It’s become a cliche to say that Social Security is unsustainable, but it’s also the truth. The Social Security Administration projects that it will only be able to pay its beneficiaries in full until 2037. If Congress doesn’t act, benefits will be cut for millions of retirees who have already contributed to the plan.
Efforts to reform the program have been launched: Rep. Reid J. Ribble (R-Wis.), for example, has taken on the unpopular task of proposing potential fixes, which include a combination of expanding taxes, upping the retirement age and reducing future benefits by pinning them to more accurate inflation measurements. The proposal has attracted some limited bipartisan support, but it’s unlikely to make headway in the House. Anything that gives the impression of trying to dismantle the much-relied-upon “comprehensive package of protection” against the “hazards and vicissitudes of life” is tantamount to political suicide.
Hillary Clinton has stated that she doesn’t want to roll back Social Security benefits in any way. In fact, she wants to expand the program. Donald Trump, meanwhile, hasn’t laid out any specific policy points on Social Security, but he has said that he opposes any cuts to benefits.
Are the most popularly proposed Social Security reforms — raising the retirement age, reforming cost-of-living adjustments or expanding the withholding tax — fair to retirees and workers? If not, what should be done to make the program sustainable going forward?
Rachel Greszler is a senior policy analyst at the Heritage Foundation.
Social Security is unsustainable. It faces an $11.4 trillion deficit over the next 75 years. Yet Donald Trump wants to maintain current benefits, and Hillary Clinton wants to expand them.
The next president needs to recognize that Social Security is much larger than it was ever intended to be — or needs to be — and that maintaining its current benefit structure will cause a huge drag on workers’ paychecks and economic growth. Social Security could better accomplish its goal with significantly lower cost through a flat, anti-poverty benefit.
It’s possible, as Clinton proposes, to reduce the program’s shortfalls by raising taxes on the rich. But that would be economically destructive, and politicians would almost certainly spend the higher taxes on other government programs.
Although Clinton has avoided specifics, raising the payroll tax cap would bring the top marginal tax rate (federal and state combined) to more than 70 percent, and applying the payroll tax to investment income would raise the top rate to 36 percent. Such high taxes are neither necessary nor beneficial.
Social Security was established to prevent poverty among individuals in their final years of life, when they were no longer able to work. But today, Social Security provides decades-long benefits to many retirees. The poverty rate among the elderly is nearly 10 percent, but Social Security sends benefits of more than 2.5 times the poverty level to the highest-income retirees. The program has broken its promise to workers that 6 percent “is the most that you will ever pay” — it now extracts 12.4 percent of workers’ pay.
If Social Security offered competitive returns or had a positive impact on the economy, its massive size may not be so terrible. But by taking payroll taxes that could otherwise be saved and invested and trading them for current government spending and future obligations, Social Security saps the economy of growth and guarantees paltry returns.
Most workers don’t realize that they could achieve much larger retirement incomes by saving far less than Social Security takes in taxes. Even workers earning $10 an hour could achieve Social Security’s promised benefit by saving half as much as the taxes demand.
Given its inefficiency as a retirement savings program, Social Security should focus on preventing poverty among seniors. This could be accomplished by gradually shifting toward a flat, anti-poverty benefit, increasing the eligibility age in coordination with life expectancy and work capacity and using a more accurate measure of inflation. Almost nothing would change for current and near retirees, and future workers would eventually pay lower payroll taxes.
Are these reforms fair? Absolutely. Social Security was designed to kick in when workers lose their capacity to work. Since Social Security began, life expectancy has increased by 17 years, and jobs have become far less physically demanding, leading to the finding that workers could be working four years longer than they are. And while it makes sense to provide Social Security beneficiaries with an annual cost-of-living-adjustment, it is irrational to use an outdated, narrow and inaccurate index that causes benefits to grow faster than actual inflation.
A flat, anti-poverty benefit would lift millions of retirees out of poverty. Although middle- and upper-income earners would receive less from Social Security, they would be far better off financially (both in their working years and retirement) than if they were forced to pay higher taxes to maintain Social Security’s promised benefits.
Whatever the solution, the ones proposed by the presidential candidates — inaction and expansion — are untenable.