This op-ed in the Palm Beach Post discusses how Social Security can be reformed in a way that insures solvency and promotes economic growth. It is authored by Joshua Gordon, policy director of The Concord Coalition, and Marc Goldwein of the Committee for a Responsible Federal Budget following there release of his co-authored paper on Social Security reform released as part of Concord's project on fiscally responsible economic growth.
Every day, 10,000 baby boomers turn 65, and the population of the United States gets a little bit older. This aging population poses a threat to the federal budget and overall economic growth.
The threat to the budget is simple math: more people becoming eligible and receiving benefits from retirement programs with proportionally fewer people working and paying taxes to support those benefits.
The threat to the economy comes from the fast-growing national debt resulting from that math problem and from the declining growth rate of the working-age population – a key building block for economic growth.
These factors have led The Concord Coalition to create a project promoting fiscal responsibility and economic growth. As a nation, we cannot ensure future economic growth without doing more to ensure fiscal sustainability, nor can we ensure fiscal sustainability without doing more to enhance economic growth.
At the Economic Forum of Palm Beach County recently, we released a key piece of our project: a framework proposed by staff of the Committee for a Responsible Federal Budget to save Social Security and grow the economy at the same time.
So how does saving Social Security fit into this? As it turns out, Social Security has huge effects on the economy. Social Security is the single largest federal program, and the gap between its spending and dedicated payroll tax revenue is a major contributor to rising deficits. The program offers the largest source of retirement income for most Americans and imposes the largest tax most workers pay.
Social Security’s looming insolvency – just 16 years away – is a major source of uncertainty for American families. And the Social Security program sends powerful signals to Americans about how they should save and invest, how much they should work, and when they should retire.
For these reasons and more, the right improvements to Social Security would not only rescue the program from insolvency, but also would accelerate economic growth in the process. Under the pro-growth Social Security reform framework (the “framework”), the economy could be as much as 8 percent larger by 2050. That’s a quarter-point increase in the growth rate each year and enough to grow average income by almost $8,000 per person by 2050. The recent tax cut bill likely grew the size of the economy by only a tenth as much.
How can Social Security reform do so much to grow the economy? In short, by promoting work, savings, investment, sustainability, and certainty. And we have a four-part plan to get there.
First, as Americans are living longer, the framework proposes we do more to promote productive aging – encouraging those who are able to work longer to do so and offering them more flexible arrangements for phased retirement, bridge jobs, part-time work, and encore careers.
Delayed retirement not only improves economic growth; it improves lives. Studies find that for most people, working longer increases retirement income and security, extends life expectancy, improves physical and mental health, strengthens marriages and social networks, and increases overall life satisfaction.
Unfortunately, many Americans follow the signals set by the Social Security program and retire at age 62 or 66 rather than the age that makes most sense for them. To address this, the framework would raise Social Security’s ages and index them to life expectancy while creating a new safety net benefit so anyone who needs to can retire at age 62 without falling below the poverty line.
In addition to encouraging many Americans to work longer, the framework would reward work at all ages. The current benefit formula only counts your highest 35 years of work toward calculating benefits and offers a much lower return for later years of work than earlier years. A better plan would be to count all years of work equally. This change would significantly improve work incentives for workers in their 40s, 50s, and even 60s.
Third, the framework proposes to increase total national savings and investment by automatically enrolling every worker in a supplemental retirement account on top of Social Security. The supplemental accounts could only be invested in broad diversified funds aimed at providing strong yields with low long-term risk, and they would be voluntary – workers could opt out at any time. The money contributed to these accounts would generate more capital to fund investments in the equipment, buildings, software, and research needed to accelerate economic growth.
Lastly, and perhaps most importantly, the framework would adopt a mix of progressive tax and benefit changes in order to rescue the Social Security trust fund from insolvency.
Under current projections, Social Security will run out of reserves in less than 16 years – when today’s 51-year-olds are reaching the normal retirement age and today’s youngest retirees are turning 78. Since the law calls for a 20 to 25 percent benefit cut upon reaching insolvency, that means we can’t even guarantee full benefits to today’s retirees under current law.
And this looming insolvency is bad news for the economy – it creates huge uncertainty for today’s workers and investors and creates tremendous risk of an ultimate bailout funded by massive new federal debt. The framework suggests raising the amount of wages subject to the payroll tax (currently capped at $132,900), slowing benefit growth for high earners, and adopting other modest reforms in order to prevent insolvency and its consequences.
Taken as a whole, the framework we’ve discussed here would not only save Social Security, improve retirement security, and slow the rise of debt – it would also accelerate economic growth and lift incomes for Americans of all ages. This plan isn’t the only way to achieve those goals – but as policymakers work on their own plans to save Social Security, they should keep those goals in mind.