Magazine | May 23, 2016, Issue

Entitlement Reform after Trump

The need of it will remain no matter who becomes president.

Donald Trump has betrayed conservative principles in ways large and small. But perhaps his biggest betrayal is his rejection of the decades-long movement to limit the growth of entitlements, particularly Social Security. Without a meaningful entitlement-reform agenda, larger government, slower economic growth, and greater government dependency are inevitable.

Social Security is the largest federal spending program, bigger than Medicare, Medicaid, or the Pentagon. As a share of income, Social Security’s payroll tax is the largest tax paid by most workers (who split its 12.4 percent evenly with their employers). And both the spending and the tax burden are slated to grow as 10,000 Baby Boomers retire daily, swelling the benefit rolls and increasing costs. Over the next 75 years, Social Security faces funding shortfalls of $10 to $15 trillion. To address these deficits would require an immediate and permanent payroll-tax increase of 4.4 percentage points, according to the Congressional Budget Office, or an at least 20 percent across-the-board benefit reduction. Trump’s stance on Social Security, which combines a willful ignorance of the facts with a seductive claim that everyone deserves everything he has been promised by Social Security, threatens to swell unnecessarily the size of a program that penalizes work, undermines saving, and increases dependency among middle- and upper-income households that could easily afford to save more for retirement on their own.

To the degree that Trump has a plan for Social Security, it borders on magical thinking: He promises that higher economic growth spurred by his other policies would bring new revenues into the system. Perhaps it would. But Social Security’s trustees already project that future growth of wages and salaries — the key economic variable affecting the program’s finances — will be higher than in the past, averaging 1.17 percent above inflation versus an average of 1.09 percent since 1950 and 0.59 percent since 1970. And even higher economic growth would make little difference, since both taxes and benefits would increase. We could literally double the rate of economic growth, and Social Security would still be insolvent.

But Trump has gone beyond ignorance of how Social Security is financed. He contends that in an election in which both of the remaining Democrats are proposing to raise Social Security benefits, “you’re going to lose the election” by talking about cuts. That claim may or may not be true, given that Hillary Clinton’s and Bernie Sanders’s plans to boost Social Security benefits won’t pay for themselves. Both candidates propose massive Social Security–tax increases that would push America’s top tax rates to Scandinavian levels.

But Trump, like former Arkansas governor and presidential candidate Mike Huckabee, opposes reform not simply on political grounds: “More importantly, in a sense, I want to keep it. These people have been making their payments for their whole lives. I want to keep Social Security intact.” As Trump tells the story, we have a moral obligation not to reduce benefits.

In part, this belief stems from how conservatives have sold Social Security reform in the past. The push for Social Security personal accounts, which culminated in George W. Bush’s failed 2005 reform drive, often framed choices in these terms: To fix Social Security, we need to raise taxes, cut benefits, or earn a higher rate of return through personal accounts. In that context, personal accounts had an obvious appeal. But crunching the actuarial numbers revealed a problem. Allowing workers to divert part of their Social Security taxes to personal accounts would create a funding gap that required tax increases or benefit cuts on top of those needed to restore solvency. And while personal accounts offered the possibility of higher returns, they came with greater risk. It was never mentioned that if workers wanted to take more investment risk in search of higher returns, they could do so simply by shifting their 401(k) savings toward stocks. In other words, conservative voters weren’t given an informative picture of the difficult choices they faced.

A more forthright discussion of the choices available to fix Social Security might help dismantle the moral case that Trump builds against entitlement reform. The simple point is that Social Security has promised more in benefits than it will collect in taxes. Politicians have known that fact since the late 1980s and have failed to act. It is true, as Trump points out, that Americans have paid into Social Security all their lives. But they simply haven’t paid enough to cover what they expect to receive back in retirement benefits. That doesn’t mean we should pull the rug out from under retirees who have few options available to them. Trump is right that someone who has paid into the system for his entire life should not suddenly face large benefit cuts. But younger workers haven’t paid in all their lives, and they have the option to save more or delay retirement. They should do so. The only other realistic option is for those same workers to pay higher Social Security taxes. Compassionate-sounding arguments don’t make difficult choices go away.

 In the 1990s, the media reported extensively on how population aging and falling ratios of workers to retirees were pushing Social Security toward insolvency. Ohio governor John Kasich, who was chairman of the House Budget Committee during that time, hopes to restart that conversation. He would, he says, “lead a bipartisan effort to assemble the best ideas from the various reform plans that have been proposed to preserve [Social Security’s] solvency.” But even in yesteryear’s favorable environment, with support from Democratic heavyweights such as New York senator Daniel Patrick Moynihan, Congress never came close to approving Social Security–reform legislation. And since that time, the politics of Social Security reform have shifted well to the left. The “green eyeshades” reform strategy of a retirement-age increase here and a cost-of-living reduction there won’t pass Congress. And even if it did, it would leave Americans with Social Security and retirement programs that are, in many ways, substandard.

What was lacking in the 1990s and is still lacking today is a personal perspective. Social Security is a massive budgetary problem, but it is not only a budgetary problem: Its insolvency is a threat to the retirement security of millions of Americans. The typical American has no idea how his Social Security benefits are calculated or how the program is financed. What the typical household cares about is being able to put together enough money for a secure retirement, at a time when both progressives and the financial industry are stating that Americans are trillions of dollars short of what they need. The typical American’s retirement goal is both understandable and achievable. If Social Security and retirement reform are framed in personal terms, with dollars measured in hundreds and thousands rather than billions or trillions, a conservative reform agenda may have a chance. To date, however, none of the Republican presidential candidates has even talked about a retirement agenda.

Such an agenda must not only address Social Security’s finances, but also offer better ways for Americans to save for retirement on their own. Americans don’t trust Social Security. They want to, but they have seen the system’s problems go ignored for decades. Only 35 percent of working-age Americans are “very” or “somewhat confident” in receiving benefits at least equal to what today’s retirees receive. Sixty-five percent are either “not very” or “not at all” confident. This doesn’t mean Americans don’t value Social Security. But they will be reluctant to pay more into a system when they feel unsure they will get that money back.

By contrast, Americans are confident in their own savings: 81 percent of 401(k) or IRA participants are “somewhat” or “very confident” that these retirement plans can help them meet their goals. This doesn’t mean such options are perfect: 401(k)s, in particular, have had problems with low participation, confusing investments, and high administrative costs. But compared with the risk of giving additional taxes to Congress today in hopes of receiving them back decades in the future, personal savings look like the better bet.

And the main problems with 401(k)s are being addressed. For instance, automatic enrollment of employees has become far more widespread, helping increase retirement participation rates to record levels. Most 401(k)s today also offer simple “target date” funds, which automatically shift from stocks to bonds as workers near retirement, thus allowing workers to access the higher returns from stocks when they are young but shifting to a more stable portfolio as they approach retirement age.

The overall purpose should be to help Americans who can save more for retirement do so while strengthening the Social Security safety net for those who need it most. One simple step would be to make automatic enrollment in 401(k) plans universal. The Employee Benefit Research Institute found that such a policy would more than triple a young worker’s account balances by the time he reached retirement age.

Social Security reform should guarantee that no one will retire into poverty. That’s an affordable promise, since the system already pays out more than enough to provide everyone a poverty-level benefit. But to keep this promise over the long term, we must prioritize those who need Social Security most. Already, nearly one-third of retirees receive a sub-poverty-level Social Security benefit. Unless we want to increase taxes substantially, benefits for middle- and upper-income households will need to be scaled back, and not just by a nip and a tuck. Americans may be willing to live with not receiving Social Security benefits they never thought they would receive in the first place, but only if they have adequate opportunities to save for retirement on their own and are confident that Social Security remains available as a safety net.

Social Security reform also needs to encourage longer careers. A higher retirement age could be part of that. But carrots are just as important as sticks. Eliminating the burdensome Social Security payroll tax for those who work beyond age 62 would give an immediate boost to older workers and encourage more people to delay retirement.

Donald Trump’s economic bluster may have ruined the possibility of a meaningful entitlement-reform agenda in this election cycle. But Social Security isn’t going to fix itself. No matter who wins the presidential election, conservatives need to enter 2017 with a clear strategy on entitlement reform.

– Mr. Biggs is a resident scholar at the American Enterprise Institute and a former principal deputy commissioner of the Social Security Administration.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute and a former principal deputy commissioner at the Social Security Administration.

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