It occurs to me, after my comments yesterday about the Trust Fund and Megan McArdle’s subsequent post on the topic, that I haven’t really laid out my preferred Social Security program. (I just did a search of my past posts and I can’t find anything that isn’t labelled “draft”.) So I’m going to spend a few minutes writing this out.
It’s a multi-part system, actually.
Part 1: a basic anti-poverty benefit for everyone over a fixed age, with a fixed amount, reduced pro rata only for those who have spent less than 20 years of their working life in the United States. The benefit would be set at the poverty level threshold for a single person, and would simply be provided for each individual; that is, there would be no special adjustments for married couples, nor would benefits be reduced for a person living with adult children or similar arrangements.
The benefit would come out of general federal funds, no differently than any other government spending, and, when the Jane Tax Plan is implemented, the costs would simply be factored into the tax rates.
The objective here is obvious: keep the elderly out of poverty. Ensure that everyone has sufficient funds to be properly housed, to purchase sufficient food, and their other daily needs, and that regardless of whether they had a suitable work history because, well, it’s too late now.
Part 2: mandatory savings for additional retirement income. Employees would be required to save 5%, and their employers contribute another 5%, and the funds would be directed to a “pooled retirement fund” (similar to those Tom Harkin proposed) in which investments would be professionally managed, mutual-fund style, but with some key additional components: fund returns would be smoothed, annuities would be purchased at retirement (with modest lump-sum options), and the government would provide a PBGC-like backstop that would enable funds to invest in a more return-seeking manner than insurance companies, with losses smoothed over time but still the possibility for participants to see their pension checks reduced as needed to keep the fund financially sound. The idea here is to provide something that provides lifetime income in the style of a Defined Benefit plan but while recognizing that employers are not providing, and cannot be expected to provide such plans any longer.
The key here is that this 5%/5% savings requirement would not apply to all income, but only to that slice of income above the basic benefit, and topping out at an income level that’s solidly middle-class but not especially high. This is, honestly and admittedly, a matter of saving people from their own grasshopper-y nature, to ensure that those who were middle-class during their working lifetime, have a level of income that at least provides them with some approximation of the living standard to which they’re accustomed, or at least ensures that they won’t need to pinch pennies and watch every dollar of spending. In application, unlike the Social Security ceiling that means that for the upper-income, FICA taxes simply end at a given time of the year, the upper and lower thresholds for applying the 5%/5% would be converted to a per-paycheck (or per-hour) basis and applied evenly over the course of the year. In other words, as an illustration of the concept, if you earned a salary equivalent to $30 per hour, the 5%/5% might be applied to the pay between $10/hour and $20/hour only.
Why 5%/5%? Oh, partly because it’s a nice even 10%, but some time ago, in real life, we did some modeling and concluded that under a reasonable set of assumptions, this would generate a 50% income replacement rate.
Part 3: Additional savings.
Additional savings are great. Knock yourself out. Tax-effectiveness of your chosen savings vehicle depends on the particulars of the Jane Tax Plan (in which I’ve pencilled in a general tax deferral for savings, though caps may be necessary).
Part 4: Medical care.
Let’s face it: the older you get, the less able you are to manage a high-deductible healthcare plan. You’re not able to weigh your doctor’s recommendations, and you may or may not have adult children able to help (that is, you may have adult children who want to help, but they live a good five hour drive away and despite their urging, you don’t want to leave your home). So I’d go with Steven Brill’s Staff Model HMO approach, though knowing that the first try, in the 70s/80s, didn’t work: a primary care physician (a gerontologist) and team of doctors managing care, and cost savings achieved not through high deductibles and copays but coordination of care, efforts at health maintenance, and elimination of unnecessary treatment. And, accordingly, I’m not factoring medical costs into the basic benefit, or the savings-related benefit.
Part 5: Housing.
Falling Short discusses the possibility of using your house as a source of income, either via downsizing or a reverse mortgage (though I didn’t really discuss this in my summary the other day). Longtime readers will know what I think of “aging-in-place” ; in any event, for purposes of retirement policy, we shouldn’t be aiming at keeping the elderly in their homes, but should think of their income needs as based around smaller multi-family units (whether an apartment or condo, and whether in a regular or senior-only complex).
(Note: on Megan McArdle’s blog, I got some pushback on this, saying I was ready to kick granny out of her home and consign her to a retirement home; no, not really, I’m just saying that for policy-planning purposes we shouldn’t be building in a “need” for a large home.)
What’s left?
What should the retirement age be? I’m undecided. Maybe 67. Maybe 70. Maybe, considering that there’s no distinction between “early” and “normal” retirement, as early as the old 65. Set, in any case, based on that age at which adults who are not disabled per se, are generally unable to continue working, due to physical or mental limitations. And also, in any case, given the realities of the job market, those approaching this age who find themselves unemployed should have more generous unemployment benefits available to them, given the difficulties of being re-hired.
Should benefits be means-tested? Maybe — but, if so, the phase-out should happen gradually and at fairly high income levels, to avoid the feeling that older adults who have diligently saved are being “punished” for it.
What about disability benefits? That should properly be its own program, not connected to Old Age benefits at all, and with a focus on rehabilitation and partial employment wherever possible, and with a general reform of its own processes (given report such as yesterday’s that Puerto Ricans are found disabled for not speaking English, and other stories — sorry, no link — that in very poor areas, families obtain disability benefits for their “disabled” children, with afflictions such as ADHD and various learning disabilities, and then are more concerned with keeping the kids “disabled” and the benefits intact than seeing their children progress).
What about survivor’s benefits? Again, a separate, and reformed benefit program.
What about transition? It would necessarily be gradual, of course, and may take a long time. Later on, I’ll see what I can pull up on the UK, which is implementing a major transition in its benefits.
So there you have it — and now it’s time to log in to work!
UPDATE: Some further comments on origin and context:
The plan has some elements of similarity with some other proposals out there. For example, Andrew Biggs proposed, in 2013, a flat benefit plus a universal 401(k), but without the pooled (or the compulsory) components of my Part 2. And Theresa Ghilarducci proposes what she calls Guaranteed Retirement Accounts (here’s an article, but she lays this out fully in a 2008 book, When I’m Sixty-Four) which are an additional layer onto Social Security, with an “account” but in this case one managed by the Social Security Administration with a guaranteed return.
But my proposal actually comes from plans overseas (and predates the Biggs plan, in real life): the flat benefits in Australia, Ireland, and the Netherlands, the retirement accounts in Australia (though retirees there stumble their way through postretirement draw-down just as in the U.S.), the “collective DC” plans also in the Netherlands, and the mandatory “cash balance”-type plans in Switzerland, which operate specifically on this middle slice of income. In fact, the U.K. is right now in the process of gradually transforming its Social Security benefit into a flat amount, and trying to establish a legal framework for what it calls “Defined Ambition” plans, meant to be, if I understand correctly, a plan with this pooled framework, to respond to their, ahead-of-us, disappearance of formerly near-universal employer-sponsored Defined Benefit plans. More on that later, if I can find some good (and not proprietary to the company) sources.
And the purpose of my plan isn’t a simple “hey, let’s boost retirement income.” The basic benefit is meant to respond to the fact that individuals who had patchy work history do not receive even barely sufficient benefits from Social Security as it is, producing a whole patchwork of supplementary benefits, including Food Stamps and subsidized housing (which itself is quite spotty in its availability, though that’s another story). The pooled-account piece aims to create a funded system to replace the pay-as-you-go system, and the fact that the accounts are built up based on this middle section of income is meant to build up retirement income in a more logical way, and respond to the fact that people are, at present, generally in the dark on how to take Social Security benefits into account when it comes to their own retirement savings (because the benefit levels decrease as pay increases, a simple statement of average benefit levels is of little help; see these tables by the Social Security Administration). And the whole thing attempts to respond to the decline in employer-sponsored Defined Benefit plans, which means that the pensions environment will be very different a generation from now. Have I worked out exactly who would be the winners and losers compared to the present system? No — that would be a worthwhile exercise, though the first step is to get anyone to notice the plan, to begin with!
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