Compromised Principles
November 28th 02:52:09 PM
Nearly two months ago, Sebastian Mallaby of the Washington Post wrote plainly and boldly about Social Security reform. In "A Party Without Principles," Mallaby challenged that "If Democrats cared about poor women and minorities, they would be clamoring to reform Social Security." Part of the reason Mallaby's piece was so good was that he criticized the Democrats' lack of direction so clearly. "If the Democrats win a measure of power next month, it's hard to see what they will do with it," he complained.
Fast-forward to the reality of that Democratic power, about which Mallaby writes in yesterday's Post. This time around, he lets the non-reformers off the hook. As Mallaby runs through one of the compromises that is being discussed as a "solution," he explains the progressive indexing of benefits and the lifting of the contributory cap without any noticeable expression of concern.
Well, you might think, there is no reason for concern if we get something in exchange for lower benefits and higher taxes. What it is that we get in exchange, however, is a bit hard to see. Mallaby writes that universal 401(k) plans--retirement plans subsidized by the government in varying degrees based upon income--would be a success for both parties. To some extent, he is right. Both parties want retirement security for all Americans, and both parties wish to increase this country's abysmally low savings rate.
But what does this have to do with Social Security? The answer may be in the Social Security surplus, but it isn't clear whether this is the connection or not. Reading his article one way, Mallaby simply does not answer the question of what to do with extra money paid into Social Security. Reading it another way, the answer is that surplus funds would be diverted into the universal 401(k) plans. It is too early to support or oppose such a plan, but there are certainly some issues to be considered.
First, we currently have a surplus. Why not invest it somehow in a move separate from that of reforming the long-term financing of Social Security? Second, why would we raise taxes and cut benefits to the point that there is a considerable surplus each year? Third, the matching levels of universal 401(k) plans would ensure that the surplus would not be distributed evenly. For example, if the sliding scale is such that high-income workers receive no matching contribution to their 401(k), this means that in addition to contributing more in taxes and receiving less in benefits, these workers will not receive a cent from the surplus for which they will be largely responsible.
If the temptation is to entangle universal 401(k) plans with our Social Security system, we should be wary of the ease with which the retirement security of all can become dependent upon the efforts of a few. As Lawrence Lindsey writes in the Wall Street Journal, "Don't make it too tough on him, or Atlas may actually decide to shrug."
Posted by Ryan Lynch
Comments
Ryan's right. However, the elephant in the room is intergenerational fairness.
The first generation of SS beneficiaries paid very little in and received a lot out (for example, Ida May Fuller paid $24 and received over $22k in return). For that generation, Social Security was a great deal.
The next few generations (through the '50s, '60s, '70s) got a good deal also. Payroll tax rates were still relatively low, and they lived long enough to collect enough benefits to offset their contributions.
However, as time goes on, successive generations are getting a worse deal. Those in their 40's and 50's right now are facing a possible reduction in benefits when they retire - even as they pay more in the next 10 years in contributions.
Finally, we come to today's younger generation. We pay the highest payroll tax in history, and already they tell us that Social Security can only pay 70% of promised benefits when we retire. So what solutions do they offer? Raise taxes and lower benefits. I almost wonder if we would be better off with the current system.
Which brings me to my point. It's surprising that some are offering these "add on 401k" accounts as a sweetener to a deal that includes tax increases and benefit reductions...as if, as Ryan says, one has anything to do with the other.
In truth, a Social Security system with increased payroll taxes and reduced benefits only kicks the can down a few generations. At some point, we must revisit the structure of the program.
Personal accounts are the only way to deal with SS's fundamental demographic issues.
Posted by Jeremy on November 28th 05:20:15 PM
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