was expected to go broke in two or three years. But here we are, 33 years later, with far more people in the system than ever before, and there is enough money in the system today to last another 20 years.

Since most of my students can expect to live for another 30-40 years, the question of whether they’ll still get a check at the other end is a real question. It deserves a more qualified answer than I can possible deliver. Here is a answer from someone very qualified.

By Stephen Hill, July 11, 2016

The U.S. has entered an anxious era in which fewer workers have a single employer or a regular workplace. Instead they have various employers and multiple part-time jobs and “gigs,” with these businesses not required to provide healthcare, make Social Security contributions or even offer compensation for workplace injuries.

A crucial adaptation to these changing circumstances would be the creation of a portable safety net, one that would make it possible for all workers to go from employer to employer while still retaining access to basic benefits. Social Security — which is already gloriously portable — could play a key role in such a system, but only if we fix it.

Social Security is our most effective anti-poverty program; without it, nearly half of the nation’s retirees would be living in poverty. Three-fourths of retirees depend on it heavily, particularly women and racial minorities. During the 2008-09 economic crisis, moreover, when home ownership, private savings and the stock market collapsed, Social Security remained stable.

The criticism that Social Security will face a financial deficit sometime in the 2030s is overblown. Social Security has an established trust fund that, legally speaking, cannot spend more than it takes in. Any future shortfall could be made up from any number of revenue sources, it’s all a matter of budgetary priorities.

In fact the real problem with Social Security is not a shortfall but that its payout is so meager. Social Security is designed to replace only about 35% of wages at retirement, yet most Americans need twice that amount to live decently. With the other components of the retirement system looking wobbly, and with incomes low, Social Security is too skimpy to be the nation’s single pillar retirement system.

The obvious solution is to expand it. There are numerous revenue streams that would allow the nation to greatly increase the monthly payout for the 43 million Americans who receive retirement benefits. Here are a few recommendations to consider.

First, we should eliminate the Social Security payroll cap so that all income levels pay the same rate. Currently any wage income above $118,500 is not taxed for Social Security purposes. The practical effect of the cap is that billionaire bankers and CEOs contribute a far lower percentage of their income into the Social Security Trust Fund than their secretaries and chauffeurs. Making payroll contributions more fair would raise approximately $135 billion annually.

In addition, we should stop exempting investment income from Social Security taxes. Wealthy Americans make 40%-50% of their money from investment income, and we help fund Medicare by taxing it like wages. If we did the same for Social Security, we could raise an additional $75 billion annually.

Along the same lines, we could scrap income tax shelters for wealthy households and businesses, and then reallocate the savings to the Social Security fund. Loopholes include the drastically lower tax rate for investment income like capital gains, “carried interest” and “step-up in basis,” the latter exclusively benefiting inherited wealth. These tax rules cost the national treasury hundreds of billions of dollars per year.

Lastly, the U.S. could end or reduce tax breaks for private retirement accounts, including 401(k)s and IRAs, and again reallocate the savings to Social Security — which would be far more equitable. Of the $165 billion that the federal government spends subsidizing individual retirement savings, nearly 80% of it goes to the top 20% of income earners. Many of the middle class and poor can’t take advantage of these deductions because they don’t earn enough income to save. (For that reason, a universal 401(k), as has been proposed by President Obama, would be largely pointless).

Just these four revenue streams would come close to raising the $662 billion necessary to double Social Security’s monthly benefit.

Other nations manage to provide retirement benefits at that level, so there is no reason the U.S. can’t. Doing so would create a more secure retirement for everyone, even as it would benefit the overall economy and form a core part of a portable safety net that so many workers need. As the old New Deal crumbles, substantial expansion of Social Security benefits would provide a new kind of deal for U.S. workers.

Steven Hill is a senior fellow at the New America Foundation and author of the recently published “Expand Social Security Now: How to Ensure Americans Get the Retirement They Deserve.”

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