By Marc Goldwein, Maya MacGuineas, and Chris Towner
Executive Summary
As the population ages and an increasing share of Americans exit the workforce for retirement, economic growth is projected to slow considerably. The aging of the population also undermines retirement security and puts the Social Security program at risk.
Due to the increasing number of beneficiaries relative to workers, Social Security spending already exceeds revenue. By 2035, the program’s trust funds will be exhausted, triggering an automatic 20 to 25 percent across-the-board benefit cut under current law.
Social Security spending and revenue must be brought in line to prevent insolvency. However, a thoughtful Social Security reform plan should go beyond simply assuring actuarial soundness by also improving retirement security and economic growth. In particular, Social Security reform should increase national income by promoting work, investment, and fiscal sustainability.
In this paper, we propose a Pro-Growth Social Security Reform framework, which would both shore up Social Security and grow the economy at a faster pace. Our framework includes four parts:
Promote delayed retirement and productive aging by increasing Social Security’s retirement ages while insulating vulnerable workers with an Age 62 Poverty Protection Benefit (62-PPB) to boost benefits for low-income workers.
Reward work at all ages by counting all years of work toward benefits and by calculating benefits based on each year’s earnings rather than average 35-year lifetime earnings.
Increase savings and investment by automatically enrolling workers in add-on “Supplemental Retirement Accounts” (SRAs) and placing a share of wages, on top of the payroll tax, in those SRAs unless a worker chooses to opt out.
Improve certainty and sustainability by making Social Security sustainably solvent through a mix of progressive revenue and benefit adjustments.
We estimate that our framework would increase the projected size of the economy by between 3.5 and 13 percent by 2050, which is the equivalent of a 0.25 percentage point increase in the annual growth rate under our central estimate. A growth rate of that magnitude would increase average per person income by about $8,000 in 2050 and reduce projected debt levels by about 20 percent of GDP (excluding the direct effects of reform).
An illustrative plan based on our framework would also permanently restore Social Security solvency and substantially improve retirement security – particularly for low-income retirees.
While it would be impossible to totally reverse the adverse economic effects of population aging, our paper shows that demographics are not destiny – at least not fully. Thoughtful public policy can mitigate reductions in capital and labor force growth, resulting in faster rising incomes and wealth and a stronger economy for current and future generations.
Summary of Recommendations for Pro-Growth Social Security Reform
Recommendation #1: Increase the Retirement Ages while Insulating Vulnerable Workers with an Age 62 Poverty Protection Benefit (62-PPB). One way to increase the size of the economy is to promote work among older Americans. Workers today face mixed retirement signals that often draw them into early retirement and treat retirement itself as a binary choice. To encourage longer and more flexible working lives, we propose phasing in an increase to Social Security’s early and normal retirement ages and then indexing them to growth in life expectancy. Understanding that many workers are unable to continue to work, we also propose offering all workers a 62-PPB benefit designed to insulate low-income workers from the financial effects of the age increases and ensure that anyone can retire at 62 without slipping into poverty.
Recommendation #2: Calculate Benefits Based on Each Year of Work Rather than Lifetime 35-Year Average Earnings. Higher labor force participation among workers of all ages can help to strengthen the economy. Yet the current Social Security benefit formula imposes a significant implicit tax on those who work less than ten years and on workers later in their careers – especially after 35 years of work. To reward each year of work, we propose counting every year of earnings toward Social Security benefits and applying Social Security’s benefit formula to annual, rather than average, earnings through a formula known as “mini-PIA.”
Recommendation #3: Automatically Enroll Workers into a “Supplemental Retirement Account” (SRA) on top of Social Security, with the Choice to Opt Out. Increasing the national savings rate would boost overall investment, increasing capital stock and economic growth. Unfortunately, many workers lack access to retirement savings vehicles, or are saving too little for retirement. To increase savings and investment, we recommend enrolling workers into add-on SRAs and automatically contributing 2 to 3 percent of their wages unless a worker chooses to discontinue contributions. SRAs could be invested into one of several well-diversified, low-fee funds and would be owned by the worker, who could access the funds upon retirement.
Recommendation #4: Make Social Security Sustainably Solvent Through a Combination of Progressive Tax and Benefit Changes. Reducing federal borrowing can promote economic growth by reducing “crowd out” of private investment, while improving policy certainty can significantly improve saving and investment choices. Unfortunately, Social Security is running large and rising deficits, which increase federal debt and leave the program on course to exhaust its trust fund reserves by 2035. To make the program sustainably solvent, we suggest a package of progressive revenue and benefit adjustments that would protect low-income seniors, phase in gradually, and ultimately bring the program’s costs and revenues in line. We also suggest that the precise composition of this package be decided as part of a political negotiation.
We also suggest lawmakers consider other pro-growth reforms – as part of and to supplement Social Security reform – in order to maximize potential growth effects.
