Thinking About Social Security Reform (Andrew Biggs)

8/7/2019 Thinking About Social Security Reform (Andrew Biggs)

1/10

Thinking AboutThinking About

Social Security ReformSocial Security Reform

Andrew G. Biggs

Resident Scholar

American Enterprise InstitutePresentation to National Press Foundation

June 21, 2010

[email protected]


2/10

What does Social SecuritysWhat does Social Securitys

retirement program do?retirement program do? Mandate savingMandate saving

Some people wont save for retirementSome people wont save for retirement

unless requiredunless required Subsidize low earnersSubsidize low earners

People who could fall into poverty even ifPeople who could fall into poverty even if

they did savethey did save Protect against longevity riskProtect against longevity risk

Benefits last as long as you liveBenefits last as long as you live


3/10


4/10

General conceptsGeneral concepts

In aging society, we want people to:In aging society, we want people to: Work moreWork more

Save moreSave more

Retire laterRetire later

Fixing Social Security through lowerFixing Social Security through lower

benefits will tend to encourage thosebenefits will tend to encourage those

thingsthings Fixing through higher taxes willFixing through higher taxes will

discourage them. Why?discourage them. Why?


5/10

Higher taxes mean peopleHigher taxes mean people

wouldwould Work lessWork less Lower pay for each hour workedLower pay for each hour worked

Save lessSave less Less after-tax pay with which to saveLess after-tax pay with which to save

Retire earlierRetire earlier

Replacement rate (Social Security/after-Replacement rate (Social Security/after-tax wage) will risetax wage) will rise


6/10

Effects of raising tax capEffects of raising tax cap Individual earning $106,800 currently pays:Individual earning $106,800 currently pays:

28% federal income tax28% federal income tax

2.9% Medicare payroll tax2.9% Medicare payroll tax

~5% state income tax~5% state income tax Total marginal rate: ~36%Total marginal rate: ~36%

With higher Social Security cap: ~48%With higher Social Security cap: ~48% $107k isnt that rich$107k isnt that rich

We havent done a thing to fix Medicare/ MedicaidWe havent done a thing to fix Medicare/ Medicaid


7/10

We need more personalWe need more personal

savingsaving Easy to supplement lower Social SecurityEasy to supplement lower Social Securitywith higher personal savingwith higher personal saving Much harder with MedicareMuch harder with Medicare

Universal 401(k)s would reduce burden on SocialUniversal 401(k)s would reduce burden on SocialSecuritySecurity

Almost half of retirement benefits go to topAlmost half of retirement benefits go to top

1/31/3rdrd of earnersof earners We can reduce costsWe can reduce costs withoutwithout increasing povertyincreasing poverty

High earners can, should and would save moreHigh earners can, should and would save more

in response to lower benefitsin response to lower benefits


8/10

Can Americans work longer?Can Americans work longer? Typical age of Social Security claiming:Typical age of Social Security claiming:

1950: 68.7 years1950: 68.7 years Life expectancy: ~age 76Life expectancy: ~age 76

2008: 63.6 years2008: 63.6 years Life expectancy: ~age 82Life expectancy: ~age 82 Americans could spend 1/3Americans could spend 1/3rdrd of adult life in retirementof adult life in retirement

In 1930, 20-year old had 66% chance of livingIn 1930, 20-year old had 66% chance of living

to age 65to age 65

Today, 20-year old has 65% chance of living to ageToday, 20-year old has 65% chance of living to age7878

But are we healthy enough?But are we healthy enough?


9/10

But are we healthier?But are we healthier?


10/10

Summing it upSumming it up Increase early and full retirement agesIncrease early and full retirement ages

Raising early retirement (62) age delaysRaising early retirement (62) age delays

benefits, doesnt cut thembenefits, doesnt cut them

Raising full retirement age (66) withRaising full retirement age (66) withlongevity equalizes lifetime benefitslongevity equalizes lifetime benefits

Reduce benefits for high earnersReduce benefits for high earners

Improve benefits for low earners, whereImprove benefits for low earners, wheremany fall through the safety netmany fall through the safety net

Implement universal 401(k) planImplement universal 401(k) plan

Documents

Thinking About Social Security Reform (Andrew Biggs)