Senator and presidential candidate Elizabeth Warren has a new – and expansive – proposal for Social Security. It’s got one of grab-bag of changes that seems to be the norm these days, a list that includes the following:
- A $200 flat boost to all recipients’ benefits. (Is the $200 a one-time boost, or does it grow with inflation, and why not integrate that into the formula itself?)
- Cost-of-living increases based on the CPI-E, a version of the consumer price index that’s based on a “basket of goods” of a typical older person, with more weight given to healthcare, for example.
- A caregiver credit based on the median wage, for each month an individual provides 80 hours of unpaid care to an under-age-6 child, a disabled dependent, or an elderly relative. (There seems to be no requirement that individuals be out of the workforce, so this would appear to boost benefits for all parents with below-median income.)
- A boost to surviving-spouse benefits to 75% of the level the couple had been receiving when both were alive. (Is this “fair” or an unfair subsidy for married couples? You be the judge.)
- A boost for surviving spouses with disabilities, by repealing age requirements.
- Elimination of the Windfall Elimination Provision and Government Pension Offset for public workers. (Warren characterizes the WEP as unfairly “slash[ing] Social Security benefits”; the reality is that without the WEP, workers with both private-sector and non-Social-Security-participating public sector work years would get benefits more generous than people would judge to be fair. For instance, without the WEP, a full-career schoolteacher who works in the private sector in the summer would appear to Social Security’s benefit formula to have been poor and benefit from the relatively more generous benefit formula for the poor.)
- Restoration of dependent (children’s) benefits for adult college students, and expansion through age 24.
- A reduction by up to three years of the Social Security averaging period for individuals in apprenticeships and job-training programs, to boost average wage history and benefits. (Why give special treatment only to these programs? The 35 year averaging period already excludes 14 years from an adult working lifetime – ages 18 to 67 – to account for education, unemployment and other absences from the workforce.)
- A minimum benefit of $1,501 for any worker – that is, 125% of the single poverty level plus $200, with 30 years of work history. (Note that this is actually more than the current average benefit. For a married or cohabitating couple, their combined benefits would be 220% of their combined poverty level; even for unmarried retirees, the benefit is slightly more than the eligibility level for Medicaid.)
- And, like all such proposals, an additional tax on the upper middle class and the wealthy to fund it – expressed as a 14.8% “Social Security contribution requirement” on income above $250,000 plus a 14.8% investment income tax, this is really nothing more than raising marginal income tax rates and directing the income towards Social Security. (If this tax parallels the equivalent tax for Medicare, it’s unindexed and will affect more and more workers over time. Also, I will repeat again my observation that, even if you think there’s more “room” for tax hikes, there are opportunity costs to every tax increase – money spent on Social Security cannot also be spent on healthcare or childcare or parental leave. At the same time, Vox writer Matthew Yglesias explains Warren’s thinking differently: rather than spending the same pot of money half a dozen times, “The way Warren sees it, . . . economic resources are plentiful — they’ve just been captured by a small number of people at the very top.”) Unlike many such proposals which claim to achieve long-term solvency, Warren only goes so far as to say that these changes extend the Trust Fund solvency by 20 years, not permanently. (Recall that the Trust Fund is currently projected to be depleted in 2035 – and this, and future cashflow projections, are optimistically based on a future increase in fertility levels that may not happen.)
So how do you make sense of this? Some of these change seems small-bore – special Social Security benefit provisions for apprenticeship students, for instance. Others are expansive, like the new much higher minimum. What nearly all have in common is the elimination or weakening of the link between benefits and lifetime wages. Canada provides caregiver credits by dropping years from the averaging requirement, so as to retain the link to an individual’s actual work history, but Warren proposes treating individuals as “median earners” for every year in which they can claim part-time caregiving. The surviving-spouse boost further increases benefit levels for couples vs. singles. The WEP elimination ignores a worker’s true employment history. The new tax on high earners purely injects more money into the system without any relationship to benefit accruals. The flat-dollar benefit boost and the new minimum benefit are obviously unrelated to income.
And maybe that’s fine – after all, the current system has a benefit formula heavily tilted in favor of low earners as it is. Politicians of various stripes will nonetheless tell their constituents that they earned their benefits fair and square, regardless – as Warren herself says: “Social Security is an earned benefit –– you contribute a portion of your wages to the program over your working career and then you and your family get benefits out of the program when you retire or leave the workforce because of a disability.”
But these are all half-measures.
If we really want to ensure that Social Security provides benefits to everyone sufficient to meet their basic needs, then the obvious solution is simply a flat “basic income”-like benefit.
And at the same time, Warren writes:
“For someone who worked their entire adult life at an average wage and retired this year at the age of 66, Social Security will replace just 41% of what they used to make. That’s well short of the 70% many financial advisers recommend for a decent retirement” –
suggesting to readers that she thinks that Social Security itself should fill that gap, something that places her well outside mainstream opinion that what’s needed is more attention to plans or programs that help middle-class Americans achieve this for themselves. (Though, for a couple, $1,500 x 12 = $18,000; x 2 = $36,00 which is 70% of $51,000, as another indicator of how high her minimum benefit level is.)
What we need, instead, is my comprehensive three-tranche Social Security reform, in which all Americans are kept out of poverty with a flat “basic income” benefit, structures are put into place for second-tranche-income retirement savings and risk-sharing life-income drawdown, and Americans make their own choices on upper-tranche income saving. The concept of income tranches means that no one is expected to save on that portion of their income that is just enough to meet their basic needs – as Andrew Biggs wrote recently at MarketWatch, the lowest earners may be better off not saving for retirement at all – but save only for retirement on that slice of income above this level. The flat benefit means that we can include every American but fund it through an income tax that leaves debates about the “fair share” of rich or poor taxpayers behind. And a second-tranche-income retirement savings program, by incorporating retirement savings into a wholly-redesigned Social Security program, likewise leaves behind debates about “privatization” or “unfair government savings mandates” for something new.
Or, on the other hand, maybe not so new.
As always, you’re invited to comment at JaneTheActuary.com!