Shoring up Social Security and ramping up private savings were the laudable goals on the agenda at a recent conference, Improving Retirement Security, put on by the Bipartisan Policy Center and the Concord Coalition. But high-income earners might not like the proposed solutions experts kept falling back on: raising taxes one way or another.
Congress needs to act soon to address the fact that the Social Security disability fund will run out of money by next year, necessitating a drastic cut in benefits. That presents an opportunity to address broader retirement security issues, said former Democratic senator Kent Conrad in opening remarks.
In addition to Social Security’s financing problems, Conrad listed a series of failings when it comes to private savings: many people don’t have access to retirement plans at work; people who do have access to workplace retirement plans aren’t saving enough; and many people haven’t dealt with the risk of longevity and possibly needing long-term care. “For many people these issues seem complex and that freezes them; that in many ways is the most dangerous thing we face,” Conrad said.
Conrad, and James B. Lockhart, former deputy commission of the Social Security Administration under President George W. Bush, are heading up a bipartisan Commission on Retirement Security and Personal Savings. He said they’re on track to issue a set of concrete proposals in September.
In the meantime, here are some ideas bandied about at the conference.
Raising the cap on income subject to payroll taxes above the current $118,500 threshold (it’s already indexed for inflation).
“My brother calls me on the day he’s maxed out Social Security taxes; that day is getting very close to January 1,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities. Bernstein called for raising the cap on income subject to payroll taxes as a way to shore up Social Security, warning that trying to solve Social Security’s problems by cutting benefits too far would violate the goal of making sure vulnerable seniors have economic protections. For 2015, the maximum amount of a worker’s pay subject to the 7.65% Social Security tax (the so-called “wage base”) is $118,500.
Should high-income earners like his brother be worried? Even Bernstein pegs the chances of raising the so-called “tax max” at less than 10% if a progressive president was elected.
Cut off Social Security benefits for the well-off or raise taxes.
“We need a minimum benefit that will take most of the elderly out of poverty, start with [that], then decide, ‘Are we going to cut off benefits for the well-off or raise taxes?’” said Eugene Steuerle, co-founder of the Urban-Brookings Tax Policy Center. Steuerle said that Social Security is becoming a middle-age retirement system as people are living longer; instead it needs to be made more of an old-age system. One way to do that: Backloading benefits to enhance really old age needs. That would also be a partial answer to the long term care savings shortfall, Steuerle said.
Echoing Conrad’s hope for action in 2016, Steuerle noted that historically, a new president gets what he (or she) wants in the first year in office, so there’s a chance for reform if we have a president who wants to tackle these issues.
Doug Holz-Eakin, president of the American Action Forum, called for “aggressive” means testing for high earners: making Social Security benefits “richer at the low end, less luxurious at the upper end.”
Limit tax breaks for retirement savings.
Jason Furman, chairman of the White House Council of Economic Advisers, attacked the “upside down nature of retirement savings incentives,” pushing President Barack Obama’s plans to limit tax deduction for contributions to retirement accounts to 28% (currently high earners get a 39.6% break). "If you make $250,000 or more, you’d get a generous incentive to save for retirement, just not as generous as today," he said. The savings could pay for a federal program that would mandate employers establish "auto IRAs" for employees, to try to force workers to save for retirement. Furman noted that Obama’s proposals go further. Another would disallow tax deductions for retirement accounts of about $3.4 million (that proposal is so complicated he stumbled, trying to explain it).
Judy Miller, director of retirement policy with the American Society of Pension Professionals & Actuaries spoke in favor of auto IRAs, noting that some states are putting forth their own versions, while Congress dithers. Under the federal version, an estimated 30 million additional families would end up saving.
But Miller was skeptical of trimming tax breaks. Tax incentives are “absolutely critical when you’re trying to get a small business owner to put in a plan,” she said.
Sen. Orrin Hatch (R-UT), chair of the Senate Finance Committee, made a quick appearance towards the end of the conference, apologizing for not being able to give his planned speech because he was tied up with the trade package Democrats first scuttled before reaching a compromise yesterday. Maybe on retirement, the parties will also find common ground.
