by Steven Hill, BillMoyers.com, July 8, 2016
Here’s a plan to secure retirement for all Americans — without spending any more government money.
Recently President Barack Obama announced his support for expanding Social Security for our nation’s retirees. That is welcome news because Obama and other Democrats like Hillary and Bill Clinton have not always been the best friends of Social Security. Under the guise of “cut it to save it,” Obama previously proposed trims in the already meager annual rate of increase for Social Security payments. Even worse, he appointed as co-chairs of his ill-fated Social Security commission two committed entitlement slashers, Republican curmudgeon Alan Simpson (a former senator who once described Social Security as “a milk cow with 310 million tits“) and Wall Street multimillionaire Democrat Erskine Bowles, who served as Bill Clinton’s White House chief of staff.
So Obama’s pivot on this issue is important, especially during the middle of a presidential election year. The president’s late conversion is surely an indicator of the impact of Sen. Bernie Sanders’ campaign for president, as well as the leadership of Sen. Elizabeth Warren (D-MA), and the indefatigable efforts of organizations like Social Security Works and theProgressive Change Campaign Committee.
It’s also a recognition of the fact that Social Security is one of the most popular government programs of all time — even 70 percent of Republicans are in favor of it. And with good reason.
Since its inception during the Great Depression, Social Security has proven to be indispensable as the policy cornerstone of a decades-old philosophy which deploys the “visible hand” of government to foster a fairer and better economy for all. Not only is it the most stable component of our nation’s retirement system, especially when compared to Americans’ other chief sources of savings — their homes, their 401(k)s and IRAs — it also is the greatest anti-poverty program ever. Three-quarters of Americans depend heavily on Social Security in their elderly years. Nearly half would be living in poverty without it. Social Security is particularly important to retired women and racial minorities, but it is also beneficial for US businesses and the broader macroeconomy. During economic downturns, it acts as an “automatic stabilizer,” keeping money in people’s pockets which maintains consumer-spending levels.
As we move deeper into this year’s presidential race, in which the future direction of our country will be decided, it’s time to elevate this debate to a new level. For this year’s candidates, the question should be not whether we should expand Social Security, but HOW and by HOW MUCH?
My recently published book, Expand Social Security Now: How to Ensure Americans Get the Retirement They Deserve, demonstrates that it is possible not only to expand Social Security but to double the monthly benefit. We can accomplish that by enacting tax fairness, ensuring that all Americans contribute their share to the nation’s retirement system. That would bring us in line with the national retirement programs of other advanced democracies such as Denmark, Sweden and France.
The real challenge for the nation’s retirement system is not that it might go broke two decades from now (which is not going to happen, due to its dedicated funding base). The problem is that its payout is too meager. Social Security was designed toreplace only about 35 percent of a worker’s wages at retirement. Yet most experts estimate you will need twice that amount to live decently. But for most Americans, the other two legs of the three-legged stool of retirement — private retirement pensions and plans and personal savings centered on homeownership — collapsed during the economic bust of 2008, if not before. Tens of millions of retirees don’t have much more than Social Security, yet the monthly benefit is woefully inadequate. The solution, as Sanders has been pointing out, is to expand Social Security, not cut it.
Even Sanders’ proposal would only add about $68 per month per beneficiary — better than nothing, but not good enough to make a significant difference. What the US really needs to do is to double Social Security’s individual monthly payout for the 43 million Americans who receive retirement benefits.
How much would it cost to double the monthly benefit? Approximately $662 billion. That seems like a lot of money, but it’s achievable. Here’s how:
- Eliminate the unfair Social Security payroll cap, which allows wealthy people to make a much smaller contribution to Social Security, as a percentage of their income, than middle- and working-class Americans. Currently any income above $118,500 is Social Security-tax free. The practical effect of the cap is that billionaire bankers and CEOs contribute a far lower percentage of their income for Social Security than their secretaries and chauffeurs. Making the payroll contributions more fair and equal would raise approximately $135 billion toward our targeted goal.
- Apply Social Security tax to investment income. Many wealthy Americans make a lot of their money through investment income instead of from wages. Yet they make zero Social Security contributions based on that income. By applying Social Security rules on this investment income — which is how Medicare is partly funded — we would raise billions of dollars more for doubling the Social Security payout.
- Eliminate tax shelters and loopholes for 1-percenter households and businesses, including for capital gains, investment income, “carried interest” and the truly outrageous “step-up in basis,” which exclusively benefits inherited wealth. These function as direct federal subsidies to mostly affluent Americans. And they cost the national treasury some $350 billion per year. The “step-up in basis” exemption is particularly repugnant. When a yacht or mansion or any other type of expensive asset is sold, the seller’s profit is subject to the capital gains taxation rate of 15–20 percent — about half the 39.6-percent tax rate that the wealthiest pay on their wage income. Normally, the amount subject to taxation is the difference between the sale price and the amount that the seller originally paid for that particular asset. But for inheritedproperty, the difference is calculated using the date that the previous owner died and left it to the heirs. As a result, the appreciation in value is much less, and so are the capital gains taxes. Rather than a “step-up in basis,” this dodge might more accurately be termed a “step-up in privilege.” In 2015, this rule reduced federal revenues by a whopping $63 billion. That’s a greater amount than the $42 billion the Department of Housing and Urban Development spent on all affordable housing programs for low-income people. Of the more than 200 federal tax expenditures in the individual and corporate income-tax systems, this is one of the 10 largest. And of course none of the income received from the sale of these inherited assets is taxed for Social Security purposes. If it were, at the usual 6.2-percent Social Security tax rate that all workers pay, it would generate another $19 billion for the Trust Fund.
- Eliminate the tax exclusion that employers receive for sponsoring their company’s retirement plans. That will raise another $100 billion that can be used for Social Security Plus. Not many people realize it, but every tax-paying American subsidizes the retirement plans provided by companies, even though a small minority of Americans — disproportionately the better-off — benefit from them. By implementing Social Security Plus, which would double the monthly benefit and make Social Security the de facto national retirement plan, employers would be liberated from having to provide retirement for their employees. So they will not need the substantial taxpayer-funded subsidies they receive from the federal government for their company’s retirement plan.
- Scrap tax breaks that have failed to enhance the retirement security of most Americans, since these deductions also vastly benefit the most well-off: Savings vehicles such as 401(k)s and IRAs have proven to be ill-equipped to help most retirees for a very simple reason — you can’t put very much into your 401(k) if your wages are too low to save. And with aggregate wages in the US staying flat for the last three decades, the reality is that most middle- and poorer-class Americans haven’t been able to sock much away. Consequently, of the $165 billion that the federal government spends subsidizing individual retirement savings, nearly 80 percent goes to the top 20 percent of income earners. President Obama has proposed a universal 401(k), in which the vast majority of workers with no savings plan will be automatically enrolled in a 401(k) plan. But it seems pointless when wages are so low that the vast majority of middle-class Americans can’t accumulate sufficient savings.
The same is true for federal underwriting of homeownership, which totaled $154 billion in 2014 – nearly four times the affordable-housing budget.The federal subsidy for the home mortgage interest deduction amounts to around $70 billion per year, with Americans in the top 10-percent income bracket hoovering up a massive 86 percent of this federal subsidy. And the federal tax deduction allowed to homeowners to mitigate the cost of state and local property taxes they pay on their houses cost the federal budget another $32 billion in 2014; a study by the Congressional Budget Office found that Americans in the upper 20-percent income bracket reaped 80 percent of this federal subsidy.
Just to make sure everyone understands whom the tax code favors, homeowners also do not have to pay taxes on up to $250,000 of their capital gains profits when they sell their home, which doubles to $500,000 for married taxpayers. That exclusion amounts to a federal subsidy to the tune of another $52 billion. These three federal subsidies for homeownership mostly subsidize higher-income people; renters and most low-income Americans don’t benefit at all, and while some middle-income people benefit, the total amount of their deductions and subsidies are comparatively small. They would be far better off if we doubled their Social Security monthly benefit.
To put it bluntly, these tax-code favoritisms are nothing more than entitlements for wealthier Americans. The current system perversely amounts to a hidden subsidy for better-off people at the expense of everyone else. These affluent recipients of federal largess are the true “welfare queens,” since these subsidies are mostly not available to middle- and lower-income Americans.
If we combine those budgetary add-backs with our previous savings, we now have reached nearly $900 billion, well over the $662 billion level we needed to reach in order to enact Social Security Plus and double the national retirement system’s monthly payout. In short, just a few revenue streams — lifting Social Security’s payroll cap, taxing the capital gains investment income for Social Security purposes, eliminating the employer tax deduction for providing a retirement plan, and reducing some unfair deductions that vastly over-subsidize wealthier Americans — would raise more than enough revenue for creating Social Security Plus, which would provide a stable, secure retirement for every American.
And note that we were able to do this without spending a dime more in government money or national wealth than what is already being spent on the retirement system or subsidizing the wealthy. We are just shifting expenditures that right now benefit a small number of individuals and special interests to refocus these resources on the vast majority of Americans.
Tax fairness not only would create a more secure retirement, it also would act as an automatic stabilizer for the economy: Even during downturns, retirees would have a decent income that would help maintain levels of consumer spending. Moreover, this kind of system of Social Security Plus would better fit the type of high-tech digital economy that is slowly taking root. More and more Americans have been forced into becoming contractors, freelancers and temps, and so Social Security Plus would form a core part of the portable, universal safety net that is so badly needed for the many Americans today who are working part-time for multiple employers.
My proposed plan for Social Security Plus would form the core of a new kind of deal for American workers. Making our retirement system more fair, innovative and stable will vastly improve everyday Americans’ lives. It also will put the national economy on a more solid footing, helping to preserve the robust middle-class society that made the United States a magnet for the world.
Yet Obama has done nothing to close even the most egregious tax loopholes I’ve described above while president, and Clinton has been mostly silent. If she isn’t careful she is going to be scooped by Donald Trump, who has been more outspoken about closing these loopholesthan most Democratic leaders. Wouldn’t that be ironic – if Trump beat Clinton in the electoral vote-rich states of Florida and Ohio, where so many retirees live, and won the presidency because he took a bolder stand on Social Security?