Social Security is unsustainable. It faces an $11.4 trillion deficit over the next 75 years. Yet Donald Trump wants to maintain current benefits, and Hillary Clinton wants to expand them.
The next president must recognize that Social Security is much larger than it was ever intended to be – or needs to be – and that maintaining its current benefit structure will cause a huge drag on paychecks and economic growth. Social Security could better accomplish its goal with significantly lower costs through a flat, anti-poverty benefit.
It’s possible, as Clinton proposes, to reduce the program’s shortfalls by raising taxes on the rich. But that would be economically destructive, and politicians would almost certainly spend the higher taxes on other programs.
Although Clinton has avoided specifics, raising the payroll tax cap would bring the top marginal tax rate (federal and state combined) to more than 70 percent, and applying the payroll tax to investment income would raise the top rate to 36 percent. Such high taxes are neither necessary nor beneficial.
Social Security was established to prevent poverty among people in their final years of life, when they were no longer able to work. But today, Social Security provides decades-long benefits to many retirees. The poverty rate among the elderly is nearly 10 percent, but Social Security sends benefits of more than 2.5 times the poverty level to the highest-income retirees. The program has broken its promise to workers that 6 percent “is the most that you will ever pay” – it now extracts 12.4 percent of workers’ pay.
Most workers don’t realize that they could achieve much larger retirement incomes by saving far less than Social Security takes in taxes. Even workers earning $10 an hour could achieve Social Security’s promised benefit by saving half as much as the taxes demand.
Given its inefficiency as a retirement savings program, Social Security should focus on preventing poverty among seniors. This could be accomplished by gradually shifting toward a flat, anti-poverty benefit, increasing the eligibility age in coordination with life expectancy and work capacity, and using a more accurate measure of inflation. Almost nothing would change for current and near retirees, and future workers would eventually pay lower payroll taxes.
The trustees who oversee Social Security say the program has enough money to pay full benefits until 2034. At that point, Social Security will collect only enough taxes to pay 79 percent of benefits.
Are these reforms fair? Absolutely.
Social Security was designed to kick in when workers lose their capacity to work. Since Social Security began, life expectancy has increased by 17 years, and jobs have become far less physically demanding, leading to the finding that workers could be working four years longer than they are. And while it makes sense to provide Social Security beneficiaries with an annual cost-of-living adjustment, it is irrational to use an outdated, narrow and inaccurate index that causes benefits to grow faster than actual inflation.
A flat, anti-poverty benefit would lift millions of retirees out of poverty. Although middle- and upper-income earners would receive less from Social Security, they would be far better off financially (both in their working years and retirement) than if they were forced to pay higher taxes to maintain Social Security’s promised benefits.
Whatever the solution, the ones proposed by the two leading presidential candidates – inaction and expansion – are untenable.
Rachel Greszler is a senior policy analyst at the Heritage Foundation. She wrote this for The Washington Post.