The Social Security retirement program in the United States is facing a significant challenge - it will be unable to pay full promised benefits in about 10 years. To address this issue, two highly-respected experts, Andrew Biggs and Alicia Munnell, have proposed a unique solution. They suggest slashing tax subsidies for private retirement savings and using the money to strengthen the public system. This proposal has the potential to provide two major benefits.
Firstly, redirecting the tax breaks that primarily benefit high-earners towards shoring up Social Security would help preserve future payments for low- and moderate-earners. While IRAs and employer-based retirement plans offer only modest benefits to these individuals, the public program is a critical source of income for them. By reallocating the funding, the proposal aims to ensure that those who rely on Social Security as their primary retirement income receive the support they need.
Secondly, investing the additional funds into Social Security would buy some time for Congress to make essential structural changes to the program. In 2020 alone, tax benefits for IRAs, 401(k)s, and pensions led to a reduction of $186 billion in federal revenue and an additional $68 billion in payroll tax revenue. However, according to calculations by Biggs and Munnell, much of this tax revenue does little to increase national saving. They estimate that only around 65 to 70 cents of each dollar of tax-advantaged retirement savings would actually be saved in taxable accounts. Therefore, the potential infusion of funds from reallocating these tax subsidies could significantly enhance Social Security and pave the way for broader reforms.
It is important to note that this proposal is not without its weaknesses. By repealing or reducing the tax subsidies for retirement savings, the incentive for employers to sponsor retirement plans could be diminished. These plans are a crucial source of savings for many workers, and even though the majority of benefits go to higher-income employees, lower-paid workers still save money that they might not otherwise be able to. Additionally, while auto-enrollment in 401(k)-type plans may not necessarily encourage workers to save enough, it does promote higher savings levels compared to if such plans did not exist.
Furthermore, reallocating retirement savings from a mix of stocks and bonds to solely US Treasury bonds, as proposed by Biggs and Munnell, would significantly alter how these savings are invested. While stocks and bonds offer a prudent long-term investment strategy, the exclusive investment in Treasury bonds may limit potential growth opportunities.
The idea of redirecting retirement savings to strengthen Social Security is not entirely new. In 2005, President George W. Bush proposed allowing workers to invest a portion of their Social Security payroll taxes in a balanced portfolio of stocks and bonds. However, this idea faced opposition and was ultimately labeled as 'privatizing Social Security.' Biggs and Munnell's proposal would essentially reverse Bush's approach by shifting retirement savings from stocks and bonds to bonds only.
One key question that arises is the allocation of the new tax revenue. Currently, Social Security benefits are funded by payroll taxes and interest on Treasury bonds. When the income from payroll taxes exceeds benefit payments, the excess effectively funds other government operations. Conversely, when benefits exceed this income, the government must rely on general tax revenues or borrow more to cover the shortfall. Biggs and Munnell's proposal would increase federal general fund revenues by repealing the tax subsidy. However, using this revenue to strengthen Social Security means it would not be available to reduce the deficit, which could further increase national savings.
Additionally, altering Social Security's funding structure to rely more explicitly on general tax revenues would challenge the program's longstanding design as a social insurance system. Since its inception, Social Security has been perceived as a program where workers contribute through the payroll tax and receive benefits as a return on their contributions. While the reality is that benefits are mostly paid by taxes collected from younger workers, maintaining this perception has provided a level of protection against political interference. Explicitly using general tax revenues to fund Social Security might blur the lines between social insurance and other government spending programs, potentially subjecting it to greater political volatility.
Lastly, the proposal would buy Congress time to develop a more permanent solution to Social Security's funding problem. However, there is a concern that with more time, Congress may not act decisively and the issue could persist, exacerbating both the federal deficit and the challenges posed by an aging population.
In summary, addressing the funding shortfall of the Social Security retirement program requires innovative thinking. The proposal put forth by Andrew Biggs and Alicia Munnell offers a progressive alternative to raising payroll taxes. By reallocating tax subsidies for retirement savings to strengthen Social Security, the proposal aims to preserve benefits for low- and moderate-earners while allowing for necessary structural reforms. Nonetheless, it is essential to carefully consider the potential consequences of this approach, such as the impact on employer-sponsored retirement plans and the shift in investment strategy. Ultimately, finding a lasting solution to the challenges facing Social Security will require comprehensive and thoughtful consideration.
