Social Security has a long-term funding gap that just keeps growing. Neither political party has a plan to pay for the promises we’ve already made to people contributing to the system. But Democrats are bringing a new idea to the table: Make even more promises.
Almost all Senate Democrats have lined up behind a proposal by Elizabeth Warren of Massachusetts and Joe Manchin of West Virginia to expand benefits for current retirees. Liberals are exulting that Warren has shifted the politics of Social Security to the left: Where once we were debating cutbacks to the program, now we’re debating benefit increases. Too bad that also means the debate is shifting further away from fiscal reality.
Social Security is becoming a worse deal for each generation. Those now joining the workforce are expected to pay more into the system than they get out of it. Warren’s plan is to shower more money on the current generation of retirees, but without increasing the deficit over the next 10 years. That means, in all likelihood, raising taxes on current workers while also increasing the program’s long-run fiscal deficit.
The strongest argument in favor of expanding benefits is that Social Security should keep all senior citizens out of poverty, and doesn’t. That fact, though, is really a remarkable indictment of the way the program is currently structured. As my American Enterprise Institute colleague Andrew Biggs has pointed out, the program substantially reduces work, saving and even birth rates without accomplishing this key social goal.
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Social Security has always been a combination of forced savings and redistribution. The forced savings is overt, and helps cement political support for the program: It’s the basis for the idea that retirees are “just getting back what they put in,” which has been a fiction for most of the program’s history. The redistribution is hidden, disguised in part by the program’s universality: The formula for setting payments is progressive, but it is complicated, and even Warren Buffett can draw benefits.
Liberals seeking to expand Social Security want to keep this structure. They hope to make it better at alleviating poverty by raising benefit levels for everyone, even people who don’t need it. The AFL-CIO’s executive council put it this way in a 2012 statement: “Social Security retirement benefits must be increased across the board, which would be especially meaningful for low-income seniors.” That’s a good way to help the neediest at the largest possible cost.
It would be better, as Biggs proposes, to shift gradually to a new system that separates the two functions of Social Security. People joining the workforce now should be promised a flat universal retirement benefit set at a level that keeps all seniors out of poverty. At the same time, they should be given the opportunity and incentive to save so that they have retirement funds beyond that subsistence-level benefit. They should be auto-enrolled in retirement savings accounts that would include an option to invest in index funds, with the mix of investments shifting from stocks to bonds as workers approached retirement.
That would do better than the current program at preventing destitution because of the basic benefit. It would make for a more predictable stream of retirement income because it would dispense with complicated benefit formulas. And it would reduce Social Security’s negative economic effects because it would no longer discourage work and saving.
It would also reduce Social Security’s unfunded liability – assuming, of course, that anyone still cares about that.
Ramesh Ponnuru, a Bloomberg View columnist, is a senior editor for National Review and a visiting fellow at the American Enterprise Institute.