For workers' sake, reinvent the ownership society

Opinion: When it comes to incomes in retirement, fixing Social Security is just a start. The real challenge is to increase saving.

By MSNMoney partner Mar 14, 2012 1:37PM Clive Crook, Bloomberg


Here's some good news about America's public pension system. Contrary to many reports, the country can afford it.


Social Security faces much less fiscal pressure over the coming decades than pension systems in other advanced economies. While it will need patching, the repairs aren't that difficult.


But there's bad news as well. When it comes to incomes in retirement, fixing Social Security is the smaller part of what needs to be done. The real challenge is to increase saving.


The narrow fiscal problem is manageable because the U.S. will have plenty of taxpayers. Americans retire later than most Europeans, and they have more children, too, so the aging of the U.S. population is less pronounced. Between now and 2050, the U.S. working-age population will expand, whereas Europe's will shrink. The fundamental variable is the ratio of U.S. pensioners to workers, which will rise as the baby boomers retire, though more slowly than elsewhere.


America's public pension problem is easier in another way. Again by advanced-economy standards, the U.S. commitment to government spending on pensions is middling rather than high. True, if you fold government spending on health care for senior citizens into the mix, things look a lot worse, thanks to rising health costs. There, the U.S. is a global outlier. But if you look just at incomes in retirement, the projected cost of Social Security is moderate.


America's real pension problem is not that Social Security is going bust but that the retirement incomes it will provide are too small. Too many people will rely exclusively on Social Security. Private pension saving -- increasingly through 401k's and other defined-contribution vehicles rather than traditional defined-benefit plans -- is inadequate, and fees eat up too much of the return for small savers. For many families, saving through home equity has turned out to be a catastrophic mistake. When they retire, many baby boomers will see a far bigger drop in their standard of living than they had expected. Many will have to work longer, whether they want to or not.


To mend the system, the U.S. must do two things. First, the easy part, get Social Security back in fiscal balance. Second, supplement it with a new retirement saving plan.


In cold fiscal terms, Social Security is a pay-as-you-go transfer system (current taxes pay for current benefits) masquerading as a funded savings plan (in which benefits are paid out of the return on investments). Benefits already exceed payroll tax receipts, and this gap will grow. Forget the "trust fund" and its holdings of government debt. That's money the government owes to itself: It nets out to zero. What counts is that the system is now adding to the budget deficit, and will add more with time. Some combination of spending cuts and tax increases -- either within the Social Security budget or outside it -- will be needed to balance the books.


This calls for nothing too drastic. A gradual increase in the retirement age to reflect rising life expectancy is most of what's required to pay for benefits at roughly the existing rate. But managing Social Security's burden on the budget doesn't raise incomes in retirement. For that, people need to save more -- and those without the means to do so will need help.


Why not simply acknowledge that Social Security is not a savings plan but a transfer system, make it more generous, means-test it to limit the cost and then raise other taxes to pay the bill? That approach has the advantage of fiscal simplicity, but the politics won't work.


The fact is, the masquerade serves a purpose. Support for Social Security is strong precisely because people see it as a savings plan. They have paid into the system -- or so the Social Security Administration tells them -- and they feel entitled to what the system owes them. Recasting Social Security as just another welfare program would be the first step toward dismantling it.


The opposite approach is partial privatization, as tried by George W. Bush. The idea was to let people divert some of their payroll taxes to a private pension. All being well, they could expect a higher return on that money, so adding their private pension and their diminished entitlement to Social Security together, they would come out ahead. One problem is that savers would have to bear more financial risk -- not something you should ask people of limited means to do. Another is that the shortfall in payroll tax receipts would drive Social Security deeper into deficit, which subtracts from national saving when one of the goals in all this is to increase it.


Even so, it's a pity that Bush's plan was trashed so viciously. Greater private saving should be part of the solution -- as an addition to Social Security, rather than a replacement in whole or in part. Building the "ownership society" Bush talked about is surely a worthy goal. Democrats shouldn't renounce that idea because of its provenance. The idea that retirees "own" their Social Security benefits -- as illusory in fiscal terms as that notion might be -- accounts for the country's devotion to the system, and this devotion is telling. People want and should be granted ownership of the assets they will need to support them in retirement.


How, specifically, might this be done? I'd recommend, as a start, that an additional 5 percent be deducted from wages and invested in a choice of pooled accounts holding a mixture of domestic and foreign assets. Pooling and central administration would keep fees very low. Balances would accumulate tax-free until retirement; distributions would then be taxed. I'd also advocate that taxpayers provide a subsidy to those on low incomes, sufficient to cover the whole deduction for those earning the minimum wage, so that everybody could afford to save through their retirement account. To help meet the cost of this taxpayer subsidy, narrow the existing tax preferences for saving, which flow to those on higher incomes who least need the help.


The aim would be to make the subsidy and the plan as a whole both revenue-neutral and progressive. Revenue neutrality means that public saving would not decline. Moving the subsidy from rich to poor improves equity, and will probably increase private saving overall. That's because the existing subsidy for saving by high-income households diverts saving to tax-preferred vehicles more than it increases saving overall. Directing the subsidy to people who can afford to save little or nothing now would therefore raise saving in the aggregate.


Social Security can be mended easily, but the U.S. needs to be more ambitious than that. The "ownership society" is part of the answer. Rather than scorning that idea, Democrats should make it their own.

More from Bloomberg

Mar 15, 2012 2:03AM
The problem with your plan is that it is basic redistribution policy. Why must everything be predicated on socialist principles?

The real question that needs to be asked is this: 

What right does any individual have to force another individual to do something they don't want to do? Or, in this case, force them to pay for something they don't want? 

That is the fundamental problem with any government redistribution program. You talk about how those "who least need the help" should be subsidizing those "who can afford to save little or nothing." The people who least need the help probably don't want a program that they have no use for. So, why must they be forced to participate in it against their will and forced to subsidize it for others to use? From where is that government power derived? What right do we have as individuals to force other individuals to do anything against their will - so long as those other individuals are not depriving any person of their life, liberty, or property?

Social Security is a multifaceted problem. First of all, there really isn't any constitutional basis for a government redistribution program. Secondly, no individual has the right to the fruits of others' labor. Thirdly, governments are horribly inefficient and ours is particularly predisposed to spending whatever money it does or does not have - which is why we have a problem with S.S. shortfalls in the first place. 

I am not my brother's keeper. If you failed to properly plan for your own retirement years, why must another person be burdened with your irresponsibility or your incapacity to do so? And if you're guaranteed a comfy retirement by the government, through subsidies from the "rich," why bother living responsibly and try to save for retirement? That's one of the problems with relying on other people's money. That's the problem with the socialist ideology.
Mar 15, 2012 12:39PM
I have no idea where theories like this are even brought forth. Right now, the socialists are filling the SS program with people no longer looking to work for a living. I wonder what the percentage of people under retirement age are now in the SS program.
Mar 15, 2012 11:33AM
What funds Social Security?

Payroll taxes, 6% of every dollar earned/paid is taken from both the employer and employee.  But as of last year and into the next, the employee is only putting in 4% in hopes of stimulating an economy in which inflation is setting in.

So please explain again how sturdy Social Security is when we are investing LESS into it as well as paying out MORE! 

And let's look at what the benefactors now receiving from it put in 50 years ago when a mere $10 a month was taken out, just for them to claim well over $1000 a month today. How did that "investment" grow?  And how dies one live off of a mere $1000 a month today when fuel is at around $4 a gallon, food is as high priced as ever and energy costs rise more often than the sun?
Mar 16, 2012 3:38PM

The answer to every problem seems to be fleecing the successful to hand cash and benefits to the lower class. We should focus on reestablishing a rugged, self reliant society.  Take care of the truly handicapped and incapable and require everyone else to pay their own way.  We should repudiate the calls for socialistic change.

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