November 4, 2015

WE ALL KNOW WHERE WE'RE HEADED:

Social Security reform: A conservative plan (Andrew G. Biggs, November 4, 2015, National Review)

[T]here is a new paradigm that rejects the "program for the poor is a poor program" credo in favor of a different philosophy: that if government provides a solid, reliable safety net against poverty in retirement, retirement saving on top of that base should largely be entrusted to individuals investing in private-market accounts that they, not the government, would control.

New Zealand, the United Kingdom, and Australia have all evolved in the same direction: The government provides a guaranteed minimum retirement benefit of about $1,000 per month. New Zealand pays this benefit to all residents, the U.K. scales it based upon the number of work years, and Australia means-tests the benefit based upon other income. But in all cases, the government aims at providing a solid base income to keep retirees out of poverty, not generous benefits for middle- and upper-income households.

On top of that base, individuals participate in 401(k)-type defined-contribution retirement plans. In Australia, participation is mandatory, though only the employer must make contributions, of 9.5 percent of worker wages. In New Zealand and the U.K., workers are automatically enrolled but may withdraw if they choose. In those countries, both workers and employers contribute, and the government provides a modest match.

I have proposed a similar reform for the U.S. Social Security program. Beginning immediately, Social Security would pay every long-term U.S. resident a minimum benefit pegged at the poverty threshold of $950 a month, regardless of the retiree's work history or earnings. This minimum benefit would take the place of both the redistributive aspects of Social Security and the Supplemental Security Income program, but do so with greater protections against poverty and no prohibition on work and saving. In fact, the Social Security payroll tax would be eliminated at age 62 to encourage longer work lives.

But over several decades, the maximum Social Security benefit would be scaled down so that eventually every retiree will receive the same flat dollar benefit from the government. For the bottom third of retirees, benefits would increase, but for middle and upper income Americans, benefits would decline relative to currently promised levels. This makes sense. At any given time, higher-income Americans are less dependent upon government than lower-income households. As incomes rise over time, Americans should gradually become less dependent on the government for income in retirement and more able to build their own savings.

To ensure an adequate retirement income, middle- and upper-income Americans would need to save more on top of Social Security. Federal policies should work to help them do so. Currently, around half of employers automatically enroll their employees in 401(k) plans, a policy that dramatically expands participation. Auto-enrollment should be made universal, as a simple best practice for pension administration. To expand pension coverage by small employers, which often find 401(k)s costly to establish, Congress should allow for less-expensive "Starter 401(k)s" and multiple employer-defined contribution plans, as proposed by Utah senator Orrin Hatch. Finally, 401(k) plans should adopt auto-escalation, which gradually increases contributions over time. Again, employees can withdraw, but most don't even notice the increased contributions, and the vast majority choose not to reduce them.

This plan would not cheat Americans out of Social Security benefits they had already earned. But it would change the terms on which Americans earn future benefits, to a paradigm in which government provides a real safety net against poverty -- the ultimate "retirement crisis" -- but treats middle- and upper-income households as adults who can and should generate most of their retirement income through their own saving.

Posted by at November 4, 2015 6:09 PM

  

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