Can those aged 45 to 64 be saved from misery in retirement? How?
Targeted increase
A targeted increase in Social Security would likely take the form of an increase in SSI, the means-tested anti-poverty program for the elderly that falls under the umbrella of the Social Security Administration. The program guarantees income for those over 65 (as well as the blind and disabled) up to a maximum threshold, currently $8,529.32 for an individual and $12,792.55 for an eligible couple. (For example, if a retiree has an income of $7,529.32 this year, SSI will pay that individual $1,000.)
Ghilarducci, Morrissey, Kingson, and Virginia Reno all supported this idea as a way to directly boost the poorest retirees out of poverty. According to Reno, “The maximum benefit right now, at least the maximum federal benefit before you get any state supplements…is three quarters of the poverty line, and the poverty line itself is something that hardly anybody could live on. So the benefits are too low, even as a safety net program.” Boosting the SSI limit to the federal poverty line would currently provide eligible two-person households with an additional $2,717.45 in annual income. Boosting it to 200 percent of the poverty line would provide them an additional $7,835.45.
Alternatively, one could increase benefits for those who met a means test. Dean Baker suggested that those with income below the national median could have benefits increased by “10 or 15 percent.” A 15 percent increase would boost the average annual Social Security benefit for a low-income individual from $10,648 to $12,245. In so doing, Congress would effect an approximately 16 percent increase in the replacement rate of a median, two-person, low-income household (a household in the bottom two income quintiles, which have median annual earnings of $20,262). This would add approximately $32 billion to the annual cost of Social Security.
Monique Morrissey said the benefit of such a directly targeted approach is that “you get more bang for your buck. You can target it to people who would be just below poverty or very close to the poverty line, so therefore it’s inherently less costly.” However, she cautioned that such programs tend to be politically weak.
“There’s a cliché, but it’s true, that programs for the poor become poor programs,” she said. By repositioning Social Security as “something that’s for the poor,” she fears the program could lose its political strength, which she believes stems from the fact that earnings are linked to contributions. Eric Kingson echoed this concern, saying that bringing means testing into Social Security could “create schisms between people” and “undermine the political strength of the program.”
An across the board increase?
Alternatively, the government could increase Social Security benefits across the board. In April, the New America Foundation proposed one model for doing this. Its plan would create two tiers of Social Security: the current contribution-based program would be retained and renamed “Social Security A.” A new program, called “Social Security B,” would be a universal flat benefit for all retirees, to be funded by general revenues rather than the payroll tax. This program, the authors of the model wrote, could replace SSI.
Implementing the plan would be expensive. It is estimated to cost approximately 3.7 percent of GDP annually on top of current Social Security expenditures; this year, that would put its price tag at $558.3 billion, which is considerably greater than the cost of a more targeted program. Eric Kingson said this cost makes the idea highly unlikely to pass through Congress anytime soon, and added, “There might be better ways to use those resources.” Nevertheless, he commended the plan’s authors for attempting to start a national conversation.
“We’re not being particularly subtle about what the goal is. We’re not going to turn this into an immediate legislative proposal. That’s not where any legislator is right now,” said Joshua Freedman of the New America Foundation, one of the model’s authors. “We’re looking much longer term about changing the conversation about retirement security in general,” from its current narrow focus on cutting Social Security to a broader assessment of how “people are not able to have adequate standards of living in retirement,” which he credits in large part to the failure of the 401(k) system, and what can be done about it.
Andrew Biggs of the American Enterprise Institute argued that the New America Foundation plan, along with any general increase in Social Security, would “crush private savings,” because those who could save would have a reduced incentive to do so, “and that can’t be good for the economy.” Monique Morrissey disagreed; favoring Social Security over retirement savings, she said, would actually provide “macroeconomic advantages,” particularly during a period of economic recovery. “Right now we have a global savings glut. We don’t really need more money holed up in pension funds or savings accounts. What we need is more money being spent.” The question of whether spending or investment is better for the economy is one of the oldest disputes in macroeconomics.
A more modest approach would be one suggested by Dean Baker: boosting Social Security benefits for a limited amount of time — perhaps for 10 or 15 years — in conjunction with implementing retirement savings reform. This hybrid approach would provide extra income to the 55- to 64-year-old cohort (those who would not benefit from new forms of retirement savings), could be phased out as younger generations take advantage of newly-enacted forms of retirement savings, and could potentially gain more political traction given its temporary nature.
How much would a solution cost? A rough estimate.
Teresa Ghilarducci, an economics professor at the New School, though confident that such research could be done, said it was “complicated…I can’t just do it. I think that’s a really good project and maybe something we should do.” When asked why no one has done this research, she replied, “No one asks for it…In politics there aren’t many advocates for the poor. So most people want to know ‘where [can I] save money and make the most money’ — those are questions for people who already have money, and those are the questions lawmakers are asking for that income group and that’s where the research money is going. So poor people and low-income people don’t have a voice in Washington.”
Ghilarducci was, however, willing to provide a couple of rough estimates. The cost of ensuring every retiree in America reaches the target replacement rate of 70 percent, she said, would be “less than a trillion dollars per year.” More specifically, she said, “I would estimate about a third of that” for just the cohort currently aged 45 to 64. The cost of simply bringing retiree households below 200 percent of the elderly poverty line (what Ghilarducci called the “near-poverty line”) up to that mark, however, is significantly less costly still. By taking the number of retiree households in the bottom two quartiles of U.S. income distribution and estimating those groups’ average income distance from 200 percent of the poverty line ($16,000 and $10,000), Ghilarducci estimated for Remapping Debate that “something in the range of $20 billion per year would bring poor and near poor retirees to the near poverty line.”