The next U.S. president and Congress will face a serious test: What to do, if anything, about the nation’s retirement crisis?
Americans aren’t saving nearly enough in their 401(k)s, while wide swaths of the workforce aren’t saving at all, because they don’t have access to a retirement plan. Social Security, meanwhile, faces a financial shortfall as the baby boomers enter retirement.
On the Democratic side of the aisle, the election breathed new life into an old idea that still seems outlandish to many in Washington: Why not help Americans save more for retirement by expanding the 80-year-old Social Security program?
It became a key plank in Vermont Senator Bernie Sanders’s campaign for the White House. Hillary Clinton also proposed modestly expanding Social Security, while President Barack Obama said he supported the idea earlier this year.
Is expanding Social Security the right thing to do? Is it even possible?
Yes and yes, Jesse Rothstein argues. A 42-year-old professor of public policy and economics at the University of California at Berkeley, Rothstein was chief economist at the U.S. Department of Labor earlier in the Obama administration. His essay, “Expand Social Security,” was included among more than a dozen policy proposals for the next president released this week by the Washington Center for Equitable Growth, a think tank, with ties to the Clinton campaign, that focuses on economic inequality.
Here, in an interview edited for space and clarity, Rothstein makes his best argument for a provocative idea.
How dire is the retirement situation for Americans? Is “crisis” the right word?
The only problem with the word “crisis” is that it didn’t happen overnight — it’s a very slow-rolling crisis. An awfully large number of people hit retirement with nothing to live on except Social Security benefits, which were never meant to be big enough to support you exclusively. [Franklin Roosevelt] talked about the “three-legged stool,” that Social Security would be basically one-third of the solution to the retirement puzzle.
Along with pensions and private savings.
Exactly. And we’ve never really gotten the other two legs of the stool strong enough, or widespread enough, to keep it level.
Many 401(k)s are nudging workers to save by automatically signing them up, but those efforts will never reach everyone, Rothstein says. (Photo: iStock)
A lot of ideas are out there to improve retirement. You’ve got states, including now California, requiring every worker to have access to a savings account. You have 401(k)s “nudging” workers into saving by automatically signing them up. You don’t seem to think those ideas are really moving the needle. Why?
Well, some of these efforts have some impact. If you set up your “nudge” right, you can raise the share of people participating in their 401(k) plan by a few percentage points. But you don’t raise it to 100 percent, and there are still an awful lot of people who don’t participate. States trying to set up portable plans is a good idea, and we should be doing that. But ultimately what all these plans are relying on is voluntary contributions from people who aren’t necessarily making enough money to be able to make those contributions.
Social Security offers two things that you can’t really get through anything other than defined-benefit pensions, which are less and less common. One, a Social Security payment is an annuity: The money keeps coming as long as you live. That’s really useful. If you’re living on private retirement savings, even if you saved enough, you have to be very careful how you spend it down, because you don’t know how long you need it to last.
The other thing that Social Security solves is market risk. We basically leave it to people to figure out how to invest their own retirement savings, sometimes with guidance from their employers, sometimes not. They’re often taken advantage of by financial advisers who don’t have their best interests in mind and by mutual fund companies that charge very high fees. But even if they invest perfectly, there’s still a risk that, as they’re getting closer to retirement, [a market event like] 2008 happens. They thought they had enough money for retirement, and then, all of a sudden, they don’t.
So what are you proposing?
We should be expanding Social Security. We should be making it more generous. That will require more revenues, but this is not taking money away from people. It’s just giving people a better way to save for retirement. Instead of having the Social Security payroll tax rate be 6.2 percent, we could make it 7.2 percent, and all of a sudden everybody’s Social Security benefit gets 15 percent larger.
Second, the share of income not covered by the Social Security tax has gone way up as inequality has gone up. [Currently, workers pay Social Security taxes only on income below $118,500.] If we raise the cap and start taxing higher incomes, we can expand benefits by a lot without increasing the burden on middle-class workers. We can also use that money to help cover the financing shortfall we have under the current system.
Third, we should create ways for people to “top up” their Social Security benefit. If somebody wants to save more, then we should give them a way to contribute more and get a promise of higher benefits later. It would be much cheaper, in terms of administrative costs, than current private accounts, and it would offer benefits you can’t get through private accounts.
How does this fit with what Donald Trump has been talking about? He says he doesn’t want to cut Social Security, but he’s also said he won’t expand it. He is also proposing the largest tax cuts ever, $6.2 trillion over the next decade.
It’s hard to see how you could actually implement that without pretty dramatic cuts to Social Security.
Turning to Hillary Clinton, how does the idea of expanding Social Security fit in with what she’s already proposed?
She’s made sensible proposals but not dramatic efforts in this area. Which is fine. It hasn’t been that much a part of the conversation yet. She certainly hasn’t proposed my exact plan.
Perhaps the goal is to tell people not to save as much in their 401(k) and IRAs because Social Security is doing it for them. (Photo: iStock)
Can we afford this? We already have a Social Security financing shortfall when the baby boomers are fully retired.
I think the shortfall we have is manageable. You’d rather not have it, but there are perfectly straightforward ways to address it. If the question is, “Can we afford more generous Social Security benefits?” the right way to think about it is, we’re asking people to afford lots of private retirement savings in addition to Social Security. It doesn’t make it any less affordable to move it into the Social Security system rather than outside of it. And, again, Social Security offers you a much more robust benefit. The goal should be telling people not to save quite so much in their 401(k) or their IRAs, because Social Security is doing it for them.
Is one of the goals here to make clear to people that Social Security is going to be around when they’re older?
I guess the right way to phrase it is, if they want it to be there, it will be there. If the American people all conclude we don’t want it anymore, then it will go away. But every poll I’ve seen says people really value it and don’t want it to go away. And there’s no reason why it needs to.
There’s pretty broad-based consensus that we shouldn’t be cutting Social Security. We should be moving that conversation forward. We should be figuring out ways to make Social Security do more — because it can, and we need it.
You’re talking about raising taxes to pay for more generous benefits, which would help baby boomers and other retirees who didn’t pay this higher amount into the system to begin with.
There are ways to structure this so you raise the taxes ahead of when you pay the higher benefits. I don’t think that’s a great idea. I don’t think we should be raising taxes now and saving them for 30 years. But you could do that if you want to. Every generation of workers works very hard and deserves a secure retirement.
What about the argument that expanding Social Security might discourage private saving?
To some extent the goal is to discourage private savings. We’re encouraging people to save in ways that are not very well targeted to supporting them in retirement. Expanding Social Security is a way of telling people: You don’t need to do that; here’s a better way.
So what happens if the next administration and Congress do nothing about retirement? What if we keep the status quo?
The threat is that the vast majority of workers retire without enough to live on. People will continue to save, to try to assure themselves a secure retirement. And some of them will get it, and some of them won’t, due to factors entirely outside their control.
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