How Can We Change Social Security to Make It Work Better?

We've been exploring the state of retirement in the United States on The Long View. Last week, we talked with progressive labor economist Teresa Ghilarducci.

This week, we talked with economist, Social Security expert, and resident scholar at the American Enterprise Institute, Andrew Biggs, who offered a more sanguine perspective.

Though optimistic, Biggs has advocated for considerable reform to the current retirement system, like a federally administered retirement savings plan available to all Americans. Elaborating on this stance, he discussed what such a savings plan could look like, how to approach annuitization, and how to restructure Social Security to improve its solvency.

Here are a few excerpts on fixing Social Security from Biggs' conversation with Morningstar's Christine Benz and Jeff Ptak:

How Can We Fix the Social Security Funding Gap?

Ptak: Social Security is facing a huge funding gap. How would you suggest that we improve its solvency?

Biggs: The usual response is, let's just keep doing what we're doing but tweak it slightly. I tend to think that's the wrong way of going about it. We focus on the solvency and the trust fund for Social Security. What we forget, though, is that Social Security is a government program like any other. With any other government program, we think about how we can change it to make it work better for people.

When I think about this question, I try to recognize that the America of 2035 won't be the America of 1935. When we invented Social Security back in 1935, it was really hard for ordinary Americans to save for retirement on their own. Financial markets were less developed, and we barely had mutual funds, much less the index funds or target-date funds that people use today. Today we complain about financial literacy; back then we had a literacy literacy problem. People were not equipped to do a lot of retirement savings on their own. Today, it's a different world. I think Social Security needs to adapt to that.

I've argued for a retirement system that's similar to what exists in the United Kingdom or Australia, New Zealand--and even to quite some extent, Canada--where the government protects against poverty and old age. Social Security needs to have a real true guarantee against old-age poverty, which it doesn't currently have. But that also means we should fully exploit personal savings where we can. There's no reason that middle- and high-income Americans should pay higher Social Security taxes today so they can receive higher Social Security benefits in the future. A higher tax today is a disincentive to work. It reduces labor supply. And the promise of higher benefits in the future reduces personal savings because people aren't going to save as much on their own if they know they are going to get higher benefits from Social Security. Both of those aspects hurt economic growth.

While I'd immediately increase the minimum benefit for Social Security to guarantee against poverty, over time I would gradually scale back the maximum Social Security benefit. So, ultimately, you'd get a system that is kind of like New Zealand's where every retiree gets the same dollar benefit. It's a benefit that is guaranteed to keep everyone out of poverty. Then, on top of that, we'd encourage and facilitate middle- and high-income workers to save more on their own.

How Do High-Income Workers Think About Social Security?

Benz: One of the most convincing arguments I've heard in support of maintaining the status quo for higher-income workers--where they put more in and they get to take more out--is that everyone who pays into Social Security receives an eventual benefit that's large enough to be meaningful for them, giving them a vested interest in maintaining and protecting the program. How do you respond to that?

Biggs: Well, this is an argument that goes back to the 1930s when Social Security was started. It's summarized in a phrase: a program for the poor is a poor program. Meaning, if you have a program that's focused on low-income people, middle- and high-income Americans won't support it. Now, I think this argument is factually incorrect. I mean, look at Medicaid, the entitlement program that has grown the most. Medicaid is a means-tested program that many middle- and high-income Americans will never participate in, yet they have supported expanding. So, I think, empirically, this argument just isn't correct.

I also think it is kind of undemocratic and insulting to people. It says, well, we have to disguise the redistribution that goes on in Social Security, because if middle- and high-earners knew it's going on, they wouldn't support it. That's saying we think these people are not willing to support their fellow Americans, which again, I think is incorrect. It's saying if we didn't fool them with this benefit formula that they can't understand, they wouldn't support it.

If you look at progressive Social Security reform plans, sure, they don't cut benefits for high earners, but they do massively increase their taxes. If you are earning more than the current maximum taxable salary, which is $137,000, essentially, you'd pay the 12.4% Social Security payroll tax on that, on any earnings above that. It's a 12-percentage-point increase in the marginal tax rate for high earners.

If you think high earners aren't going to respond to that, you are assuming that they only care about their benefits and not their taxes. I worked in the Bush White House when we thought about Social Security reform. And one of the insights we had is that high-income people care more about their Social Security taxes than their benefits. Why not accommodate that insight to make the system work?

This article was adapted from an interview that aired on Morningstar's The Long View podcast. Listen to the full episode.