For millions of Americans, the dream of a secure
retirement has been threatened by the Great Recession. Since WWII, retirement
has been conceived as a "three-legged stool," with the three legs
being Social Security, pensions, and personal savings centered around
homeownership.
But today most private sector employers have quit
providing pensions, and state and local government’s public pensions are
drastically underfunded. In addition, a collapsed housing and stock market,
combined with increased inequality even before the Great Recession, have
drastically reduced Americans’ personal savings.
In short, the "retirement stool" no longer is
stable and secure, and suddenly Social Security, which always has been viewed
as a supplement to private savings, is the only leg left for hundreds of
millions of Americans. Studies show that people in the bottom two income
quartiles depend on Social Security for 84 percent of their retirement
income, and even the second richest quartile depends on Social Security for
55 percent of its retirement income. Only the richest 25% of Americans
don't rely on Social Security.
Despite Social Security's new role as a de facto national
retirement plan, many budget deficit hawks are calling for cuts to it to
decrease America's indebtedness. But that would only make things worse
for retiring Americans. The real problem with Social Security is that
it is not robust enough to play this role as retirement security of last
resort, though not for the reasons most critics say. Contrary to gloomy
predictions about its future collapse, the program is on solid footing, with
the Congressional Budget Office projecting that Social Security can pay all
scheduled benefits out of its own tax revenue stream for the next 40 years.
The bigger problem is that its payout is so meager.
Currently it replaces only about 33 to 40 percent of a worker’s average wage
from the year prior to retirement. That is simply not enough money to
live on when it is your primary -- perhaps your only -- source of retirement
income.
Instead of cutting back Social Security, what we need to
do is expand it by doubling the individual payout. That would cost about $650
billion annually for the 51 million Americans who receive benefits. This expanded version --
call it Social Security Plus -- could be paid for with revenues identified in a
new study (pdf) I wrote for the New America Foundation.
Here’s how.
First, lift Social Security's payroll cap that
disproportionately favors the wealthy. Currently Social Security only
taxes wages up to $106,800 a year, and any income earned above that is not
taxed. The net result is that poor, middle class, and even moderately upper
middle class Americans are taxed 12.4 percent (split between employee and
employer) on 100 percent of their income, but the wealthiest Americans pay a
much lower percentage. A lawyer making $500,000 a year effectively pays only
2.5 percent, and millionaire bankers pay a paltry 1.2 percent.
Removing the income cap and making all income levels pay
the same percentage -- which is how Medicare works -- would be a popular
reform. Polls show most Americans think that if they pay Social Security tax
on their full salary, others should too. Taxing all income brackets equally
would raise about $377 billion, which is nearly sixty percent of the revenue
needed to double the payout.
Second, with all Americans receiving Social Security Plus,
employers would be freed from providing retirement for their employees. So
they no longer would need to receive the substantial federal deductions they
currently accrue for providing employees’ retirement plans. These
deductions total an estimated $126 billion annually.
Third, we could reduce or eliminate other unfair
deductions in the tax code that allow higher income people to reap generous
deductions that low and moderate income Americans can’t enjoy. These include
deductions for private retirement savings, homeownership, health care and
education. For example, individuals who have enough income to divert for
savings or investment are allowed considerable tax deductions for their
401(k)s, IRAs and pensions. Similarly the homeownership deduction for
mortgage interest only benefits people with sufficient income to buy a home.
But the poor and working class rarely can take advantage of these since they
don’t make enough to itemize deductions. Consequently, the majority of these
benefits go to the top 20 percent of income earners; in 2010 the mortgage
interest deduction alone will amount to about $108 billion.
These three revenue streams -- lifting the payroll cap,
eliminating the employer tax deduction for providing retirement, and capping
or eliminating various wealth deductions -- would raise 100 percent of the
revenue needed for doubling the payout of Social Security Plus. It could
be implemented in stages, targeting first those who are most in need.
An expansion of Social Security -- one of the most
successful, stable and popular programs in U.S. history currently celebrating
its 75th year -- not only would be good for retirees but also for the
macro-economy. It would keep money in retirees’ pockets and stimulate
consumer demand; act as an “automatic stabilizer” during economic downturns;
and make retiree benefits portable when changing from one job to another. It
also would help American businesses trying to compete with foreign companies
that don’t provide pensions to their employees, since those countries already
have generous national retirement plans. And it would be broadly fair, since
even those higher income Americans who are losing their tax deductions would
see part of it returned to them in the form of a greater Social Security
payout.
In short, Social Security Plus would provide a stable,
secure retirement for every American and contribute greatly toward a solid
foundation from which to build a strong and vibrant 21st century
economy.
Steven Hill (www.Steven-Hill.com) is a political writer and
researcher whose most recent book is "Europe's Promise: Why the European
Way is the Best Hope in an Insecure Age" (www.EuropesPromise.org).