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Thinking About Social Security Reform Andrew G. Biggs Resident Scholar American Enterprise Institute Presentation to National Press Foundation June 21,

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Presentation on theme: "Thinking About Social Security Reform Andrew G. Biggs Resident Scholar American Enterprise Institute Presentation to National Press Foundation June 21,"— Presentation transcript:

1 Thinking About Social Security Reform Andrew G. Biggs Resident Scholar American Enterprise Institute Presentation to National Press Foundation June 21, 2010

2 What does Social Security’s retirement program do? Mandate saving Mandate saving Some people won’t save for retirement unless required Some people won’t save for retirement unless required Subsidize low earners Subsidize low earners People who could fall into poverty even if they did save People who could fall into poverty even if they did save Protect against longevity risk Protect against longevity risk Benefits last as long as you live Benefits last as long as you live

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4 General concepts In aging society, we want people to: In aging society, we want people to: Work more Work more Save more Save more Retire later Retire later Fixing Social Security through lower benefits will tend to encourage those things Fixing Social Security through lower benefits will tend to encourage those things Fixing through higher taxes will discourage them. Why? Fixing through higher taxes will discourage them. Why?

5 Higher taxes mean people would… Work less Work less Lower pay for each hour worked Lower pay for each hour worked Save less Save less Less after-tax pay with which to save Less after-tax pay with which to save Retire earlier Retire earlier Replacement rate (Social Security/after-tax wage) will rise Replacement rate (Social Security/after-tax wage) will rise

6 Effects of raising tax cap Individual earning $106,800 currently pays: Individual earning $106,800 currently pays: 28% federal income tax 28% federal income tax 2.9% Medicare payroll tax 2.9% Medicare payroll tax ~5% state income tax ~5% state income tax Total marginal rate: ~36% Total marginal rate: ~36% With higher Social Security cap: ~48% With higher Social Security cap: ~48% $107k isn’t that rich $107k isn’t that rich We haven’t done a thing to fix Medicare/ Medicaid We haven’t done a thing to fix Medicare/ Medicaid

7 We need more personal saving Easy to supplement lower Social Security with higher personal saving Easy to supplement lower Social Security with higher personal saving Much harder with Medicare Much harder with Medicare Universal 401(k)s would reduce burden on Social Security Universal 401(k)s would reduce burden on Social Security Almost half of retirement benefits go to top 1/3 rd of earners Almost half of retirement benefits go to top 1/3 rd of earners We can reduce costs without increasing poverty We can reduce costs without increasing poverty High earners can, should and would save more in response to lower benefits High earners can, should and would save more in response to lower benefits

8 Can Americans work longer? Typical age of Social Security claiming: Typical age of Social Security claiming: 1950: 68.7 years 1950: 68.7 years Life expectancy: ~age 76 Life expectancy: ~age : 63.6 years 2008: 63.6 years Life expectancy: ~age 82 Life expectancy: ~age 82 Americans could spend 1/3 rd of adult life in retirement Americans could spend 1/3 rd of adult life in retirement In 1930, 20-year old had 66% chance of living to age 65 In 1930, 20-year old had 66% chance of living to age 65 Today, 20-year old has 65% chance of living to age 78 Today, 20-year old has 65% chance of living to age 78 But are we healthy enough? But are we healthy enough?

9 But are we healthier?

10 Summing it up Increase early and full retirement ages Increase early and full retirement ages Raising early retirement (62) age delays benefits, doesn’t cut them Raising early retirement (62) age delays benefits, doesn’t cut them Raising full retirement age (66) with longevity equalizes lifetime benefits Raising full retirement age (66) with longevity equalizes lifetime benefits Reduce benefits for high earners Reduce benefits for high earners Improve benefits for low earners, where many fall through the safety net Improve benefits for low earners, where many fall through the safety net Implement universal 401(k) plan Implement universal 401(k) plan


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