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March 09, 2013 10:22 AM A Obvious Pot of Money for an Increase in Social Security Benefits

By Ryan Cooper

Josh Barro has been teaming up with Duncan Black more and more these days. First it was the platinum coin option, now here he is endorsing an increase in Social Security benefits:

Despite its problems, Social Security is the best-functioning component of the U.S.’s retirement-saving system. Instead of cutting, the federal government should be expanding its role in retirement saving.

Barro suggests that this could be paid for by cutting Medicare, or by increasing taxes a bit. Megan McArdle is having none of it. After many paragraphs saying it’s very hard to cut medical spending, she writes:

As for doing it with taxes, Social Security is expected to stabilize at around 6% of GDP. What sort of boost are we talking about? Enough to make up for the fact that our national savings rate has fallen from about 10% of income in 1980 to 2.5% now? That would be a huge increase, not a small one. It would have quite noticeable effects on the economy, and on the living standards of the younger, poorer workers that we are asking to transfer money to older, wealthier ones…I’m not sure I see a strong case here for taking even more money from young people and transferring it to people who decided not to save enough.

In keeping with Weisenthal’s Law, McArdle blames people with low retirement savings for their plight, not considering the possibility that low savings could be a result of forty years of declining median wages and rapidly increasing healthcare and education costs. As a young person myself, I’d happily eat a smallish payroll tax increase if that’s what it took for me to be able to avoid the ice floe retirement option when I get old.

But in any case, there is another source of funding we could tap for a Social Security increase before we talk about raiding other pots of money: the 401k tax exemption. Originally this was supposed to usher in the neoliberal free market retirement utopia. It failed (instead we’ve created yet another set of rent-seeking parasites, this time in the form of objectively useless mutual funds). As Barro writes:

Private saving for retirement is woeful. This typical near-retirement household has just $42,000 in retirement accounts and $18,300 in other financial assets. For most Americans, Social Security isn’t augmenting private saving; private saving is (just barely) augmenting Social Security.
And as both home equity and stocks were battered over the last few years, retirement insecurity worsened. Munnell and her colleagues estimate that as of 2010, 53 percent of American households were on track to be more than 10 percent below the amount of assets they would need at age 65 to maintain their standard of living in retirement, up from 44 percent in 2007…
Individuals won’t do it: Tax advantages of retirement-saving accounts don’t seem to induce people to save enough on their own. And when people do use individual retirement accounts and 401(k) accounts, they’re often hit by high fees and bad investment choices.

The 401k exemption costs somewhere around $200$100 billion per year (depending on the estimation), and it doesn’t work. That money could be plowed into Social Security right away, and if that’s still not enough to keep most seniors out of poverty, we can increase it some more.

Because as Black says, lots of people are set to retire right now without nearly enough to make it. Regardless of whose fault that is, shall we let them starve?

I say no.

Ryan Cooper is a National Correspondent at The Week, and a former web editor of the Washington Monthly. Find him on Twitter: @ryanlcooper

Comments

  • Ken in Madrid on March 09, 2013 12:10 PM:

    Another possibility for augmenting SS would be to eliminate the current ceiling and tax ALL earned income. This would also reduce somewhat the regressivity in FICA taxes and lower income inequality a little.

  • biggerbox on March 09, 2013 12:10 PM:

    McMegan seems to ignore the sizable number of people who decided to save quite a lot, thank you very much, only to have their investments decimated when banksters gaming the system flushed the world economy down the toilet.

    If I had a dime for every time McArdle wrote something stupid in a column, I'd have almost made it all back by now.

  • Ryan Seacrest on March 09, 2013 12:35 PM:

    What bigger said. Oh, what a better world it would be if McArdle were rightly ignored (or better, excluded from polite socity).

    And OF COURSE we should let people starve! We couldn't possibly put on a tiny transaction tax, or end the carried interest loophole, or anything else that might alter the inexorable grab of the 1%.

  • jjm on March 09, 2013 12:35 PM:

    You said it, @bigger box!

    I watched as friends my age who did not have a defined benefit for retirement as we did lose half --yes HALF -- their 401K to the financial crisis. Then to have the dastards who induced the crisis turn around and yell at people for not having saved enough is just these sadists taking delight in twisting the knife.

    Raise the cap on the payroll tax. Problem solved for ages.

  • Doc Sportello on March 09, 2013 12:52 PM:

    Totally agreed on expanding Social Security benefits. By my math, spending another $200 billion would increase the average monthly benefit from $1200 to $1560. Nobody would get rich, but that's a nice increase.

    Another source of funding for additional benefits would be to apply Social Security taxes to all income, not just earned income. According to the IRS, in 2009 there was $7.7 trillion in income, some $5.7 of which was attributable to salaries and wages. So there's another $2 trillion out there -- more than 25% of the pie -- that might be worth taxing.

    http://how2saveamericaeasily.blogspot.com/2013/03/more-on-social-security-and-401ks.html

  • Citizen Alan on March 09, 2013 1:23 PM:

    Regardless of whose fault that is, shall we let them starve? I say no.

    That is because you are fundamentally human. McMegan, being a vile, soulless psychopathic monster, would probably disagree, as would the overwhelming majority of the Republican Party.

  • Daryl Cobranchi on March 09, 2013 1:41 PM:

    Of course, if you remove the tax incentives built into the 401(k), the earnings in those accounts would have to be taxed at the cap gains rate (instead of the normal earned income rate as they are today), reducing a portion of the $200B.

  • David Carlton on March 09, 2013 2:03 PM:

    Er, OK. That $200 billion presumably comes from the as-yet-unpaid taxes on all the money that those of us with 401(k)s/403(b)s have been contributing throughout our lifetimes, right? And you're going to eliminate those shelters all at once for all of us? Yes, it's true that the mean balance in these accounts is quite low, given that you're lumping twenty-somethings in with us sixty-and-older-somethings (and that even we sixty-somethings aren't in great shape, all told), but it's still yanking something we've been promised, and which most of us need. What I think would be a better option is to tighten the limits on annual contributions. That $17,500 isn't the true limit; for instance, there's also the 50-plus catch-up contribution, a sometimes generous employer match and, at least in my case, the 3-percent mandatory contribution that doesn't count against the $17,500. The major limit to the 401(k)'s effectiveness isn't the mutual-fund industry's fees (those can be avoided; all my money's in Vanguard and TIAA-CREF, and Vanguard, especially, has superlow fees, especially on its index funds). Rather, it's the inability of most contributors to come anywhere close to maxing out, which makes the vehicle primarily a subsidy to the well-off--much like the home-mortage-interest break. Tightening the limit won't net $200 billion (sorry), but it would make the system more equitable without screwing those of us who've been using the vehicle all along. For many of us in the nonprofit community, 403(b)s have been the only retirement vehicle available since long before 401(k)s were thought of, and quite a few of us would like to keep it.

  • c u n d gulag on March 09, 2013 3:22 PM:

    McMegan should stick to making mediocre bechemel sauce in her $1,000 kitchen helper for the culinarily inept.

    What's really pathetic, is her culinary skills, such as they are, exceed her knowledge of economics by about the same distance between Usain Bolt and a tortoise in the 100 meter dash.
    And her culinary skills suck.

    Yes, eliminate the cap, take ALL 401K savings and apply them to peoples SS accounts, and have some miniscule tax on stock, bond, and investment savings, trades by the rich, to not only make SS solvent for the next 100+ years, but to increase the amount that current and future recipients will receive.

    You want a thriving American economy, you rich and smug morons?
    Well, as the largest part of our population, the Baby Boomers, continue to retire in the next decades, then give them some more to spend - the rich ones can't spend enough to keep the economy going for everyone else.

    This would be idiotic to point out to the rich in America in another time.

    Except that now, with the global economy, the rich care less and less about what happens to those who aren't rich, since they can always sell their electronic gizmo's to India, or sell some more bad investment deals around the entire globe.

    But that won't happen.
    We are doomed.
    Greed isn't good.
    But greed rules.

  • iyoumeweus on March 09, 2013 5:17 PM:

    SOCIAL SECURITY Change the pay roll tax by reducing it from 6 to 5 per cent on the first $100,000 which would be matched by the employer then a graduated upward tax on all gross or total income including wages, salaries, bonuses, interest, dividends, capital gains and other forms of income. Such a tax may look something like this:
    $100K 1M +1% above that amount.
    The first $100,000 5%

    $1M - 5M +2%
    $5M - & above +3%
    Everything paid above the first $5,000 would be a tax deduction. In other words a person making one million dollars would pay $5,000 on the first $100,000 and $9,000 on the remaining $900,000 for a total of $14,000. Someone fortunate enough to be making $10,000,000 would pay $5,000 plus $9,000 plus $80,000 or 2% on the next $4M and $150,000 or 3% on the final $5M for a total of $244,000 or 2.44% of earnings of which $239,000 would be tax deductable.

  • Eric Lindholm on March 09, 2013 5:18 PM:

    This is a remarkable piece: people aren't saving enough for retirement so let's take away their incentive to save for retirement. Further, let's put it into a program that has a negative rate of return: workers today will pay more in taxes than they will receive in benefits.

    http://finance.yahoo.com/news/social-security-not-deal-once-165406538.html

    But, hey, you're willing to pay more in taxes? That's great. I, on the other hand, who has responsibly saved for retirement at the sacrifice of new cars and vacations, want nothing to do with the "best run program" of the U.S. government. Crazy, right? I subscribe this insane belief that stealing from my kids for their working lifetime to pay for my pina coladas is immoral.

    The Social Security trust fund will be empty in 20 years and then everybody's benefits will be automatically cut by 25%. This Ponzi scheme cannot continue.

  • Rich on March 09, 2013 6:17 PM:

    Not so sure this is a great idea. The only people who benefit from tax exemption are those with relatively low incomes. the only people who seem to benefit from 401s and IRAs are those who make a lot of money.

  • James Wimberley on March 10, 2013 6:50 AM:

    "... to be able to avoid the ice floe retirement option when I get old .... "
    What's an ice floe, Grandpa?

  • c u n d gulag on March 10, 2013 8:13 AM:

    Eric Lindholm,
    CONGRATULATIONS!!!
    And good for YOU!

    But realize that some of us couldn't afford new cars and/or vacations in our entire lives.

    Or pina colades, either.
    We just got caught in the pain (sic) - of the 50+ year-old Conservative plot to kill the middle class.

    If you'd care to educate yourself, my I recommend listening to, or reading, the great Thom Hartmann.
    http://www.thomhartmann.com/

    If you don't care, there's nothing I know of that can give you some empathy.

    Well, let me correct myself - maybe Karma can.

    Karma has a nasty way of teaching some people empathy for others through humility.

    I hope Karma doesn't decide to make you an unwilling student.

  • c u n d gulag on March 10, 2013 9:13 AM:

    joela zimmerl - another CRAPTCHA success story!

  • akindependent on March 10, 2013 12:17 PM:

    Who are these people who "decided" not to save enough? The average income in 2011 was about $43,000; median income about $26,000. We expect responsible Americans to buy a home, feed their families, and carry health insurance with deductibles of $5-7,000. They should be saving for their children's college education. Oh, and save enough to fund their retirements.

    Even if we pretend that none of these people will ever experience a period of unemployement, have to help support an elderly relative, lose their homes in a recession, or have a disabled child or a serious health event, where is the fat in the income of real families that could be salted away for retirement?

    I think the problem with politicians and pundits tsk-tsking about the great numbers of Americans who "will never take responsibility for themselves" is that
    they have a collective inability to imagine what life is like for a majority of their fellow citizens.

  • Tom Dibble on March 10, 2013 2:12 PM:

    Eric -

    It's not often that you see a post demonstrating abject lack of reading comprehension, circular reasoning, AND a (willful?) misunderstanding of what a Ponzi scheme is.

    Congratulations, you've hit the Conservative Blowhard trifecta!

    To piss into the wind of ignorance, I'll try to correct your statements:

    "people aren't saving enough for retirement so let's take away their incentive to save for retirement" - Setting aside the fact that the "incentive" has not had any measurable positive impact for most Americans (outside the upper middle class and above), the proposal is to shift from incentivizing risk-taking to a guaranteed benefit. You obviously don't like this idea, but it stems from the fact that the benefits of risk-taking (more money in the stock market than ever before) are heavily weighted to enriching the financial management industry, not to enriching the small investors. Low personal retirement investment is not the problem; low levels of capital on investment is the problem.

    "Further, let's put it into a program that has a negative rate of return: workers today will pay more in [payroll] taxes than they will receive in benefits." - This is assuming that we will hit a "wall" in 20 years and refuse to fund Social Security. I agree that's a significant risk with Republican morons at the helm, but with reasonable people working on the problem (the flawed unstated major premise of this article, by the way) there's nothing magic about the Social Security Trust Fund. It's a "fund" that's been robbed by Congress many times in the past; that they would see it empty and say "oh well, I guess all our seniors get a 25% paycut then!", politically, is stupid, and would result in both electoral slaughter and another US credit rating downgrade. The guarantees of Social Security are not contingent upon the health of an arbitrary funding mechanism; defaulting on our seniors, aside from being just plain wrong, is also akin to defaulting on paying T-bill interest.

    "This Ponzi scheme cannot continue." I agree that Ponzi schemes can not continue for more than a couple of years (the original lasted less than 200 days). Which should be a significant clue to you that Social Security is not a Ponzi Scheme. But, if that's not enough for you (and I'm sure it is not) then consider that Ponzi Schemes: enrich one or more people at the "top" while draining all others dry (who is at the "top" of the SS "Ponzi Scheme"?); are 100% parasitic and non-self-funding (SS is 75% self-sustaining at current tax rates, which was by design less than 100% to allow SS to get mostly over the "hump" of baby boomer retirees with minimal short-term impact; after the glut of boomer retiree subsides, it will be >100% self-funding again); do not serve any societal need (feeding and housing the elderly was a MAJOR problem before Social Security, as you have forgotten); and inherently collapse under their own weight (aside from the baby boomer surge, SS is entirely self-sustaining).

    "I subscribe this insane belief that stealing from my kids for their working lifetime to pay for my pina coladas is immoral." What an idiot. If you think Social Security checks are putting retirees in luxury hotels and beachside resorts you are beyond help.

  • Eric Lindholm on March 10, 2013 8:43 PM:

    I know you people can't get beyond ad hominem attacks, but here are the facts: under current law when the Social Security Trust Fund drops to zero, benefits will be automatically cut by 25%. At present the Social Security Administration says this will happen in 20 years (two years before I retire).

    There is no "guaranteed benefit" - the government can take it away at any time and under CURRENT LAW the benefit will be slashed. This will make the negative return of Social Security super-negative.

    I want my 401(k) because no matter the meager return and enriching stockbrokers, it's a POSITIVE investment. With compounding. And it's an asset that I control. If you drop dead at 64, SS gives you nothing.

    FDR set up SS to keep Americans from "old-age poverty" but in it's modern incarnation it mostly takes money from younger workers and transfers them to older, more affluent, Americans. If you want to means-test or enhance the program's progressivity, more power to ya. But don't pretend it's not paying for golf fees in Florida.