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February 16, 2024 at 03:57 PM
What You Need to Know
- A new analysis by the Cato Institute's Romina Boccia points out some stark differences between the retirement safety nets in the U.S. and the U.K.
- Wealthy people in the U.S. get far more back from Social Security than their European peers.
- A reduction in benefits for higher earners, while painful, is one of few viable solutions, Boccia argues.
The shaky financial position of the U.S. Social Security system is a major problem facing the federal government and workers who expect to rely on the program to avoid poverty in retirement, but near-universal agreement about the importance of Social Security doesn’t mean finding a solution is an easy matter.
As Romina Boccia, director of budget and entitlement policy at the libertarian Cato Institute, wrote in a recent analysis posted to her Debt Dispatch blog, U.S. legislators’ procrastination has allowed the Social Security system to run into the red with a $120 billion annual cash-flow deficit and a $23 trillion long-term unfunded obligation.
Simply put, tough actions are going to be needed in the years ahead to “stop the bleeding,” Boccia warns, and she makes the case that raising taxes on workers isn’t the best approach to balance the system’s finances.
Rather, Boccia argues that reducing benefits for higher income earners is a better way to keep program costs in check — especially if such a move is included as part of a “more fundamental rethinking” of the proper purpose of an old-age-income support program.
“[This] is a better alternative than raising taxes on current workers,” Boccia writes. “It will inflict lower economic costs and reduce uncertainty over future tax increases from allowing program costs to continue to grow on an unsustainable trajectory.”
According to Boccia, keen readers will observe that reducing higher income earners’ Social Security benefits after the fact will amount to a de facto tax increase by reducing the amount these individuals will receive in old age without changing the payroll taxes they were required to pay.
“They’re not wrong,” Boccia says, but this fact also needs to be put in its proper context, and one way to do that is to compare the current structure of the U.S. Social Security program with retirement-poverty mitigation efforts in other developed nations with similar working cultures, such as the United Kingdom.
The View From Across the Pond
“When it comes to government provision of retirement benefits, differences abound,” Boccia writes. “Comparing the United States Social Security program to the United Kingdom’s state pension illustrates a stark contrast. While both countries promise an old-age safety net, the U.S. Social Security benefit for the highest-income earners looks more like a golden parachute than what President Roosevelt referred to as ‘some measure of protection to the average citizen and to his family against poverty-ridden old age.’”
To make this case, Boccia cites data from the American Enterprise Institute, the Social Security Administration and other sources.
“According to the Social Security Administration, in 2024, the maximum benefit for an individual earner, who claimed benefits at age 70 and who earned at least the maximum taxable amount for 35 earnings years would be $4,873 per month,” Boccia writes. “That amounts to nearly $117,000 per year for a two-earner couple where both spouses meet the maximum benefit criteria.”
She compares this maximum Social Security benefit to the U.K. state pension, and the difference is indeed vast.
