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These Social Security plans could help solve America’s retirement crisis

America is facing a looming crisis as generations of workers who mostly participated in do-it-yourself savings plans — or no plan at all — approach retirement.

Though a few high-income households have amassed small fortunes in tax-favored retirement accounts, such as 401(k)s and IRAs, at least half of working households are expected to see a steep drop in their living standards once they retire due to the decline of traditional pensions, a lack of savings and cuts to Social Security. That not only poses big risks for America’s seniors, but it threatens the US economy as well.

Members of Congress are waking up to the problem and proposing a flurry of Social Security expansion plans that could help alleviate the crisis. One of the most promising bills, championed by Rep. John Larson, would expand benefits by 2% for most workers — more for low earners. It would raise enough revenue to fund these benefits and to close a projected shortfall by slowly increasing the payroll tax rate and by taxing earnings above $400,000. Earnings above $132,900 aren’t currently subject to Social Security tax, but most expansion plans, like Larson’s, would scrap or amend this cap to raise revenue. So far, Larson’s proposal has garnered a lot of support from fellow Democrats, with more than 200 sponsors.

The latest proposal, from Sen. Elizabeth Warren, goes even further. Warren’s plan provides for an extra $200 per month for beneficiaries — a roughly 15% increase for the average beneficiary and a nearly 25% increase for low-income seniors. Her plan, like some of her predecessors’, also includes targeted benefits for caregivers, surviving spouses and college and vocational students with a parent who has a disability or has died.

The combination of targeted and across-the-board benefits would reduce the number of seniors in poverty by almost 5 million while also helping many younger and better-off beneficiaries. To pay for these benefits and extend the solvency of the program, Warren would impose a slightly higher payroll tax rate on earnings over $250,000 and tax investment income received by high-income taxpayers. Warren’s plan shares some features with an earlier proposal by Sen. Bernie Sanders and Rep. Peter DeFazio that would scrap the cap for earnings above $250,000 and tax investment income in order to raise benefits by 5% for average retirees and more for low earners.

Both of these plans would improve Social Security’s finances and restore some of the benefits Congress cut in 1983, when Social Security was facing an imminent funding crisis. Behind these commonalities are differences in emphasis. Larson’s plan would eliminate the entire 75-year projected shortfall but provide more modest benefit increases. Warren’s plan would provide bigger and more progressive benefit increases, but would only extend the system’s solvency through 2054.

Surveys have shown that most people believe the wealthy should pay more to strengthen Social Security. The wealthy have countered with arguments for cutting Social Security instead. They couch their opposition in patriotic terms, trumpeting their willingness to forgo Social Security benefits. But since millionaires are few and the benefits they receive limited, cutting their benefits does little to help the system’s finances, in contrast to taxing their income.

The latest tactic used against expansion is feigning concern for the economy. Expanding Social Security, some claim, would slow the economy by discouraging work and redistributing income from higher-income households (who save) to lower-income households (who spend), thus supposedly starving business, government and households of funds needed for investment. But as we pointed out in a critique of a Penn Wharton Budget Model analysis, taxing earnings has an ambiguous effect on work effort. And raising the income of beneficiaries increases consumer demand and boosts economic growth except when the economy is already operating at full employment.

Though the unemployment rate is historically low today — which in the past might have signaled an economy running at capacity and threatening to overheat — people are still entering the workforce at a healthy clip, blunting upward pressure on wages and prices. Many prominent economists argue persuasively that the biggest macroeconomic problem we face in the 21st century isn’t a lack of investment capital or willing workers, but a global savings glut and chronically weak spending. As John Maynard Keynes and other economists have long recognized, what might be prudent for the individual can harm the economy if it saps consumer demand for goods and services.

Without Social Security and other pay-as-you-go social insurance programs that reduce the need for private saving and modestly favor low-income beneficiaries, interest rates would have to be negative to prevent the economy from contracting, wrote former US Treasury Secretary Larry Summers in The Washington Post last spring. In other words, Social Security isn’t dragging down the economy, it’s helping keep it afloat.

Reasonable people can differ about how to bolster Social Security’s finances, but either of the plans currently before Congress would leave future retirees — and the economy — much better off.

CNN