[By John Burbank, Executive Director, EOI – cross-posted from The People’s Pension]

Rebuilding the Foundation for Retirement Security

A secure and dignified retirement was a symbol of American middle class well-being – a hybrid product of government social insurance, the corporate social contract, and the post-World War II culture and ability to save, as opposed to the current economic reality of income-stagnation, increasing debt and corporate-hyped consumption. This hybrid of Social Security, defined benefit pensions, and personal savings worked well…right up until the 1980’s.

While Social Security is on solid financial footing for decades to come, private defined benefit pensions have largely disappeared from the economic landscape, and decades of stagnant wages and debt have depleted workers’ savings and retirement accounts.

Where does that leave us? Thanks to the foresight of the architects of the New Deal, we have a solid foundation to remedy the cratering of retirement security. We can augment and strengthen Social Security, advance universally accessible voluntary retirement accounts, and develop state supplemental social insurance programs.

Our approach toward enhancing Social Security focuses on increases in benefits that preserve the concept of Social Security as universal social insurance:

Increase the benefit formula: New minimum benefits and increased benefits for all Social Security recipients will provide a robust and progressive adjustment to Social Security. In 2010, Social Security benefits totaled 90% of the first $761 of average monthly earnings. And between $761 and $4,586, a retiree received 32% of earnings. These benefit formulas should be increased to 100% and 36%, respectively, to help keep elderly Americans out of poverty. This proposal would cost about 2.0% of payroll.

Increase elderly survivors’ benefits. An elderly widow or widower loses one-third to one-half of the Social Security benefit received before the death of her or his spouse. Raising the benefit for a surviving spouse to 75% of the couple’s pre-death benefits would help low and moderate-income widows and widowers. This change would also eliminate the “working women’s penalty”, by which a dependent non-working widowed spouse could receive a higher Social Security benefit than a widowed spouse with a lengthy work history. This reform would cost about .46% of payroll.

Base Social Security benefits on the worker’s 30 highest-earning years. Social Security benefits are based on the adjusted average of a worker’s 35 highest-earning years. However, this formula penalizes women, who tend to spend far more time providing unpaid family care and average only 32 years of paid work – compared to the male average of 44 years. Any years under the 35-year threshold are counted as zeros in the Social Security formula, lowering the typical woman’s benefit and penalizing workers who experience high rates of unemployment.

A solution is to base benefits on the adjusted average of a worker’s 30 highest-earning years. This reform would acknowledge time spent in family care-giving (disproportionately benefitting women) and time spent unemployed (disproportionately benefitting low-wage males). This solution makes little difference to a high earner near the maximum taxable threshold, while having a noticeably positive effect on low earners. This proposal would cost about 1.2% of payroll.

Eliminate the cap on taxable income. The benefit increases noted above will require additional revenue, which can be achieved by eliminating the cap on taxable income. Over the past three decades, a smaller percentage of wages have been subject to Social Security taxes, thanks to disproportionately large gains in compensation for the highest income professionals and executives. Under the taxable earnings ceiling of $106,600 in place from 2008-2011, just 83% of wages were subject to Social Security taxes – down from 91% in 1983.

Eliminating the cap on earnings taxable for Social Security benefits would create a more progressive tax system and generate new revenue for Social Security – an additional 2.21% of payroll. Under this approach, Social Security funding would mirror that of Medicare, in which all workers and their employers pay the same proportionate tax, and all retirees 65 and older receive the same package of benefits. It also maintains the concept of shared social insurance. Not only would the highest earners be contributing more proportionately to Social Security, so would their employers.

Undertake a new investment approach. The current practice of purchasing Treasury bonds creates a number of political and fiscal problems. It hides the actual federal deficit and creates the false impression that Social Security Trust Funds don’t really exist in a tangible form. It also allows the continued transfer of tax responsibility from the wealthy (through the thirty-year trend in diminishing income taxes) to workers (through increased FICA taxes). Finally, it exacerbates the federal debt, through the eventual necessity of re-paying the Social Security Trust Fund in order to fund Social Security benefits.

New revenue should first be used to pay for enhancements to Social Security, with additional income invested in the purchase of highly-rated state and local bonds. This approach is not only safe and secure; it will also improve the nation’s infrastructure without increasing the obligations of the federal government. New funding for state and local bonds will result in increased and sustained transportation, energy, and manufacturing projects that will help rebuild the nation’s infrastructure and revitalize our economy.

After several decades, if the Trust Fund is invested more in state and local bonds rather than Treasury Securities, long term federal indebtedness to the Social Security Trust Fund will start to decrease.

A Bigger Picture: If wages increase with productivity, Social Security will be well-funded decades into the future. This is easier said than done, but it demonstrates how workers’ income determines long-term shared economic security. A robust increase in wages will vanquish any forecasted funding shortfalls in the long-term or very long-term future. So the solution to the Social Security 75-year funding horizon is to organize workers now, so that they can bargain more effectively for wages, to index the minimum wage to productivity increases, and to lower the cost of the dollar to increase exports and decrease imports, creating jobs in our own country. As I said, easier said than done, but we can and should certainly proceed forthrightly with smaller incremental proposals for enhancing Social Security benefits.

In my next posts for The People’s Pension, I will discuss universally accessible voluntary retirement accounts and state supplemental social insurance. Sources and date on the Social Security proposals are here.