Senator Elizabeth Warren delivered a typical speech this week before the Senate: long on nostalgic rhetoric and factual delusions, and short on serious or innovative policy proposals. She identifies a real problem in the United States: our low personal-saving rate, and the corollary that many Americans can’t expect secure retirements. Her solution consists of two proposals to expand programs that discourage personal saving.
She called for expanding Social Security and revitalizing employer-based defined-benefit pensions, both bankrupt systems that require reform, not headlong expansion. Her discussion of Social Security, in particular, offered little clarity.
The program’s “benefits are shrinking in value,” she said, a finding based, according to her footnotes, on a complicated assessment of benefits as a share of median working-age income after the rising costs of Medicare premiums. In actuality, Social Security benefits continue to grow in real terms. Her sense that Social Security benefits are dropping must be why she claims it has “a $2.7 trillion surplus,” a misleading term intended to suggest the program is operating in the black, and one that doesn’t appear once in the 184 pages of the Social Security commissioner’s 2013 report. Social Security’s retirement program is running a $55 billion deficit, which is covered by drawing on the $2.5 trillion it holds in federal bonds (another $154 billion is held by the Disability Insurance program). When those run out, the former bankruptcy-law professor confidently says, it “will continue to pay most benefits.” Try telling that to retired Americans, every one of whose Social Security checks would legally be cut by about 30 percent.
She suggested increasing benefits by using the Bureau of Labor Statistics’ measure of inflation for elderly consumers, “CPI-E,” an experimental and imprecise measure that has tracked the existing inflation measure closely over the past decade. (Moreover, a number of Social Security recipients, survivors and the disabled, aren’t elderly.)
But Democrats of Warren’s ilk have released more specific plans for expanding Social Security. The idea she highlighted — faster cost-of-living adjustments for everyone — is actually the most regressive element of those proposals, based on the current system; it’s most helpful for wealthy Americans who live longer and have higher initial benefits, and least helpful for poorer Americans. It isn’t the most economically damaging, though. That honor belongs to the funding source of Senator Tom Harkin’s plan to make the program solvent and more generous. He would expand the payroll tax to every dollar of individual income — a measure whose massive economic downsides would, to start, make it far from a panacea for the program. Senator Warren didn’t say how she’d like to pay for expanding the program, but her vaunted “surplus” won’t do: The $2.5 trillion in bonds the program holds are unfortunately liabilities for the federal government, so that drawing down the balance means higher taxes or lower spending elsewhere.
Social Security would benefit not from expansion but from reform — it should be preserved as a safety net for all Americans, but with less generous benefits for upper-income Americans than are currently planned. Reforming Social Security need not, as Warren contended, mean cutting benefits for the low-income Americans who currently depend on it entirely. More progressive benefits and a higher retirement age would also encourage saving, which, Senator Warren is right to point out, is far too low.
Yet when it came to people actually saving for themselves, she disparaged the 401(k) system, claiming it “leave[s] the retiree at the mercy of a market that rises and falls, and, sometimes, at the mercy of dangerous investment products.” In reality, investment products are vastly better for personal savers than they ever have been before, and market returns over time are so much better than Social Security’s that volatility hardly poses the problem she claims. The problem with 401(k)s is not that they don’t work but that people don’t participate in them. Employers should move toward automatic-enrollment models for their employees, and the federal government should do more to encourage Americans to save.
Expanding Social Security to make Americans solvent in retirement is the classic example of a 20th-century solution for a 21st-century problem. This is not the first example of Senator Warren’s thinking along these lines, and we suspect it won’t be the last.