Mr. Chairman, my testimony this morning addresses two aspects of strengthening retirement security: why it is critical to preserve Social Security’s core insurance features while reforming the program to eliminate its long-term deficit; and how we can expand retirement saving on top of Social Security.
Saving Social Security without destroying it
Social Security is one of America’s most successful government programs. It has helped millions of Americans avoid poverty in old age, upon becoming disabled, or after the death of a family wage earner.
Social Security’s success as a social insurance program is attributable to several basic features of the system. It provides participants with a well-defined, assured basic income that is protected against inflation, the risk of outliving one’s assets, and financial market fluctuations. It is progressive, providing larger annual benefits (relative to previous wages) for lower earners than for higher earners. And it provides families with insurance against the disability or death of a wage earner, in addition to retirement benefits.
Although we can and should boost retirement saving on top of Social Security, we must not forget that for the majority of the population, Social Security provides the key layer of financial security during particular times of need. One-fifth of elderly beneficiaries receive all their income from Social Security, and nearly two-thirds receive the majority of their income from Social Security. The average Social Security benefit amounts to slightly more than $10,000 a year, and 20 percent of beneficiaries receive $7,000 a year or less.
Social Security faces a long-term deficit. Restoring long-term financial balance to Social Security is therefore necessary, but it is not necessary to destroy the program in order to save it. One particularly contentious issue involves whether part of Social Security should be replaced with individual accounts. In my view, such an approach would be unwise both because of the
financing issues it entails and because individual accounts are not likely to provide an adequate replacement for the crucial protections offered by the current system:
A final issue regarding Social Security involves the relative magnitudes of the actuarial deficit in Social Security and the cost of the recent tax cuts. Over the next 75 years, the Social Security actuarial deficit amounts to 0.7 percent of GDP. Over the same period, the tax cuts (if they are extended and protected from being erased by the Alternative Minimum Tax) amount to more than 2 percent of GDP. In other words, the tax cuts cost more than three times the actuarial deficit in Social Security.
The relative size of the tax cuts and the Social Security deficit underscores two points:
Expanding retirement saving on top of Social Security
Various types of savings incentives already exist for households to supplement the key protections offered by Social Security. These savings incentives, however, are upside-down:
In part reflecting this upside-down set of incentives, the nation’s broader pension system betrays several serious shortcomings:
Vice Chairman of Investment Banking, Managing Director, and Global Co-Head of Healthcare - Lazard
The bulk of the policy changes that have been enacted in recent years, moreover, move the tax-preferred pension system further in the wrong direction. They provide disproportionate tax benefits to high-income households who would save adequately for retirement even in the absence of additional tax breaks, while doing little to encourage lower- and moderate-income households to save more.
The Administration’s new savings proposals would exacerbate this flawed approach. The Retirement Saving Account proposal and Lifetime Saving Account proposal would induce substantial asset shifting by high-income households, do little to boost saving among moderate- income households, and significantly reduce revenue over the long term. Over the next 75 years, the revenue cost of the proposals would amount to a third or more of the actuarial deficit in Social Security.
A better strategy would encourage expanded pension coverage and participation among low- and middle-income households by:
Retirement Security Project
A new Retirement Security Project at Brookings and George Washington University, funded by the Pew Charitable Trusts, is studying ways of bolstering financial security for America’s aging population by raising retirement savings and improving long-term care insurance products. It brings together pension researchers and health care experts to examine areas such as the opportunities and challenges involved in using home equity to purchase long-term care insurance; reforming the existing saver’s credit to strengthen its incentives for moderate-income households to save; and removing the disincentive for pension saving implicit in the existing asset tests under various means-tested government programs.
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