Policy experts with the Center for Retirement Research and the American Enterprise Institute published new research offering a solution to the gloomy outlook for Social Security. The authors suggest that eliminating the tax incentives that come with a traditional IRA or 401(k), would generate enough revenue to postpone the threat of insolvency of Social Security.
Their paper is titled ”The Case for Using Subsidies for Retirement Plans to Fix Social Security,” and the authors deserve a great deal of credit for offering new ideas, but at the same time the proposal exposes a common and frightening view of Social Security reform in Washington, and the “fix” would essentially end Social Security as we know it.
If enacted in law, this change would mean that someone who is 50 and planning to take full advantage of the existing contribution would pay additional tax on the $30,000 of income. While the levy financing Social Security would be nearly double the standard payroll tax rate, the worker would not get any additional credit toward their future benefits.
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Social Security is more than a name. Its structure of earned benefits distinguishes the system from other government programs, and offers seniors some protection from being reduced to a line-item in a budget battle. If Congress were to bail out Social Security in this manner, the structural protections provided to beneficiaries would evaporate.
In a nutshell, the government could keep the third leg of the retirement stool for current retirees by cutting off the back two legs of the stool for workers approaching retirement.
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As unpopular as that idea might sound to workers who are struggling to make ends meet today, the reality of the change would be considerably worse for those in retirement collecting benefits.
Retirees might recognize the name on their checks, but they will struggle with the parts of the system that they lost in the transition. As it is, seniors enjoy the privilege of earned benefits, which has protected the checks of beneficiaries from reductions even as the rest of the government skidded toward default.
Once the general fund gets involved in paying the bills, the feeling of getting something that was earned would be lost forever.
That dates back to the inception of the program, when President Franklin Roosevelt required that the whole system be built around the principle of earned benefits. FDR said that he wanted workers to have a legal, moral, and political right to benefits, such that “no damn politician can ever scrap” the program.
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All voters, particularly those approaching retirement, should not casually skip over FDR’s choice of words. He referred to Social Security in a personal sense as “my” program. He wanted to protect the individual contributions and the program as a whole from an annual debate about who does and who does not need benefits.
In the new “Social Security,” beneficiaries would lose their legal and moral rights to their checks. All that today’s seniors would have left is a political right: the ability to vote for the guy who promises to put the most cash in their pocket.
With each passing year, seniors would grow to appreciate the wisdom of FDR’s design.
When the money that pays the bills comes from the General Fund, the new “Social Security” would have to compete for its resources against every other priority of the government. At some point, seniors would lose.
To illustrate, younger voters would likely want the $200 billion applied to pay for lower payroll tax rates charged on wages of workers. These folks would reason that benefits aren’t really earned anyway, so why should anyone be forced to contribute anything for them?
To the credit of the authors, their work provides a valuable public service. Giving Congress new ideas is a vital part of the Social Security reform process. Equally important in this case, the proposal also exposes younger voters of the tangible cost of preserving the existing benefit structure.
For the most part, voters young and old tend to think of Social Security reform in an abstract way. Congress will fix the system where someone will get taxed more, or someone’s benefits will be cut. As a result, voters have been able over the last 40 years to hear what they wish to hear. Generally, Social Security reform means someone else will pay more, and someone else will have to make do on less.
The authors in the case of this research have explained to younger voters whose ox is to be gored and how it will be done.
As unappealing as this prospect might be to the man on the street, the real wake-up call for younger voters is that this sacrifice is only a partial down payment on securing the program’s future. In the extreme case, the extra cash would only solve 75% of the problem in Social Security.
Call the leftover program what you will, but Social Security as we know it would be scrapped.
Brenton Smith is a policy adviser to the Heartland Institute.
