In a recent article for National Review Online, I advocated Social Security reforms that combine a universal, guaranteed, flat retirement benefit provided by the government with expanded 401(k) retirement savings accounts to supplement that minimum benefit. These proposed reforms are similar to the retirement systems of New Zealand and the United Kingdom, and they also take cues from Canada and Australia.
Following the publication of that article, I received a wide range of feedback from readers — some asking for additional details on how the plan would work, others inquiring about various technical issues. But the most pressing questions have been about politics. Could such a plan pass? Or will fiscally conservative plans simply be beaten again, as they were when President George W. Bush invested heavily in reform in 2005?
No one designs a Social Security reform to be politically popular. Any proposal to bridge the $10 trillion-plus gap between the benefits Social Security promises and the taxes it will collect will inevitably deliver a lot of bad news to a lot of people. Anyone proposing a magic reform that guarantees full promised benefits without raising taxes is peddling snake oil.
But, compared with traditional reform plans, the flat-benefit plan offers a number of politically attractive features.
The core of the flat-benefit plan is a gradual shifting of Social Security benefits away from the current benefit formula, in which retirees receive a progressive replacement of their pre-retirement earnings. Under current law, a retiree’s basic benefit is equal to 90 percent of his first $826 in average monthly pre-retirement earnings, 32 percent of earnings between $826 and $4,980, and 15 percent of earnings over $4,980. To become vested for benefits at all, a person must have worked at least ten years in employment covered by Social Security.
Under the flat-benefit plan, each legal, long-term U.S. resident would receive a flat dollar benefit pegged at the single, over-65 poverty threshold, which is currently about $950 per month. Legal residents who lived in the U.S. for fewer than 40 years would receive a graduated benefit. For new retirees, this minimum benefit would be increased each year along with growth of economy-wide wages, to keep up with the average standard of living.
Anyone proposing a magic reform that guarantees full promised benefits without raising taxes is peddling snake oil.
To supplement that base benefit, the government would reform 401(k) rules to enhance personal saving: Automatic enrollment in 401(k)s, which dramatically increases participation, would be made universal; 401(k) plans would utilize “auto-escalation,” which gradually increases worker contributions; and regulatory and legal costs of establishing a 401(k) would be reduced, to make plans more attractive to the small employers who today often don’t offer 401(k)s. If these reforms allowed worker-age individuals to increase their 401(k) contributions by about 3 percentage points — say, from 6 percent to 9 percent of their pay — their total benefits would match those promised under the current Social Security framework.
In addition to the flattening of the Social Security benefit formula, the flat-benefit plan has a number of other provisions.
First, beginning at age 62, it would immediately eliminate the 12.4 percent Social Security payroll tax, to make work more attractive to retirees and older workers more attractive to employers.
Second, the plan would boost benefits for current retirees with benefits below the poverty line. Retirees with benefits below $950 would receive a higher Cost of Living Adjustment (COLA) based on the Experimental Consumer Price Index for the Elderly (the CPI-E); the CPI-E is calculated according to the purchasing habits of individuals over 65 and generally rises faster than the Consumer Price Index for Urban Wage Earners and Clerical Workers (the CPI-W). The CPI-W is currently used to calculate COLAs but is based on the purchasing habits of working-age individuals. Those with benefits between $950 and $1,350 would receive the standard CPI-W-based COLA. And retirees with monthly benefits above $1,350 would receive a COLA based on the so-called Chained CPI, which generally rises more slowly than the CPI-W.
Third, the plan would gradually restore the early retirement age of 62 to its original age of 65, to encourage longer work lives and to prevent workers from claiming reduced benefits that last throughout their lives. The normal retirement age would not be increased relative to current law. And fourth, the plan would enroll newly hired state and local government workers in Social Security, to provide those employees with a retirement benefit that is portable between jobs and to diversify their retirement income beyond the greatly underfunded state and local government pensions on which they currently rely.
As a whole, the plan should prevent the exhaustion of the Social Security trust fund, currently projected to occur in the early 2030s, and keep the program solvent over the long run.
#share#One advantage of the flat-benefit plan is that both its justification and its implementation are simple to explain: Government has an obligation to reduce poverty in retirement, but individuals have an obligation to save additional amounts to help them maintain their pre-retirement standard of living. And that’s what the flat-benefit plan does: The government benefit would reduce poverty in old age from the current level of 10 percent to approximately zero, while the 401(k) provisions would increase saving by middle- and upper-income households while making them less dependent on taxpayers in old age. Anyone who has tried to explain other Social Security reforms, such as President George W. Bush’s “progressive indexing,” will recognize the difficulty ordinary Americans have in understanding how these provisions work, much less the policy rationale that motivates them. Social Security reform is a tough sell, and policymakers must be able to explain it in English, not actuarial minutiae.
Another advantage of the flat-benefit plan is that it honors the benefits Americans have already earned. It doesn’t renege on benefits that workers accrued through prior work, but it acknowledges that we need to change the terms on which future benefits will be earned. This is how successful reforms to pensions, whether private sector or state and local government plans, have operated, and the continuity will help reassure Americans that reformers are working in good faith.
Perhaps most important, the flat-benefit plan gives current and near retirees a reason to support reform. Previous reform plans satisfied themselves with exempting current and near retirees from any benefit cuts. That didn’t do the trick politically, and most conservative plans today can’t even make that promise because they would reduce annual Cost of Living Adjustments (COLAs) by pegging them to the Chained CPI. The flat-benefit plan, by contrast, provides some real sweeteners for older Americans.
The flat-benefit plan gives current and near retirees a reason to support reform.
The poverty-level minimum benefit would be implemented immediately. Many previously ineligible workers, who had paid into Social Security for up to ten years, would now be eligible for benefits. And even among those who do qualify, about one-third of retirees currently receive a Social Security benefit that is below the poverty line. Those new retirees would immediately be lifted out of poverty. No other reform plan, from Democrats or Republicans, offers such an immediate improvement in the social safety net.
Current retirees wouldn’t be left behind. The one-third of current retirees with a benefit below the poverty line would see their benefits boosted through higher COLAs, while eliminating the payroll tax at age 62 would increase paychecks by 6 to 12 percent for retirees who continue to work.
#related#Finally, while the benefit enhancements and the payroll tax cut would take place immediately, reductions to promised benefits for middle-income and high-earning individual would be scaled in over several decades. Those reductions would be substantial, but households would have a long time to adjust. Moreover, even middle- and upper-income households suffer from fears that they will fall into poverty in retirement. Two-thirds of Americans younger than 50 are either “not too confident” or “not at all confident” in the future of the Social Security program, according to an August 2015 Roper poll. That Social Security will offer, and can afford to pay, a true guarantee against poverty in old age might address their fears concerning reform.
Social Security reform is a difficult task for either political party: Americans neither wish to pay more taxes nor to receive lower benefits, while the underlying mathematics of the program make choosing one or both inevitable. But a reform plan has to overcome these obstacles, because Americans can only reap the benefits of a sustainable and effective Social Security program if reform legislation can actually be passed by Congress and signed by the president. The flat-benefit plan is not a magic solution to Social Security’s problems. But its combination of real benefit enhancements for current and near retirees with a solid guarantee against poverty in old age for future generations has the potential to change the political dynamic on Social Security reform.
— Andrew G. Biggs is a resident scholar at the American Enterprise Institute and a former principal deputy commissioner of the Social Security Administration.