Writing in U.S. News & World Report, I argue that the technical side of Social Security reform should wait until we consider some of the broader issues on what we want a social insurance program to accomplish and how different households react to government plans offering retirement benefits.
First, we must recognize that while Social Security is a progressive program and does help reduce poverty in old age, most benefits don't go to poor households. In fact, the highest-earning fifth of the population receives about one-third of total Social Security benefits, and the next fifth receives almost another third. Social Security doesn't pay benefits to middle- and high-earning households because those households can't save on their own. It pays those benefits based on a political calculation, dating from the time of Social Security's founding, that middle- and higher-earning Americans wouldn't support a program that benefits the poor unless they themselves received a benefit from it. But paying generous benefits to middle- and high-earning households gets very expensive as the population ages and the workforce paying into Social Security shrinks.
And second, there is plenty of evidence that middle- and high-earning households treat Social Security and personal saving as substitutes. That is, if you increase Social Security benefits, these households will save less on their own. If Social Security benefits are lower, middle- and high-earning households tend to save more to make up the difference. Research from the U.S., United Kingdom, Canada and Poland finds similar results: If future Social Security benefits are lowered, middle- and upper-income workers save more. But if future benefits are made more generous, working-age households will save less. The result of the Democratic candidates' plans to expand Social Security benefits would very likely be less individual retirement saving by middle- and upper-income Americans.
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3 comments:
"there is plenty of evidence that middle- and high-earning households treat Social Security and personal saving as substitutes."
But you have said before "that one dollar of future Social Security benefits crowds out between zero and 50 cents of private saving", so SS does increase the total available retirement. The analysis is complicated by the actual money flow from workers to beneficiaries, but it provides a function of mandatory savings in the same way that making 401k plans be opt out does.
That figure comes from a literature review from CBO that's now at least 15 years old. The difficulty in judging these effects for the US comes from a couple things: first, there haven't been many recent changes to the system that we can use to see how people react; second, the system is progressive, so the interaction between benefits and personal saving is more complicated than in other countries (say, the Canada Pension Plan pays a flat replacement rate of, I think, 25; when Canada raised taxes for the CPP, the trade-off with personal saving, future benefits, etc. was pretty clear to people); and third, most working-age people have no idea what they'll get from Social Security, so they don't know how to react even if they should. More recent research looking at pension reforms in other countries have found very similar effects: low-income people basically don't change their saving in response to benefit changes, but middle and high-income people do. It's not dollar-for-dollar: in Canada it was close to 90 cents on the dollar, while research on the UK and Poland found offsets of 65-75%. But that's still a pretty big deal given how much is spent on benefits for these income groups.
Andrew, when you say most working people have no idea what they get from SS, that is so true. In 1973 I asked my dad what my SS benefit would be; he had no idea and told me to call the SSA. I did and asked for a benefit analysis. I was told I was too young and that I should wait until I was in my mid 50's. When I asked what the benefit formula was, they said there was none. Congress set the amount each year. When I asked the simple question How does SSA know the taxes I pay are enough to fund my future benefits, they replied, we don't. It was a quick five minute phone call that turned my attention to trying to figure out what SS-OASI would pay. In 1975 I figured out the payroll tax I was paying was far more than any actuarial analysis would require. A bit more time at the library revealed a program that did not balance early payroll taxes with early benefits.
I also was able to easily see that early benefits far out paced any payroll tax benefits.
I know from experience that many of my parents age were able to save a lot. They went through the depression and knew the importance of saving. They passed that on to me and siblings. I have passed that onto my children.
I was able to save far more in the 70's than I was later on due to higher payroll taxes. When I look at the US savings rate since the 30's, there is a direct correlation between US Savings rate and the FICA tax rate. Every time the FICA tax went up, the US savings rate declined.
Since SS has been around now for 78 years, we have passed through three generations where each following generation had less to save (low wages). To perform analysis today on the affects of SS and current low income people would not be what we would call "normal" data.
SS is like a crutch. Using it too long makes you more dependent. Yes it hurts to get rid of the crutch and perform physical therapy, but in the end it is much better.
Few know what their needs will be in the future. Even fewer know what their SS benefits will be. Knowing what you may need in the future is the key to saving. Eliminating SS will require people to save in order to have a retirement. SS is a crutch that is very costly.
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