. Senator Elizabeth Warren (Photo by Nic Antaya for The Boston Globe via Getty Images)
Senator Elizabeth Warren released a Social Security expansion plan on the morning of September 12, the day of the next Democratic presidential primary debate. David Leonhardt of the New York Times was among the first to report about it. Warren’s plan to increase Social Security benefits will make the elderly better off, along with their families, and it will strengthen the solvency of the system. Very wealthy and high income people will pay more taxes, but research suggests they will maintain their status in society. And fixing Social Security may help relieve the worries among some of the wealthy that inequality threatens capitalism, and their own high-status position.
Warren’s plan would provide an across-the-board increase in monthly Social Security payments. Every current and future beneficiary will receive at least $200 more per month than they do now, and many low-income workers will receive at least $600 more. Mark Zandi from Moody’s Analytics has done a comprehensive analysis of the bill, finding that today’s average $1395 a month check could go up to $1595.
Senator Warren’s expansion could be worth $40,000 to $120,000 for all Social Security recipients. Today, a 65-year old expecting to live 20 more years who receives an extra $200 per month from Social Security could claim income worth about $40,000 (the present value of Warren’s Social Security increase). A $600 boost in benefits is worth more than $120,000 over those 20 years. And Social Security benefits are worth more than what you could buy from private annuity providers.*
To appreciate how Warren’s proposal will help elderly households, consider that the current median value of private retirement accounts for all workers is zero – most people have nothing. For those who have some retirement assets, their median balance is approximately $60,000. And if you think people can sell their houses and live off the income, think again. The median home equity value for people over age 65 is only about $120,000. Zandi’s report also finds that Warren’s plan would cut the elderly poverty rate by about two-thirds. That is big, especially because the U.S. currently has the highest rate of elderly poverty among all rich nations. And for the elderly who already have decent retirement incomes, the increased benefits will be taxed.
HOW TO PAY FOR THE SOCIAL SECURITY BOOST?
Warren’s plan is fully paid for by applying the payroll tax to higher incomes. Currently, most workers pay 6.2% because they earn less than $132,900 per year, which is the earnings cap; income beyond that amount is not taxed for Social Security. The Warren plan imposes the payroll tax on earnings above $250,000 – the income between $132,900 the current cap and $250,000 would not pay more. Those earning $250,000 and higher – less than 1% percent of all workers — are the only group that have received significant pay raises over the years.
We don’t know all the names of the 1.7 million of 166 million workers who earn over $250,000 but some of them are famous–Jeff Bezos, Warren Buffett, and others. And those who earn over $250,000 (again, less than 1% of all workers) hold the bulk of private tax-advantaged retirement assets and pensions, making them the main beneficiaries of the private retirement system. The Economic Policy Institute found that the top 1 percent of wages grew 138 percent since 1979, while wages for the bottom 90 percent grew only 15 percent. Social Security is in potential financial trouble because the earnings subject to the payroll tax is capped, and low incomes have stagnated while incomes above the cap increased. The Warren plan would help right this imbalance and mitigate this hidden and destructive consequences of income inequality.
Hope for Social Security And Retirement Futures
Without additional revenues, Social Security will only have enough money to pay 77% of benefits in 2034. I used to not worry about this, thinking the political system would never let benefits decline. But I worry now. I worry about the long-term finances of Social Security, but I am much more concerned about 401(ks) and pensions. I have been monitoring the other parts of the America’s retirement system for 35 years and the non-Social Security part is a disaster. Social Security needs more money and higher benefits–which the Warren bill would provide, fully funding the new benefits. And while Social Security is the strongest part of America’s overall retirement system, parts of the Warren bill will strengthen it, making not only Social Security but the entire retirement system stronger, in addition to the increased benefits.
Fortunately, Democratic candidates are waking up to make efforts to increase Social Security revenues to maintain benefits and increase them where necessary. Several bills in Congress are similar – but not as bold as the Warren plan.
Economically, Social Security is one of the easiest public policies to understand and implement. The Warren tax increase is relatively large, but concentrated on those who with the most income gains and who already get most of the benefits from other tax breaks supporting private retirement plans. Those who pay will have not a significant loss of their economic well-being, which has grown disproportionately in the past decades. And millions will be better off. The math is easy. The politics are difficult. The necessity is unassailable.
*Technical lesson: Buying a promise of $200 – $600 a month in the open annuity market would be more expensive because of “adverse selection.” Insurance companies know that people who voluntarily purchase private annuities are statistically the people who live longer than average. The insurance company has to charge more because of this adverse selection. And the insurance company lowers benefits and charges more because it has to make a profit. Social Security doesn’t face adverse selection because everyone gets the annuity and Social Security is not-for -profit.
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