Steven Senne/AP Photo
Eileen Quinn, 98, of Walpole, Massachusetts, visits with her great-grandson, March 21, 2021, at her retirement community.
President Biden’s rescue plan does well for working families. But one group that has been off the radar screen is the elderly.
They have no minor children at home, so no $3,000-per-child benefit. The private pension system is a shadow of its former self. Pseudo-pension plans like 401(k)s are grossly insufficient. And the median Social Security benefit in 2020 was only about $1,500 a month.
Debates about the future of Social Security tend to confuse two issues—its solvency and its adequacy. Social Security is funded by payroll taxes. Current projections show that the system will be able to pay all of its pension obligations only through the mid-2030s, depending on your assumptions about GDP growth, workforce participation, and wages.
At that point, unless Congress acts soon to raise taxes or cut benefits, or devises some other strategy such as investing the system’s current reserves to earn higher returns, Social Security runs out of reserves sometime between 2033 and 2037. After that, it would be able to pay only about 79 percent of promised pensions from current payroll tax receipts.
So we have a solvency challenge, but also the problem of inadequacy of retirement income. Once, retirement was said to be a three-legged stool—private pensions, personal savings, and Social Security. Today, few younger workers have pensions; with wages flat, few can afford to save much; and so Social Security is carrying more weight than intended. (There is a fourth leg to the stool also denied to younger adults—substantial savings in the form of home equity.)
What to do, on both fronts?
Last week, I observed in a post that a $15 minimum wage would do double duty. It would also improve the solvency of Social Security, since payroll taxes are based on wages. Henry Aaron, who probably knows more about Social Security than any other living person, sent me a polite note crunching some numbers and pointing out that a $15 minimum wage would barely make a dent in Social Security’s projected shortfall.
To be precise, it would increase receipts by only 0.16 percent of payroll. He did agree with my broader point that if wages had followed the same trajectory after 1979 that they had followed between 1948 and 1979—steadily rising with productivity growth instead of gains going mainly to the top—Social Security would be in much better financial shape. The shortfall would be about 30 percent smaller.
But of course, we can’t rerun history even if we work to raise wages going forward. On the solvency front, we need more tax revenues. Raising the retirement age is only a disguised cut in benefits.
Some have proposed lifting the cap on earnings, which is currently $142,800, so that all wage and salary income is subject to the Social Security payroll tax of 6.2 percent for workers and 6.2 percent for employers. This makes fiscal sense, but is a bear politically, since it is a tax hike for people who consider themselves not rich but upper middle class. Biden has promised that nobody earning less than $400,000 would get a tax increase, and that includes payroll taxes.
My own view is that it is time to begin financing Social Security partly out of other taxes or general revenues. When FDR’s labor secretary Frances Perkins chaired the President’s Committee on Economic Security, which designed the Social Security program, unemployment compensation, and much more, she recognized a key bit of arithmetic.
The Social Security system would enjoy a partial fiscal free ride for its first 30 years, because a lot more people would be contributing payroll taxes than would be taking out full benefits. At that point—circa 1970—the system would need more revenue. (She was off by just a decade thanks to the high wage growth of the early postwar period. In 1983, Congress did give Social Security more revenues, as well as trimming benefits.)
FDR, as a superb politician, was adamant that his Social Security system should be financed only by payroll taxes, despite the fact that they were regressive. He famously said, “We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program.”
Not to second-guess the most astute progressive politician ever, but it seems to me that the legal, moral, and political right to collect Social Security is sufficiently well entrenched after 86 years that it would be OK to top up payroll tax receipts with other sources of revenue. That could be a revived estate tax, or a financial transactions tax. Maybe even extend Social Security taxes to income on capital as wages.
What about increasing benefits? Teresa Ghilarducci, a retirement expert and professor at the New School, has proposed a system of guaranteed retirement accounts. These would be funded by a new 1.5 percent payroll tax, which would be refunded via tax credits to people earning under $40,000.
The proceeds from the tax, to be matched by employers, would fund private retirement accounts, privately managed but with earnings guaranteed by government. The additional income would be sufficient to increase retirement income by an average of $13,000 a year.
This is a shrewd plan. My only quibble is that we don’t need to run it through private accounts. The same incremental payroll tax could create supplemental retirement accounts as part of Social Security, though giving private investment managers a piece of the action may broaden the political coalition that supports it.
And by rebating the new payroll tax to moderate-income people, the government has to get that money from somewhere. So this is already a backdoor way of bringing other sources of revenue into the retirement income equation.
One way or another, as government expands aid to kids, and caregivers, and infrastructure, let’s not forget the elderly. The boomer generation is wealthy only on average. Most older Americans are struggling.
