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.