Friday, November 20, 2015

A flat benefit plan for Social Security reform

Over at National Review online, I outline what I’ve called the “flat benefit plan” to reform Social Security. It’s modeled after the retirement systems of New Zealand and the U.K., with some nods to Australia and Canada as well.

Read the article, but the main outline is:

  • Beginning immediately, institute a minimum social security benefit for all long-term U.S. residents set at the single, over-65 poverty threshold (about $950). This would increase access to Social Security and raise benefits for about the bottom third of retirees.
  • The minimum benefit would be paid regardless of work history and earnings. Other than current law’s taxation of benefits, it would not be means-tested. The poverty-level minimum would be indexed over time with wages.
  • Over several decades, gradually reduce the maximum social security benefit so that eventually everyone receives the same flat dollar amount. 
  • Expand personal retirement saving through universal auto-enrollment in 401k plans, auto-escalation of contributions, and regulatory relief to make it less costly for small employers to offer retirement plans.

In addition, there are several other provisions to the plan that I don’t discuss much in the NRO article.

  • Immediately eliminate the 12.4% Social Security payroll tax for workers 62 and over.
  • Gradually raise the early retirement age from 62 back up to its original level of 65.
  • Pay COLAs on a progressive basis, so that current retirees receiving a sub-poverty level benefit receive an above-inflation COLA, those with mid-level benefits receive the CPI-W, and those with higher benefits receive COLAs base on the Chained CPI.

The plan would be solvent over 75 years and thereafter.

Take a look at the article and let me know what you think.


Arne said...

If you are going to unlink benefits from contributions, you can also unlink the income from payroll. You could balance the budget with income taxes. Or you could consider this a reason to switch to a value added or consumption tax for the revenue. If you did use payroll taxes, the reason for the cap would certainly be gone.

Andrew G. Biggs said...

Some countries, such as the United Kingdom, have retained a payroll tax even as their government retirement plan has shifted toward a flat benefit approach. Others, such as New Zealand and Australia, fund guaranteed minimum retirement benefits out of general tax revenues, meaning principally income taxes. The flat benefit plan is compatible with either approach. I don't have a strong opinion one way or the other.