Thinking About Thinking About Social Security ReformSocial Security Reform

Andrew G. BiggsResident Scholar

American Enterprise InstitutePresentation to National Press Foundation

June 21, 2010andrew.biggs@aei.org

What does Social Security’s What does Social Security’s retirement program do?retirement program do?

Mandate savingMandate saving Some people won’t save for retirement Some people won’t save for retirement

unless requiredunless required Subsidize low earnersSubsidize low earners

People who could fall into poverty even People who could fall into poverty even if they did saveif they did save

Protect against longevity riskProtect against longevity risk Benefits last as long as you live Benefits last as long as you live

General conceptsGeneral concepts In aging society, we want people to:In aging society, we want people to:

Work moreWork more Save moreSave more Retire laterRetire later

Fixing Social Security through lower Fixing Social Security through lower benefits will tend to encourage those benefits will tend to encourage those thingsthings

Fixing through higher taxes will Fixing through higher taxes will discourage them. Why?discourage them. Why?

Higher taxes mean people Higher taxes mean people would…would…

Work lessWork less Lower pay for each hour workedLower pay for each hour worked

Save lessSave less Less after-tax pay with which to saveLess after-tax pay with which to save

Retire earlierRetire earlier Replacement rate (Social Security/after-Replacement rate (Social Security/after-

tax wage) will risetax wage) will rise

Effects of raising tax capEffects of raising tax cap Individual earning $106,800 currently Individual earning $106,800 currently

pays:pays: 28% federal income tax28% federal income tax 2.9% Medicare payroll tax2.9% Medicare payroll tax ~5% state income tax~5% state income tax

Total marginal rate: ~36%Total marginal rate: ~36% With higher Social Security cap: ~48%With higher Social Security cap: ~48%

$107k isn’t that rich$107k isn’t that rich We haven’t done a thing to fix Medicare/ We haven’t done a thing to fix Medicare/

MedicaidMedicaid

We need more personal We need more personal savingsaving

Easy to supplement lower Social Security Easy to supplement lower Social Security with higher personal savingwith higher personal saving Much harder with MedicareMuch harder with Medicare Universal 401(k)s would reduce burden on Social Universal 401(k)s would reduce burden on Social

Security Security Almost half of retirement benefits go to top Almost half of retirement benefits go to top

1/31/3rdrd of earners of earners We can reduce costs We can reduce costs withoutwithout increasing poverty increasing poverty High earners can, should and would save more High earners can, should and would save more

in response to lower benefitsin response to lower benefits

Can Americans work longer?Can Americans work longer? Typical age of Social Security claiming:Typical age of Social Security claiming:

1950: 68.7 years1950: 68.7 years Life expectancy: ~age 76Life expectancy: ~age 76

2008: 63.6 years2008: 63.6 years Life expectancy: ~age 82Life expectancy: ~age 82 Americans could spend 1/3Americans could spend 1/3rdrd of adult life in retirement of adult life in retirement

In 1930, 20-year old had 66% chance of In 1930, 20-year old had 66% chance of living to age 65living to age 65 Today, 20-year old has 65% chance of living to Today, 20-year old has 65% chance of living to

age 78age 78

But are we healthy enough?But are we healthy enough?

But are we healthier?But are we healthier?

Summing it upSumming it up Increase early and full retirement Increase early and full retirement

agesages Raising early retirement (62) age delays Raising early retirement (62) age delays

benefits, doesn’t cut thembenefits, doesn’t cut them Raising full retirement age (66) with Raising full retirement age (66) with

longevity equalizes lifetime benefitslongevity equalizes lifetime benefits Reduce benefits for high earnersReduce benefits for high earners

Improve benefits for low earners, where Improve benefits for low earners, where many fall through the safety netmany fall through the safety net

Implement universal 401(k) plan Implement universal 401(k) plan