|
 Policy experts often point to such figures to underscore the looming
retirement security crisis, and proposals have been flying this year
from Republicans and Democrats alike for ways to encourage people to
sock away more money.
Just one problem: Middle- and lower-income households often do not
earn enough to save meaningful amounts due to decades of stagnant
wage growth, job insecurity and the rising costs of housing and
healthcare.
Only high-income households have managed to build significant
savings, and the Center for Retirement Research at Boston College
says 52 percent of today's working-age households face the shock of
declining living standards in retirement.
In other words, income inequality is translating into retirement
inequality.
Here is a better option: Expand Social Security benefits to help
people who need it most.
"If you have a dollar to spend on retirement security, it's much
better to spend it on Social Security than by spreading it out along
tax brackets to incent retirement savings," says Ben Vegthe,
research director of the Social Security Works advocacy group.
Vegthe makes the case for using Social Security to address
retirement inequality in a persuasive research paper set for
publication in the June issue of the journal Poverty and Public
Policy. He recommends expanding benefits and funding the cost
primarily by scrapping the cap on wages subject to payroll taxes
($118,500 this year).
He would also add a 6.2 percent tax on investment income (equivalent
to the current individual payroll tax rate) and restore the estate
tax to where it was in 2000. At that time, estates worth $1 million
were exempted (compared with $5.4 million this year), and the top
marginal tax rate was 55 percent (compared with 40 percent this
year).
Those changes would eliminate the funding shortfall now facing
Social Security. The combined retirement and disability trust funds
are projected to run out in 2033, when retirement benefits would
have to be cut by 25 percent across the board.
Vegthe estimates that one-third of the shortfall is due to slow and
unequal wage growth in the economy.
By law, Social Security taxes should be levied on 90 percent of the
country’s wage base, and that was the case in 1984 after the last
round of major reforms were enacted. But today, 17.5 percent of
taxable earnings fall above the maximum, according to Social
Security Administration data.
Equally important, the tax hikes could also fund expansion. What
would that look like? Now-retired Iowa Senator Tom Harkin, a
Democrat, last year proposed boosting benefits across the board by
about $72 per month, and his proposal is expected to be introduced
in the Senate again this year. Social Security Works has called for
a 10 percent across-the-board raise, up to a maximum increase of
$150 per month.
Either of those plans would primarily help lower- and middle-income
workers because the Social Security benefit formula already replaces
a larger share of earnings for those households than for high
earners. The Harkin plan would give an extra boost to benefits for
the lowest-income group.
[to top of second column] |
Some lawmakers are actually aiming to cut Social Security benefits
as part of a broader deal to rescue the program’s ailing disability
insurance fund. But others are focused on encouraging saving, and
some useful ideas have been proposed.
Representative Joe Crowley, a Democrat from New York, has proposed a
Roth-style retirement saving account that every child would receive
at birth, seeded with a $500 government contribution, and expanded
child tax credits for additional contributions by parents.
Republican Senator Orrin Hatch from Utah has proposed a Starter
401(k) for small businesses that would allow employees under age 50
to save up to $8,000, much more than the $5,000 limit on individual
retirement accounts.
Senators Susan Collins, a Republican from Maine, and Bill Nelson, a
Democrat from Florida, have introduced legislation that would make
it easier for smaller businesses to cut administrative costs by
forming multiple-employer 401(k)-style plans.
But ideas like these would probably benefit mainly upper-income
people.
An analysis of Federal Reserve data by the Center for Retirement
Research found that in 2013, pre-retirement households (age 55-64)
with annual income below $39,000 had median total retirement savings
of $13,000 in 401(k) and IRA accounts; middle-class households
(income from $61,000 to $100,000) had median savings of $100,000.
Only in the highest-income band ($138,000 or more) were
accumulations significant at a median of $452,000.
Perhaps there is a bipartisan deal to be had: Expand savings options
and Social Security at the same time.
I am convinced Social Security expansion offers the best path to
addressing the retirement crisis, but why not try both approaches
and find out which delivers the goods?
(Editing by Beth Pinsker and Lisa Von Ahn)
[© 2015 Thomson Reuters. All rights
reserved.] Copyright 2015 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
 |
