One of my good friends is a political scientist who advocates increasing — not decreasing — Social Security benefits, as he believes that there is a structural problem with private retirement savings. I don’t share his view, but I do find it intriguing. Laurence Kotlikoff has long advocated what he calls a “Personal Security System“:
I say, retire Social Security and replace it with a version that works. Do this by freezing the current system, paying today’s retirees their benefits, while paying workers only what they have accrued so far once they retire.
Next, have all workers contribute 8 percent of their pay to the new system, with half going to a personal account and half to an account of a spouse or legal partner. The federal government would make matching contributions for the poor, the disabled and the unemployed, permitting the system to be as progressive as desired.
All contributions would be invested in a global, market- weighted index of stocks, bonds, and real estate. The government would do the investing at very low cost and guarantee that contributors’ account balances at retirement would equal at least what was contributed, adjusted for inflation.
Between ages 57 and 67, each worker’s balances would gradually be swapped for inflation-indexed annuities sold by the government. Those dying before 67 would bequeath their account balances to their heirs.
While this plan has private accounts, Wall Street plays no role and makes no money. Additional contributions would be used to fund life- and disability-insurance pools.
This approach addresses anxieties about administrative expenditures, etc., but it also gives the federal government an enormous pool of money to invest in global equities and other assets, and one wonders if this fund would get politicized somehow. Norway has managed to avoid that fate with its sovereign wealth fund, but Norway, as we all know, is a quirky country, as are we in a very different way.
This all came to mind because I was perusing the Tax Policy Center’s indispensable website and I was struck by the size of the tax subsidies for retirement savings:
Provisions in the tax code designed to encourage retirement saving cost the U.S. Treasury billions of dollars in forgone revenue each year. Provisions of this type, which reduce tax revenue for the sake of promoting other public goals, are called tax expenditures. Of all the tax expenditures in the tax code, the one allowing tax-free employer contributions to employee pension plans is the second largest, costing $108.6 billion in 2007 according to estimates by the congressional Joint Committee on Taxation. All of the retirement saving incentives in the tax code together amounted to $133.8 billion in tax expenditure in that year and $760.3 billion over five years.
That’s a lot of scratch, and it goes without saying that most of the value of these subsidies goes to relatively affluent households.
Here’s the deal: I’m fine with affluent households getting getting generous subsidies for retirement savings if they’re willing to accept much lower Social Security benefits. We need to keep this tax subsidy in mind when we think about the broader retirement picture. Make Social Security a safety net with a decent-sized minimum benefit plus a private savings component, a la Australia’s Superannuation Guarantee.