So far the debate on Social Security has been between the deficit hawks who want to cut Social Security benefits to reduce government debt and others who want to preserve it as is. A recent policy paper by Stephen Hill at the New America Foundation (and reported on by Alternet) takes a surprising, and different position. He recommends doubling the current Social Security payout, thus making it a true national retirement system. According to Hill, a more robust Social Security system would be good for American retirees and good for the economy.
Our three-legged stool has lost two legs
Hill explains that since WWII, retirement has been conceived as a “three-legged stool,” with the three legs being Social Security, a pension, and personal savings largely derived from home ownership. But in today’s world, few private sector employers provide pensions, and state and local government pensions are underfunded. In addition, the collapsed housing and stock market have devastated personal savings. What is left is a one-legged stool that is no longer stable or secure. Social Security, once conceived as a supplement, is now the only source of support for hundreds of millions of Americans.
According to Hill, the bottom half of all earners depend on Social Security for 84% of their retirement income. The next 25% of earners depend on Social Security for 55% of their income. Only the richest 25% of Americans don’t rely heavily on Social Security for their retirement income. Because the “retirement stool” is broken, the real problem with Social Security is that the payout is too small. Currently, it replaces only about 33 to 40 percent of a worker’s average wage compared to Germany, for example, where it replaces 70 percent. Obviously, Social Security is not enough money to live on for at least half of seniors for whom it is the primary, and possibly the only, source of retirement income.
But how would we pay for it?
Hill says doubling Social Security’s individual payout would cost about $650 billion annually for the 51 million Americans who currently receive benefits. Although deficit hawks would howl at this number, he counters with solid and practical ways to pay for this increase:
- Lift Social Security’s payroll cap. 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 wealthy pay a much lower percentage. Making all income levels pay the same percentage would raise about $377 billion.
- Because employer based pensions would be redundant, remove the business deductions businesses currently receive for providing them. These deductions total $126 billion annually.
These two sources of revenue alone would provide three-fourths of the revenue needed to double Social Security’s payout. Hill recommends other revenue streams such as removing the unfair deductions in the tax code, which benefit the top 20 percent of earners but that most low and moderate income Americans cannot enjoy. Some examples are deductions for private retirement savings, homeownership, health care and education.
He argues that while a certain number of moderate income Americans benefit from these, if we doubled Social Security payments for everyone they would no longer need to rely on these deductions as vehicles for retirement savings. Home ownership and 401Ks, as we have seen, are not reliable investments. In 2010 the mortgage interest deduction alone will amount to about $108 billion. Higher income Americans who are losing these tax deductions would see part of it returned to them in the form of a greater Social Security payout.
Unfortunately, Stephen Hill does not mention the logical place to find offsets for doubling Social Security benefits: Decreased defense spending.
How would doubling Social Security work?
Hill has additional ideas for how doubling the Social Security payment could be implemented. For example, he suggests rolling it out in stages, targeting lower earners first. And, allowing seniors who have not yet reached full retirement age to take a half their Social Security and work part time without losing their right to a full Social Security payment upon their retirement.
According to Hill, an expansion of Social Security would be good for the economy because it would act as a stabilizer during economic downturns, keeping retirees secure while stimulating consumer demand. It also would help American businesses compete with foreign companies who don’t have to provide pensions because their countries already have generous national retirement plans.
Hill’s practical idea for an expanded Social Security would provide a stable, and secure retirement for every American.