In the past two weeks, two radically different proposals for the future of Social Security have provoked widespread discussion in the media.
One proposal was made by President Barack Obama, as part of his proposed budget. This called for using inflation adjustments to deprive the middle-class elderly of nearly 10 percent of their promised Social Security benefits if they lived to their 90s, while only the poor would be shielded from the cuts. Obama’s proposal was angrily denounced by progressives and conservatives alike.
The rival proposal came in a policy paper called “Expanded Social Security,” written by Steven Hill, Robert Hiltonsmith, Joshua Freedman and me, and published by the New America Foundation’s Economic Growth Program. Our plan called for a major expansion of Social Security benefits, on the grounds that Social Security is far more efficient and reliable than the other two “legs” of the retirement security “stool” — employer pensions (both defined-benefit pensions and 401Ks) and tax-deferred private savings accounts like IRAs.
Robert Kuttner praised the plan in a column for the Huffington Post:
If you don't read any other piece of policy wonkery this year, you owe it to yourself, your parents, and your own golden years to read "Expanded Social Security." It provides a politically serious blueprint for expanding the retirement income of the elderly, rather than selling them out. If we had a Democratic Party worthy of the name, it would get behind this proposal and change the entire dynamics of the Social Security debate.
A number of congressional progressives have defended their support for Social Security by citing our report, as did the AFL-CIO. Chris Hayes praised the report on MSNBC. On Washington Post’s “Wonkblog” Ezra Klein wrote:
This is the other, perhaps more pressing, Social Security crisis: It’s not generous enough to counteract the sorry state of retirement savings nationwide. In a report for the New American Foundation, Michael Lind, Steven Hill, Robert Hiltonsmith and Joshua Freedman survey this data and conclude that the ongoing debate over how to cut Social Security is all wrong: We need to make Social Security much more generous.
Nor has interest been limited to the center-left. The Expanded Social Security Plan was discussed seriously by Reihan Salam at the conservative magazine National Review’s blog and Andrew Biggs of the American Enterprise Institute.
That makes it all the more important to note the weakness of most of the criticisms that Biggs levels against proposals like ours to expand rather than cut Social Security in response to the disappearance of traditional pensions, the failure of 401Ks and the inadequacy of private savings.
The first two of his arguments are trivial. According to Biggs: “Raising the payroll tax from 12.4% to 15.0% — about what would be needed to restore 75-year solvency — would reduce annual hours worked by around 6% for middle-aged individuals and even more for near-retirees.” Even if these estimates were correct (all such calculations are questionable) the effect on labor force participation would be minor and most likely swamped by other effects, like the cycle of booms and recessions. In our proposal, most of the benefit expansion would be funded by non-payroll taxes that would fall disproportionately on the rich, who derive much or most of their income from capital gains, not labor.
His second argument: “Social Security’s benefit formula punishes individuals who choose to delay retirement. A typical near-retiree receives only 2.5 cents in extra lifetime benefits for each dollar of additional taxes he pays into the program.” At best, this is an argument for tweaking the Social Security benefit formula. It is not an argument against making Social Security benefits more generous for all Americans, as we propose in “Expanded Social Security.”
Third, Biggs argues that “Social Security lowers personal saving.” But there is nothing wrong with this. Reducing the need to save is the whole point of social insurance, like Social Security. Instead of trying to hoard enough money to live in retirement, we pay taxes to the program that will pay benefits to us when we are retired.
Biggs thinks the economy would be better off if we hoarded more money for retirement. Because we’re not amassing enough in bank savings accounts and mutual funds, he thinks, “the capital stock is a lot smaller — and the economy weaker — due to these incentives.”
The idea that more savings leads to more investment, which automatically leads to higher economic growth, is a staple of conservative economic theory. But the comparative international data show no correlation between high levels of economic growth and stingy social security systems that force citizens to save more, like the U.S. And the idea that forcing low- and middle-income Americans to stash more cash in 401Ks would be more important for economic growth than, say, investment in R&D and productivity-enhancing infrastructure or sound macroeconomic policy is dubious.
Ironically, the final criticism made by Biggs backfires on him and other proponents of greater tax-favored private retirement savings. He thinks Social Security is depressing the American birthrate: “Roughly half the decline in birth rates in developed countries may be attributable to the increasing size and cost of pay-as-you-go pension plans. Other research finds that “an increase in government old-age pensions is strongly correlated with a reduction in fertility.”
Correlation does not equal causation, so it may be a mistake to explain declining fertility rates in advanced industrial countries in terms of public retirement security schemes, as opposed to feminism, the availability of contraception, and other causes.
But let’s assume, without argument, that a declining fertility rate is necessarily bad for a country, and let us also stipulate that the availability of Social Security reduces the importance, in decisions to have kids, of a bad reason — you want to have kids so they will keep you out of poverty in your old age — compared to a good reason: You want to have kids for the sake of having kids.
If this is a criticism of Social Security, it is also at the same time a criticism of any and every proposal that seeks to expand private savings or private insurance to increase retirement security. After all, the salient factor is not whether the insurance or savings is public or private; it is the amount of old-age income security. If plans like the partial Social Security privatization plans that Biggs and others have proposed over the years were to increase retirement security for most Americans, they would, according to Biggs’ own theory, reduce the incentives for Americans to have children who will bail them out of indigence in old age. In other words, if Biggs is right, then to promote higher fertility rates we should cut Social Security -- and also cut pensions, 401Ks, IRAs and private annuities at the same time!
The arguments of those who want to cut Social Security, then, are pretty weak. But that may not matter, because big money is backing the side that wants to cut Social Security. Proposals like ours to expand the public, pay-as-you-go Social Security system would make a lot of private retirement savings unnecessary — and that would cut into the fee income extracted from 401Ks and IRAs by the money management industry. Whereas the money managers would make hefty profits from the success of proposals to cut Social Security while beefing up tax-favored retirement savings .
Proposals like ours to address the American retirement security crisis by expanding Social Security have logic, facts and public opinion on their side. But they don’t allow the politically-powerful financial industry to maintain or expand its share of the economy, and that may be their fatal defect.