One think tank is addressing the question of how to reform Social Security while also growing the economy. (Photo: Shutterstock)
For decades, the fate of Social Security, the country's largest federal program, the largest source of retirement income for most seniors, and the second largest source of revenue for the Treasury Department's coffers, has been well known.
That hasn't kept lawmakers from dancing around the issue at the margins, if not avoiding the political third rail–a term coined by Speaker of the House Tip O'Neil in the 1980s–altogether.
The program's two trust funds will be exhausted by 2032, according to the Congressional Budget Office. Actuaries at the Social Security Administration push that date out to 2035. Either way, massive across-the-board cuts to all retires' scheduled benefits will be required absent changes in the law.
Perhaps any discussion on reforming the imminently insolvent program is good discussion. But Marc Goldwein, senior vice president and policy director at the Committee for a Responsible Federal Budget, has a "huge" problem with the ideas floated on how to fix Social Security.
"People are not putting the discussion in a growth context," said Goldwein, the lead author of a new policy paper, Promoting Economic Growth through Social Security Reform.
"We always talk about Social Security reform in the context of retirement and fiscal policy," he added. "But never as growth policy. What I want to happen is for people to start thinking about reform as an economic growth strategy. The most important idea in the paper is we need to change the discussion."
How can the largest "entitlement" program be a vehicle for economic growth?
The short answer: Through promoting more work among an aging workforce, encouraging investment and retirement savings outside of Social Security, and bringing the program's revenues in line with its spending to assure fiscal sustainability.
The long answer is technical and includes changes to the formula for calculating benefits to include earnings after 35 years of work, raising the normal retirement and earliest eligibility ages by one year each, and creating a new Poverty Protection Benefit for the most vulnerable Americans who can't work beyond age 62.
To bring revenue in line with obligations, CRFB would phase in a new taxable minimum above today's $132,900 threshold, among other measures.
What it does not do is increase payroll taxes, a cornerstone of the Social Security 2100 Act, which House Democrats are reportedly positioning to move through the Ways and Means Committee.
"I commend Rep. Larson," Goldwein said of John Larson, the Connecticut Democratic congressman, chair of the Ways and Means' Social Security subcommittee, and the initial sponsor of the Social Security 2100 Act.
"His bill shows the magnitude of how much needs to be done. But his way of reform isn't thinking about economic growth—the Penn Wharton Budget Model found it would shrink the economy by 2 percent. And there is no way it would pass the Senate," said Goldwein.
Larson's bill would expand benefits for all Americans and create a baseline benefit of 125 percent of the poverty line. It would phase in an increase in the payroll tax for all workers, beginning with a 0.1 increase starting in 2020, ultimately increasing the existing payroll tax rate of 12.4 percent to 14.8 percent by 2041.
What kind of economic growth can be expected?
CRFB's paper claims the Pro-Growth Social Security Reform framework would significantly increase economic output over the long term–-resulting in larger incomes, more wealth, and stronger public finances.
The paper estimates the framework could increase Gross National Product between 3.5 percent and 13 percent in 2050.
Delaying the retirement age would create 1 to 3 percent of growth in 2050. And recalibrating the benefit formula to account for all years of earnings would incentivize more people to stay in the work force, leading to another 0.5 to 1.5 percent increase in economic activity, the paper says.
Together, that would create a quarter point annual increase in economic growth, translating to an $8,000 increase in annual average income by 2050.
"We are not saying this is the only way to get economic growth out of reform. What we are saying is there is a way to reform Social Security and grow the economy," said Goldwein.
One option for generating growth is to let Social Security's trust funds run dry and enact across-the-board benefit cuts. CBO says that would generate 2.5 percent growth, less than CRFB's framework, and what Goldwein calls the "dumbest way possible" to implement reform.
The faster growth projected under CRFB's framework would also mitigate troubling federal debt projections, which the non-partisan think tank says will be 160 percent of GDP by 2050. Under its Social Security reform model, faster growth and more tax revenue would reduce the debt-to-GDP ratio by 20 percentage points.
Supplemental Retirement Accounts
Under CRFB's framework, Congress would create Supplemental Retirement Accounts (SRAs).
American workers would be automatically enrolled in SRAs at 2 to 3 percent of wages, with the ability to opt out, and invested in low-cost, well-diversified mutual funds that would be owned by the savers.
The result would be increases to national savings rates and increased capital stock, both of which would add to economic growth.
"The idea is not to replace Social Security, but to create more savings on top of it," said Goldwein. "What better way to assure all Americans have access to a low-cost, safe retirement plan. Behavioral economics tells us most would not opt out of the plan. That would be good for retirement security. And good for the economy."
Many of the ideas in CRFB's paper have been gestating with Goldwein for over a decade. He and authors Maya MacGuineas, CRFB's president, and Chris Towner, a policy analyst, spent over a year and a half on the paper.
"I don't expect a single member of Congress to take this plan and pack it into legislation," said Goldwein. "But I do think they will take pieces of it and put it into their own vision."
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
