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Retirement Planning > Retirement Investing

The wrong way to save for retirement

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It is a truth universally acknowledged that Americans are underprepared for retirement. And given this sad fact, there’s a growing movement on the left saying we need a government solution, stat: specifically, an expansion of Social Security benefits.

Perhaps you are confused. Weren’t we just talking about entitlement reform so that we could spend less on the program? Why, yes, we were. But since no one, left or right, really wants to take on our vast army of retirees, that chatter has died down. Now that it has, progressives who are ideologically opposed to shrinking the welfare state and are, of course, worried about retirees have decided that the best defense is a good offense, as Jamelle Bouie chronicles in Slate. Instead of reluctantly agreeing to a compromise where Republicans let some taxes rise and Democrats agree to entitlement cuts, they’re demanding bigger tax hikes to fund bigger entitlements.

At the core of their argument is a good point: Americans really do need more money for retirement. Missing, however, is a realistic discussion of where that money might come from.

And it’s a lot of money. The OASI Trust Fund (the portion of Social Security that covers old-age benefits) already pays out more in benefits than it collects in tax income. In 2014, the Social Security Trustees expect the system to collect$643.9 billion in payroll taxes and spend $716.4 billion on benefits and administrative overhead. If you add in the taxes collected on Social Security benefits, you get $671.9 billion in total tax revenue, which leaves a $44.5 billion deficit between outflow and inflow. Under its middle-of-the-road “intermediate” assumptions, the trustees’ report predicts that by 2023, the gap between taxes collected and benefits paid will be almost $170 billion. The only reason that the system isn’t in the red already is the net interest the government is paying itself on the bonds in the trust fund. 

Now, I don’t want to get mired in the tired old arguments about whether the trust fund is “real” — whether it’s a stupid accounting abstraction or a profound moral promise on the part of the U.S. government — because this obscures the actual point we need to be concerned with: If we want to pay Social Security beneficiaries more money than we are collecting in payroll taxes, the money has to come from somewhere, and ultimately, that “somewhere” is the United States taxpayer. It is supremely irrelevant whether that money flows through the “trust fund” or Uncle Sam holds an annual ceremony in which the trustees are handed one of those giant checks they present to lottery winners; we still need to find the money to make good on that check.  

Before we start adding new benefits, we should think about where we’re going to get the money to pay the ones we still haven’t funded. And then carefully count the cost of making them more generous still.

So where is the money going to come from, for our once and future Social Security program? The unhelpfully vague answer is generally “the rich.” Some specific numbers would be useful here, and thankfully, some folks from the Third Way have actually provided some.

Let’s say the top income tax rate was raised a whopping 10 points, to 49.6 percent — a level higher than anything under serious consideration. Tack on the “Buffett rule,” with its 30 percent minimum tax on millionaires to squash loopholes. And let’s take a whack at wealthy inheritances, cutting the estate tax exemption by about one-third and setting the rate on large estates at 45 percent.

If we leave entitlements be, our annual budget deficit in 2030 would still be $1.3 trillion in today’s dollars, not much different from the $1.6 trillion deficit we’d have if income tax rates for the wealthy were kept the same. Sure, raising some additional taxes on the wealthy is necessary, but it is not nearly sufficient.

Another favorite is eliminating the cap on Social Security taxes, which is a slightly less vague way of saying “the rich”. Every time I discuss Social Security, at least one angry person will demand to know how I can so disingenuously claim the system is in need of reform, when “all we need to do is get rid of the cap on the payroll tax.” All? “All we need to do” implies some sort of modest, unremarkable undertaking. In fact, as the Committee for a Responsible Federal Budget points out, this amounts to a 12.4 percent surtax on all income above $118,500. That’s an enormous tax hike, which would generate exactly the same pushback you’d get if you announced, well, a 12.4 percent surtax on all income above $118,500. And as the committee notes, with admirably dry understatement, “a tax increase that large would make it politically challenging to raise more revenue from the wealthy, if it all.” 

By that point, the top marginal tax rate would be well above 50 percent — closer to 60 percent in high-tax blue states. That would pretty much exhaust our fiscal capacity to tax the wealthy, meaning that any new program that liberals want to implement, from early-childhood education to high speed rail, will have to come paired with an announcement that middle-class taxes will be rising significantly to pay for it. And I haven’t even mentioned the current programs we have to find money for, such as Medicare. Even assuming you could get such a large tax hike through Congress, is expanding retirementbenefits really the one thing you want to spend all the money on?

Moreover, increasing the tax cap won’t even raise enough money to cover Social Security’s costs unless we also break the link between payments and benefits. Otherwise, we’ll run a surplus for a few more years, then pay out a lot of that surplus in the form of higher benefits. Progressives should think long and hard about whether they want to break that link. Social Security’s great political strength is the perception that beneficiaries have earned their benefits with previous payments. The more clearly untrue that statement becomes, the more political risk there is to the less well-off beneficiaries.

What to do about America’s anorexic retirement accounts? Friend, ask me an easy one. But here’s at least a partial answer to your question: not this.


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