Nowadays, whenever Social Security comes up in policy debates around Washington, the discussion often focuses on how best to cut benefits in order to shore up the program's finances.
But a big new report (pdf) from the New America Foundation suggests that the conventional wisdom is exactly backward. Congress should be looking at ways to expand Social Security, not shrink it — particularly at a time when traditional corporate pensions are disappearing, and 401(k)s have proved fairly risky.
The major proposal in the report is to add a brand new benefit to Social Security, called Part B, which would provide a flat $11,699 per year to all retired workers. This would come on top of regular Social Security, which would also be protected from any further cuts.
The net effect is that the new Social Security program would replace a far bigger chunk of a worker's lifetime earnings than the current program does. Kevin Drum offers up this chart:
So how much would this cost in taxes? Quite a bit. At the moment, Social Security is expected to experience a funding shortfall by 2033. Congress will need to raise taxes by between 1 and 1.5 percent of GDP just to maintain current benefits. On top of that, the expanded benefits proposed by New America would cost an estimated 3.7 percent of GDP. The net cost: About 5 percent of GDP.
That's a large hike. But the New America report, written by Michael Lind, Steven Hill, Robert Hiltonsmith and Joshua Freedman, makes a case that alternative retirement options for Americans aren't working. Defined-benefit employer plans are vanishing. Workers aren't saving enough or dipping into their retirement funds too often. And private-savings plans like 401(k)s or IRAs are proving quite volatile — the financial crisis wiped out an estimated $2.8 trillion from retirement plans.
As a result, fewer Americans are well-positioned for retirement:
"Retirement security is often thought of as three-legged 'stool' consisting of Social Security, employer retirement plans, and private savings," the report argues. "Social Security has been far more stable and successful than the other two legs of the stool. The reliance on these other legs of the system has resulted in a retirement security crisis for most Americans."
Needless to say, this isn't the sort of proposal Congress is likely to take up anytime soon. Hiking taxes by 5 percent of GDP is far outside the bounds of what either party is contemplating. And if Congress was willing to raise taxes by 5 percent of GDP, there would undoubtedly be lots of debate about whether expanding Social Security was really the best investment it could make. (Scientific research? Preschool? A crash program to cut carbon emissions and tackle climate change? And so on...)
So the New America report is probably best thought of as a way to shift the "Overton window" and expand the bounds of the current debate on Social Security — and to make a case that lawmakers should pay closer attention to what's happening with U.S. retirement savings before making any changes to safety-net programs.
--A relevant story from today: The GAO says that many 401(k) firms "offer workers misleading and self-serving information about how to handle their retirement savings when they change jobs."
--For those who prefer to cut Social Security, my colleague Dylan Matthews has looked at possible ways to do that.
--Here's an interview with economist Peter Diamond, who has his own proposal for shoring up Social Security's finances.