The real problem with Social Security is not a shortfall but that its payout is so meager. Social Security is designed to replace only about 35% of wages at retirement, yet most Americans need twice that amount to live decently. With the other components of the retirement system looking wobbly, and with incomes low, Social Security is too skimpy to be the nation’s single pillar retirement system.
The obvious solution is to expand it. There are numerous revenue streams that would allow the nation to greatly increase the monthly payout for the 43 million Americans who receive retirement benefits….First, we should eliminate the Social Security payroll cap….stop exempting investment income….scrap income tax shelters for wealthy households and businesses….end or reduce tax breaks for private retirement accounts, including 401(k)s and IRAs….Just these four revenue streams would come close to raising the $662 billion necessary to double Social Security’s monthly benefit.
This kind of thing pisses me off. It may be true that Social Security is “designed” to replace only 35 percent of wages at retirement, but that statement is wildly misleading. Here are the latest replacement rates for future retirees according to the Congressional Budget office:
- Low earners: 82 percent
- Median earners: 44 percent
- High earners: 22 percent
There are two things to note here. First, replacement rates have steadily gone up for low earners and will keep going up in the future. Scheduled replacement rates for low earners are about 63 percent for those born in the 1960s; 79 percent for those born in the 1980s; and 82 percent for those born in the 2000s.
Second, and more important, replacement rates are far higher for low earners than for higher earners. This is exactly how it should be. Low earners typically have very few sources of other retirement income and rely almost entirely on Social Security. If I had my druthers, Social Security would replace 100 percent of working-age income for low earners.
But higher earners don’t need those high replacement rates because they have other sources of retirement income: savings, 401(k) accounts, IRAs, pensions, etc. Obviously this differs from person to person, but the Social Security Administration estimates that, on average, the total replacement rate for median earners and above—which includes all sources of retirement income—is 80 percent or higher (Table 11 here).
Expanding Social Security to double its monthly benefit is dumb. It would be a massively expensive solution to a problem that doesn’t exist. We should instead focus on increasing benefits for the low earners who need it. That would cost far less and solve a problem that really needs solving.