After years of calling for benefits cuts as a way to “strengthen” Social Security, Republicans found an unlikely ally last December in Barack Obama, when the newly reelected president put chained-CPI “on the table” in an effort to negotiate a bipartisan budget deal ahead of the fiscal cliff. House Minority Leader Nancy Pelosi (D-CA) quickly took charge of selling the cut (the result of indexing regular cost-of-living adjustments to a less generous measure of inflation, thereby reducing benefits over time) to her fellow Democrats, arguing on MSNBC that it was “worth making a compromise” and that “Democrats will stick with the president”—although, she conceded, “maybe not every single one of them.”
Indeed, saner minds among the House Democratic caucus pushed back forcefully in defense of Social Security, including Progressive Caucus co-chair Raul Grijalva (D-AZ), who called chained CPI “a Beltway fig leaf that I will never support.” But although the fiscal cliff passed without any agreement on so-called “entitlement reform,” neither the president nor the Democratic leadership in Congress have rescinded their chained-CPI offer, preferring to hold the Social Security cut as a bargaining chip for next month's debt ceiling negotiations or an attempt at 1986-style tax reform.
Even as a purely political calculation, this makes no sense, as Ezra Klein and Jonathan Chait have already pointed out. But more importantly, cutting benefits completely ignores the fact that Social Security is the best functioning, lowest cost, and most secure retirement savings vehicle we've ever had. It is better funded than defined benefit pension plans, which rely problematically on either corporate benevolence or government largesse; and it avoids all of the behavioral failures that plague 401(k) plans, such as low participation rates, insufficient contributions, plan leakage, and early withdrawals.
Defined benefit pensions have all but disappeared in the private sector (and, increasingly, in the public sector) because employers don't want the unfunded liability on their books—a problem that defined contribution plans like the 401(k) “solve” by shifting all of the investment risk to the individual. When the market declines, which it inevitably does, the average retiree relies on Social Security—the one retirement vehicle that doesn't attempt to “beat the market” by betting on equities—for about two-thirds of their income. And unlike privately managed plans, which are estimated to cost Americans anywhere from $30 billion to $60 billion a year in fees, Social Security pays out more than 98 percent of its total disbursements in the form of benefit checks.
The above graph comes from an ambitious new plan issued yesterday by the New America Foundation, which not only refuses to compromise on Social Security but actually proposes adding an additional, universal flat benefit called Social Security B, which would supplement traditional Social Security income to the tune of $11,669 per year for all elderly earners.
The details of the plan are, in a way, unimportant: there is as much chance of expanding Social Security in the current political climate as there is of passing single-payer health care. What is important is that New America is taking a stand against those elements within the Democratic party—including the president and much of the congressional leadership—that would trade Social Security benefit cuts in exchange for fleeting political capital. They join a broad coalition, spanning from the wonkish center-right (see Josh Barro's recent call to expand Social Security) to establishment figures like Senator Tom Harkin (D-IA), whose own plan would strengthen Social Security by lifting the cap on wages subject to the payroll tax, increasing benefits for lower-income households, and moving the cost-of-living adjustment to “CPI-E” (Consumer Price Index for the Elderly) so that benefits keep pace with the rising cost of medical care.
All of these plans cost money. (NAF's proposal comes to nearly 5 percent of GDP.) But the U.S. economy won't underperform forever, and the largest demographic cohort of baby boomers have yet to pass into retirement. As Americans live longer and income inequality rises, we need to begin making smarter decisions about our social safety net, and how to best protect ourselves from poverty in old age. For voters, journalists, policymakers, and everyone else who recognizes the necessity of preserving and expanding Social Security, the time to start having that conversation is now.
Tags: 401k, social security, retirement
Graph: Why Democrats Need to Push Back on Social Security
After years of calling for benefits cuts as a way to “strengthen” Social Security, Republicans found an unlikely ally last December in Barack Obama, when the newly reelected president put chained-CPI “on the table” in an effort to negotiate a bipartisan budget deal ahead of the fiscal cliff. House Minority Leader Nancy Pelosi (D-CA) quickly took charge of selling the cut (the result of indexing regular cost-of-living adjustments to a less generous measure of inflation, thereby reducing benefits over time) to her fellow Democrats, arguing on MSNBC that it was “worth making a compromise” and that “Democrats will stick with the president”—although, she conceded, “maybe not every single one of them.”
Indeed, saner minds among the House Democratic caucus pushed back forcefully in defense of Social Security, including Progressive Caucus co-chair Raul Grijalva (D-AZ), who called chained CPI “a Beltway fig leaf that I will never support.” But although the fiscal cliff passed without any agreement on so-called “entitlement reform,” neither the president nor the Democratic leadership in Congress have rescinded their chained-CPI offer, preferring to hold the Social Security cut as a bargaining chip for next month's debt ceiling negotiations or an attempt at 1986-style tax reform.
Even as a purely political calculation, this makes no sense, as Ezra Klein and Jonathan Chait have already pointed out. But more importantly, cutting benefits completely ignores the fact that Social Security is the best functioning, lowest cost, and most secure retirement savings vehicle we've ever had. It is better funded than defined benefit pension plans, which rely problematically on either corporate benevolence or government largesse; and it avoids all of the behavioral failures that plague 401(k) plans, such as low participation rates, insufficient contributions, plan leakage, and early withdrawals.
Defined benefit pensions have all but disappeared in the private sector (and, increasingly, in the public sector) because employers don't want the unfunded liability on their books—a problem that defined contribution plans like the 401(k) “solve” by shifting all of the investment risk to the individual. When the market declines, which it inevitably does, the average retiree relies on Social Security—the one retirement vehicle that doesn't attempt to “beat the market” by betting on equities—for about two-thirds of their income. And unlike privately managed plans, which are estimated to cost Americans anywhere from $30 billion to $60 billion a year in fees, Social Security pays out more than 98 percent of its total disbursements in the form of benefit checks.
The above graph comes from an ambitious new plan issued yesterday by the New America Foundation, which not only refuses to compromise on Social Security but actually proposes adding an additional, universal flat benefit called Social Security B, which would supplement traditional Social Security income to the tune of $11,669 per year for all elderly earners.
The details of the plan are, in a way, unimportant: there is as much chance of expanding Social Security in the current political climate as there is of passing single-payer health care. What is important is that New America is taking a stand against those elements within the Democratic party—including the president and much of the congressional leadership—that would trade Social Security benefit cuts in exchange for fleeting political capital. They join a broad coalition, spanning from the wonkish center-right (see Josh Barro's recent call to expand Social Security) to establishment figures like Senator Tom Harkin (D-IA), whose own plan would strengthen Social Security by lifting the cap on wages subject to the payroll tax, increasing benefits for lower-income households, and moving the cost-of-living adjustment to “CPI-E” (Consumer Price Index for the Elderly) so that benefits keep pace with the rising cost of medical care.
All of these plans cost money. (NAF's proposal comes to nearly 5 percent of GDP.) But the U.S. economy won't underperform forever, and the largest demographic cohort of baby boomers have yet to pass into retirement. As Americans live longer and income inequality rises, we need to begin making smarter decisions about our social safety net, and how to best protect ourselves from poverty in old age. For voters, journalists, policymakers, and everyone else who recognizes the necessity of preserving and expanding Social Security, the time to start having that conversation is now.
Tags: 401k, social security, retirement