At a recent event at AEI, John Goodman of the National Council for Policy Analysis, Peter Ferrara of the Heartland Institute, and Andrew Biggs of AEI presented ambitious Social Security reform proposals, bracketing the question of political realism and thinking rigorously about the kind of retirement security system that would work best for retirees.
Biggs’s proposal, an early version of which appeared in the AEI contribution to the Peterson Solutions initiative, creates a universal flat defined benefit (a predictable, stable minimum benefit that would eliminate poverty among the elderly, regardless of lifetime earnings); universal defined contribution retirement accounts (this would shift the system away from pay-as-you-go, and it would tend to strengthen work incentives), and the accounts would be automatically annuitized on retirement; COLAs for the minimum benefit would be set on the basis of chain-weighted CPI; the payroll tax would be eliminated at age 62 to encourage continued labor force participation; and the Retirement Earnings Test (RET) would be eliminated.
I find the Biggs proposal very attractive, as it would greatly benefit low lifetime earners relative to the current system while requiring that middle-income and affluent retirees rely more heavily on private savings in the form of universal, dead-simple accounts that receive favorable tax treatment. To the extent these mandatory contribution represent a “tax increase,” it represents “a tax increase that individuals pay to themselves,” as Biggs puts it. Many workers already save 5% or more, however, so this would only apply to those currently save less. But Biggs also notes that these accounts needn’t be compulsory; auto-enrollment would likely achieve the same goals, or a form of “soft compulsion” in which workers must actively opt out every year.
Perhaps the most politically attractive component of the plan is the elimination of the payroll tax for workers 62 and up, which also strikes me as deeply wise. Labor force participation tends to extend healthy lifespan, which can also help reduce Medicare expenditures and long-term care expenditures more broadly.
To put Biggs’ reform in context, I recommend a recent post by Allison Schrager on retirement savings.