In roughly ten years, the Social Security pension program won’t be able to provide all benefits promised. Two well-known experts would reduce tax breaks for individual retirement accounts and utilize the proceeds to support the public system in order to remedy this. The trade would have two main advantages, according to former Social Security Administration deputy administrator Andrew Biggs and top official Alicia Munnell, who has held positions at the US Treasury, Boston’s Federal Reserve Bank, and the White House.
Drawbacks Of Private Retirement Savings
Initially, it would protect future Social Security benefits by utilizing tax advantages that support the savings of primarily wealthy individuals. For low- and moderate-earners who receive meager advantages from IRAs or else employer-based retirement plans, the public program is a vital source of income. Second, the financial infusion would give Congress more time to amend Social Security’s fundamental structure. According to Biggs and Munnell, the tax benefits associated with employer-sponsored defined contribution plans (401(k)s, defined benefit pensions, and individual retirement accounts (IRAs) decreased federal income by $186 billion as well as payroll tax collections by an additional $68 billion in 2020.
According to TPC estimates, in 2020, a third of the benefits went to families earning $245,000 or more, and over 60% went to those earning at least $167,000. There is not much of a gain in national savings from the lost tax revenue. According to the authors, 65 to 70 cents of every dollar put in taxable accounts would have been saved in tax-advantaged retirement savings. Therefore, only roughly $310 billion in novel private savings were produced by the $185 billion in foregone tax revenue. In a similar vein, Biggs and Munnell estimate that, in spite of these tax breaks, employee participation in employer-sponsored plans has remained relatively stable since 1989, averaging roughly 50%.
Transferring Resources
Therefore, they argue that Congress ought to eliminate the tax breaks for retirement savings, in whole or in part, and direct the additional funds to Social Security. Although their concept is thought-provoking, it also has a lot of flaws. Employer sponsorship of retirement plans, which is an important means of savings for many employees, would no longer be encouraged. Higher-paid employees do receive the majority of these programs’ benefits, but lower-paid coworkers also save money that they might not have otherwise.
Even if auto-enrollment may not push employees to save enough, it does enable them to contribute more than they would if 401(k)-style plans were nonexistent. Additionally, it would alter the way retirement funds are allocated. Assets held in IRAs and 401(k)s, particularly by wealthy individuals, are typically allocated to a combination of bonds and stocks, which is a wise long-term approach. In contrast, all of Social Security’s assets are held in Treasury bonds issued by the US.
Dispelling A Myth
It would also change the social insurance structure of Social Security. The general public’s image of Social Security showed that workers pay into the program through payroll taxes and receive payments as a return on their investments since the program was established nine decades ago. In actuality, taxes paid by the young mostly fund the benefits of the elderly. However, the program has been shielded from political whims by its founding story. If Social Security were explicitly financed by general tax receipts, it would appear more like a different government spending initiative. Congress has the power to take away from what it grants.
