New paper: “Promoting Economic Growth through Social Security Reform”

From Marc Goldwein, Maya MacGuineas and Chris Towner of the Committee for a Responsible Federal Budget.

Here’s the summary, but you can read the full paper here.

Summary of Recommendations for Pro-Growth Social Security Reform

Recommendation #1: Increase the Retirement Ages while Insulating Vulnerable Workers with an Age 62 Poverty Protection Benefit (62-PPB). One way to increase the size of the economy is to promote work among older Americans. Workers today face mixed retirement signals that often draw them into early retirement and treat retirement itself as a binary choice. To encourage longer and more flexible working lives, we propose phasing in an increase to Social Security’s early and normal retirement ages and then indexing them to growth in life expectancy. Understanding that many workers are unable to continue to work, we also propose offering all workers a 62-PPB benefit designed to insulate low-income workers from the financial effects of the age increases and ensure that anyone can retire at 62 without slipping into poverty.

Recommendation #2: Calculate Benefits Based on Each Year of Work Rather than Lifetime 35-Year Average Earnings. Higher labor force participation among workers of all ages can help to strengthen the economy. Yet the current Social  Security benefit formula imposes a significant implicit tax on those who work less than ten years and on workers later in their careers – especially after 35 years of work. To reward each year of work, we propose counting every year of earnings toward Social Security benefits and applying Social Security’s benefit formula to annual, rather than average, earnings through a formula known as “mini-PIA.”

Recommendation #3: Automatically Enroll Workers into a “Supplemental Retirement Account” (SRA) on top of Social Security, with the Choice to Opt Out. Increasing the national savings rate would boost overall investment, increasing capital stock and economic growth. Unfortunately, many workers lack access to retirement savings vehicles, or are saving too little for retirement. To increase savings and investment, we recommend enrolling workers into add-on SRAs and automatically contributing 2 to 3 percent of their wages unless a worker chooses to discontinue contributions. SRAs could be invested into one of several well-diversified, low-fee funds and would be owned by the worker, who could access the funds upon retirement.

Recommendation #4: Make Social Security Sustainably Solvent Through a Combination of Progressive Tax and Benefit Changes. Reducing federal borrowing can promote economic growth by reducing “crowd out” of private investment, while improving policy certainty can significantly improve saving and investment choices. Unfortunately, Social Security is running large and rising deficits, which increase federal debt and leave the program on course to exhaust its trust fund reserves by 2035. To make the program sustainably solvent, we suggest a package of progressive revenue and benefit adjustments that would protect low-income seniors, phase in gradually, and ultimately bring the program’s costs and revenues in line. We also suggest that the precise composition of this package be decided as part of a political negotiation.

We also suggest lawmakers consider other pro-growth reforms – as part of and to supplement Social Security reform – in order to maximize potential growth effects.