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Bob Pozen knows how to fix Social Security, even after the United States falls off the new fiscal cliff—and the U.S. will fall, on March 1 to be exact, predicts the Harvard Business School senior lecturer and Brookings Institution fellow.
The solution is simple, and it doesn’t involve raising taxes, the former MFS Investments chairman told an audience of 800 advisors and wealth managers at the sold-out Investment Management Consultants Association (IMCA) conference in New York on Monday.
What Pozen, the author of six books, proposes instead is increasing the progressivity of the tax code. He believes that going from the current wage indexing of initial benefits to a system of price indexing would provide Social Security the reform needed to wipe away its $8.6 trillion present-value, 75-year deficit.
“If all we did was to switch the calculation of initial benefits and went to price indexing, how much of the $8.6 trillion would we wipe out? The answer is 100%. The question is whether we have the political will to do it,” he said.
Unfortunately, that political will is in short supply in Washington, Pozen added, which is why he pinpoints the March 1 cliff fall-off date, which was the new deadline set by the fiscal cliff deal passed by Congress on Jan. 2. On that day, he predicts, Congress will take no action on U.S. budget sequestration, and that will result in $1.2 trillion of automatic spending cuts, much of it related to defense.
“The Republicans realize that sequester is the only chance because they’ll get $1.2 trillion of cuts by doing nothing,” said Pozen, a Democrat who served on President George W. Bush’s Social Security commission. “I think it’s going to get pretty messy in March and April. But maybe it’s not so bad if we get this automatic cut of $1.2 trillion.”
Both President Barack Obama and congressional Democrats want to avoid the across-the-board cuts known as the sequester.
Unfortunately, Pozen added, whether liberals or conservatives, Democrats or Republicans are arguing the point, the undeniable truth is that lower-wage workers on average live a few years less than their wealthier counterparts and are less likely to have 401(k)s or other tax-advantaged plans offered by their companies.
Price indexing would cure Social Security’s deficit, but it would also result in lower benefits to the lowest-paid workers, although no changes to Social Security’s current law would trigger a 25% benefit cut across the board by 2033, Pozen noted.
Slowing the future growth of benefits for higher earners and raising the retirement age beyond the current age of 67, but exempting lower-wage workers, could help address the gap between rich and poor, he said.
“The lower third of American workers don’t have 401(k)s and IRAs like your clients. These lower-income people don’t have the tax benefits of deferral,” Pozen said. “On a lifetime benefit basis, Social Security isn’t progressive.”
Check out Pozen Argues for $5T Plan to Cut U.S. Debt: Retirement Income Symposium at AdvisorOne.
Check out Fiscal Cliff Deal Opens Floodgates for 2013 Roth Conversions at AdvisorOne.