Social Security Should Be Replaced

July 11, 2013

Social Security is the largest domestic federal program. It is funded by the largest tax paid by most workers, and is the largest source of income for most retirees. The program provides benefits to the elderly, to the disabled and to the families of eligible workers who have died. Thus, it is relied upon by some of the most vulnerable people in our society. It is also growing insolvent. As currently designed, the program has practically no chance of remaining financially sustainable in the coming decades, says Andrew G. Biggs, a resident scholar at the American Enterprise Institute.

  • Over the next decade, the Social Security program will provide about $984 billion more in benefits than it will collect through the payroll tax that is intended to fund it, according to the 2013 report of the program's trustees.
  • Social Security can continue paying benefits for now because it ran a surplus over the past three decades; the extra funds were lent to the Treasury for use on other federal programs, and as those loans are repaid, they can be spent by Social Security.
  • The program's trustees report that, over the long term (by which they mean the next 75 years), Social Security will be underfunded by an astonishing $9.6 trillion.
  • To make Social Security "sustainably solvent" (meaning solvent over that 75-year stretch and in good financial health at the end of that period) would require an immediate and permanent payroll tax increase of 4 percent of wages.

A Social Security reform that addressed the program's structural and fiscal problems would begin by transforming today's complex benefit formula into a two-part system consisting of a savings account and a flat universal benefit. Such a system could be implemented gradually and apply only to new workers as they entered the workforce. This would very incrementally and slowly replace today's system without breaking any promises already made to working Americans.

Everyone in this new system would be given an opportunity and a strong incentive to save for retirement.

  • Each worker would be enrolled automatically in an employer-sponsored retirement account such as a 401(k) or 403(b).
  • Workers would contribute at least 1.5 percent of pay, matched dollar for dollar by their employers.
  • Universal retirement savings accounts would allow Social Security to focus its efforts: If everyone saved as they should for retirement, Social Security could concentrate its resources on low earners who needed the program the most.

Source: Andrew G. Biggs, "A New Vision for Social Security," National Affairs, Summer 2013.

 

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