Improving Social Security's Solvency

The Street

Proposals include increasing the retirement age, adjusting benefits, and raising payroll taxes

Transcript

00:00This morning on BRN, improving Social Security's solvency. Joining me now, we're going to welcome

00:09back to the program, Andrew Babes of the American Enterprise Institute. Andrew, so great to see you.

00:16Happy New Year. Thanks for joining us on the program this morning.

00:19Oh, my pleasure. Thanks for having me.

00:20Well, Andrew, January 20th has come and gone, and we have a new president along with a new

00:29Congress that has sworn in. And let me ask you, what does this all mean for Social Security reform,

00:38or what could it mean for Social Security reform?

00:41Well, it's a good point. I mean, time ticks by, elections and inaugurations come and go,

00:47but Social Security is still there. It's still getting closer to insolvency, and it still needs

00:53to be fixed. The current projections are the Social Security's retirement trust fund will run dry in

01:002033. At that point, the system is about 21% short of the revenues it needs to pay benefits. So unless

01:09Congress acts, then benefits will be cut overall by over 20%. So that's a big deal.

01:17The issue always has been, what are we going to do about it? How are we going to adjust taxes?

01:23How are we going to adjust benefits? And that's the part that Congress can agree on. But what we

01:29all do know is if you do it sooner, it's easier to fix than if you do it later. You don't want to

01:34do that right when you're standing over the precipice.

01:37Yeah, certainly. That gives you less options, not more. And then, as you said, the cuts or the

01:44changes are much more abrupt and probably more impactful. But, Andrew, we've got, as I said,

01:51for this Congress, there's probably a lot on the plate. I know they're going to talk about

01:55tax reform or extending the tax cuts from 2017. That's going to be a big part of the agenda.

02:03Will Social Security be a big, could it be a big part of the agenda?

02:08Well, President Trump has not expressed much interest in Social Security. He promised he's

02:14not going to cut anyone's benefits. But he has not talked in any detail of how he would go about

02:21keeping that promise. This is not a costless promise. It's a significant amount of money.

02:26Social Security is currently about $25 trillion short of what it needs to pay full benefits going

02:34forward. So you want to keep that promise. You have to figure out some way of coming up with that

02:38extra money. I think the more likely action might be coming from the congressional side. And I've talked

02:46to members of Congress from both parties who sort of understand that Social Security and Medicare and

02:53the larger federal budget are this ticking time bomb. We're making incremental changes along the

02:58way, but we're not thinking about how do we reduce budget deficits? How do we reduce the buildup of

03:04debt, which eventually is going to be unpayable? I've talked to some members who have some interest

03:09in a bipartisan commission based on capital bill that would try to come to some deal. And it really

03:17is easier in a way to do this stuff behind closed doors. We can trade one thing for another thing

03:22where you can backtrack on past promises. Most Republicans say they don't want to raise taxes for Social

03:29Security. Most Democrats say they'll never cut benefits. Both sides secretly know that both of those things

03:35are going to happen. And so you have to find some way of getting out of your promises. A bipartisan

03:41commission is the easiest way to do it. It's saying, oh, yeah, I know I made these promises in the past,

03:45but in the interest of coming together with this big agreement, I'm willing to do that. I'm willing

03:50to change my positions. I think that's really the best avenue going forward to fix entitlements and

03:57to fix the federal budget as a whole. Back in 2004, I think it was President Bush, right after

04:03re-election, he had made the comment about privatizing a portion of Social Security. Would that

04:10potentially, could that potentially be an option? You talked about option A, taxes, option B,

04:18cutting entitlements, or somewhere in the middle, but could an element of privatization,

04:24is that even reasonable? I was involved with that. If you search through newspapers, you can

04:30find some pictures of a younger me doing a number of public events with President Bush around the

04:35country. I worked in the Bush White House as a number cruncher on these things. I tend to think

04:41the idea of personal accounts that it had its moment then, but it's not going to happen now.

04:47And the reason for that is from the mid-80s up until around 2010, Social Security was running

04:53pretty significant surpluses. It's collecting more in taxes than it needed to pay benefits. Now,

04:59those surpluses were credited to the Social Security Trust Fund. The reality of those,

05:03they were spent. They reduced the deficit or the apparent budget deficit elsewhere. It made life

05:09easier for Congress. The idea of personal accounts, the best point of it, I thought,

05:14was to save those surpluses. Say, hey, Congress, you can't spend this money. We're going to put it

05:18in an account. We're going to only be used to pay benefits. The problem is, since the Great Recession,

05:24those Social Security surpluses are gone. Right now, Social Security redeeming the bonds and the

05:29trust fund helped fill its deficits. So I think the more productive thing, and going back to the 2005

05:37initiative from President Bush, most Democrats strongly opposed it, and they would even more

05:43strongly oppose it today. So I think the path of least resistance, so the path of the British

05:48chance to success, is to think about fixing Social Security in its own terms, but then say,

05:53how do we make sure every worker has access to a retirement account on top of Social Security,

06:00where they can save in addition to what Social Security will provide? That could be an IRA account.

06:05It could be universal 401k plans. But I think that would assuage a lot of the fears that Americans have

06:11about retirement, that there's some people who feel they need to save for retirement, but they don't

06:15have a retirement plan at work. That's something that Congress, I think, could work together to fill that gap.

06:21Andrew, I thought that they were going to put the surplus in a lockbox.

06:26Well, I mean, it's a very confusing kind of thing.

06:31I know. I'm tongue-in-cheek. I'm just referring to the 2000. I remember the debate, and it was Vice

06:38President Al Gore who actually said it's going to put it in a lockbox, and that made its way to

06:41Saturday Night Live. Andrew, where does demographics play into this? Because I think I read a report

06:47recently saying the U.S. population was not going to go, we're going to have more

06:52old-timers like me than we're going to have births. Isn't that really the issue is back when Social

06:58Security was founded back in the 1930s, we had a lot more workers per recipient. I think that number

07:07is narrowed to what? Somewhere in 789 worker per recipient is the issue. I'm sorry, go ahead.

07:13The demographics, it is the problem and it isn't the problem. In the 1930s when Social Security

07:21started, demographics were much more favorable, even going up into the 60s. It was. We had the

07:26baby boom, so we had a lot of people paying into the system, not as many collecting out.

07:31Birth rates dropped and longevity has increased, so you have more beneficiaries, fewer workers.

07:38At the same time, though, when Social Security started, benefits were increased only on an ad hoc

07:46or as-needed basis by Congress. So benefits would not automatically increase over time. Congress would

07:52step in when it was affordable, when it was needed. Beginning in 1977, Congress put Social Security

07:59benefit increases on autopilot. So if you look at somebody retiring today, they receive a benefit.

08:05The average benefit for a new retiree today is about 40% higher in inflation-adjusted terms than

08:11somebody retiring in the year 2000. So it's not just more beneficiaries and fewer workers. It's also

08:17we're promising higher and higher benefits. And so Congress needs to revisit all of that. The issue is

08:25demographics are very, very hard to change. Benefit levels are much easier to change.

08:292032 is a very interesting year. Let me just illustrate two factors here. 2032 is the last

08:36year in which Social Security Retirement Trust Fund will be solvent for the full year of enough to pay

08:41full benefits. 2032 is also the first year in which a couple retiring can receive combined benefits

08:49that exceed $100,000 in today's dollars. So if you look at that, you know, policies sort of suggest

08:56themselves that we don't need to be paying $100,000 a year to a high-income couple who's easily

09:04capable of saving more for retirement than we're all. We just need to think creatively about it.

09:09Andrew, I want to kind of come full circle and ask about the private retirement system. There's a lot

09:14of uncertainty, at least I'm hearing it is uncertainty, in terms of the Social Security benefits, many of

09:20which a lot of people depend on that as their primary source of retirement income. The retirement

09:25system has been, or the private retirement system, I should say, continues to be, you know, improved

09:32upon. It's not perfect by any stretch of the imagination. But does this put more prioritization

09:39on some more private sector retirement reforms?

09:45It is interesting. I mean, it's been 20 years since President Bush tried to fix Social Security.

09:51Nothing of substance has happened since then. Over that same period, retirement savings have improved.

09:57It's, you know, participation has gone up. We've increased use of automatic enrollment. Most people

10:02are using target date funds. Management fees have come down. Now people are talking about,

10:07can we work annuities in to convert things to a monthly benefit? There really has been a lot of

10:13improvement there. People bad mouth retirement savings in the US, but we save like crazy compared

10:18to a lot of other countries. And we save substantially more today than we did in the past.

10:24Still, there are fears. There are some people who are not offered a retirement plan. Some people

10:28are offered a plan. They don't sign up. These are not really difficult problems to solve. Just as an

10:34example, the UK has a similar retirement system to us. If you go back 10 years, their participation

10:41rate in private retirement plans are on 40%. Today, it's about 85%. And the reason is they set up

10:48retirement accounts for people who weren't offered one of the job. They automatically enrolled people

10:53in them. That solves a whole world of problems. And it's not a very complex kind of thing to do.

10:58My concern is we've had the SECURE Act and then the SECURE Act 2.0, which really don't do very much

11:05on that front. They're doing a lot of things that are important to industry. But if people's concern

11:12is there's a retirement plan coverage gap, we need to fill that gap. And it's not rocket science to do

11:19it, but it just demands Congress step up and take its job pretty seriously.

11:22Well, I think Congress has a chance. I know there's a lot on the docket, but I think with

11:28advocates like you and other individuals, hopefully we can continue to move the needle.

11:34Andrew, always great to see you. Wish you a happy new year. We look forward to having you back on

11:38the program again very soon.

11:39Thank you. My pleasure.

11:40And don't forget to subscribe to our daily newsletter of the Morning Pulse for all the news

11:45in one place. Details, of course, at our website. And we're back again tomorrow for another edition of

11:51BRN. Until then, I'm Jeff Snyder. Stay safe. Keep on saving. And don't forget, roll with the changes.

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