Is there room in Washington for a true bipartisan agreement on Social Security reform that increases national savings, individual ownership, and ultimately retirement security? It’s a tall order, but doable if both progressives and the president are willing to consider the following four-part framework for bipartisan Social Security reform:
- A Universal 401(k) to Promote Ownership, Savings and Bipartisanship: Progressives and conservatives alike should support serious efforts to increase savings, ownership and wealth creation for typical hardworking families. Yet these goals are achievable without dividing Washington by carving up Social Security into private accounts. The president and progressives could both protect Social Security’s guaranteed benefit and promote ownership with a new Universal 401(k) that offers all Americans a private retirement account on top of Social Security, and uses government funds to match contributions made by middle income and lower-income workers. The Universal 401(k) would spread individual savings and wealth creation to tens of millions of American families currently falling through the cracks by offering all Americans the generous incentives and automatic savings opportunities that the best employer-provided 401(k)’s offer their employees. The components of a Universal 401(k) include:
- Generous $2-to-$1 government matching contributions for initial savings of low-income families and $1-to-$1 matches for middle-income families. By targeting new incentives to those families having the hardest time saving, the Universal 401(k) would be designed to leverage new private savings.
- A new Flat Tax Incentive of 30 percent for savings done by all workers. In addition to matching contributions, the Universal 401(k) would institute a new flat refundable tax credit for retirement savings. The credit would replace our current upside-down system of incentives for retirement savings through tax deductibility, which offers those in the highest tax brackets the most generous incentives to save and lower- and moderate-income families little or no incentive to save.
- A single, portable account that benefits families by continuing to provide strong savings incentives for parents who take time off to raise children or who are between jobs.
- Stepped-up efforts to strengthen employer-provided 401(k)s by encouraging more employers to automatically enroll their employees. Employers would also be encouraged to make it easier for employees to automatically link 401(k) contributions to their salaries to ensure savings does not stagnate. In addition, the Universal 401(k) could include reforms to make it easier for families to directly deposit a portion of their tax refunds straight from their tax form into retirement savings.
- A 5000-to-1 Tax Cut: If financed in a fiscally responsible manner by increasing the estate tax exemption to $5-7 million per couple but avoiding outright repeal, the Universal 401(k) would mean that for every wealthy estate that would see higher taxes, 5,000 Americans would get a tax cut that could help them someday build an estate of their own.
- Mutual Sacrifice and Responsible Financing: How can the president convince anyone that there is simply no way to fix Social Security other than accepting painful benefit and tax changes, when he just passed tax cuts for the top 1 percent of earners that if made permanent would alone be enough to cover the 75-year Social Security shortfall projected by the Congressional Budget Office? Progressives should insist that any Social Security financing plan be based on the principle of mutual sacrifice – and should ask those most fortunate to bear part of the burden. The best option for mutual sacrifice would be:
- A 3 percent surcharge on all income over $200,000 – whether from income, dividends or capital gains – dedicated to increasing national savings now and increasing Social Security solvency.
- The new surcharge would affect only the top 2 percent of taxpayers and, by taxing all income equally, would avoid introducing new distortions and incentives try to turn wage income into dividends or capital gains to avoid payroll taxes.
- The surcharge could be contingent on a bipartisan agreement to find equivalent savings to shore up Social Security through measured revenue and benefit changes.
- Real Progress on National Savings and Generational Responsibility: The one thing nearly everyone in Social Security circles used to agree on was that as we moved closer to the baby boom retirement it was increasingly important to display generational responsibility – to make the tradeoffs to increase national savings now to ensure that we were putting our economy in a better place to deal with known challenges down the road. Indeed, the improvement in the federal fiscal picture in the 1990s – which was substantially driven by a commitment to fiscal discipline and saving surpluses for Social Security – was solely responsible for a doubling of national savings from 3.1 percent of GDP in 1992 to 5.9 percent of GDP in 2000. On the verge of the baby boom retirement, the Bush administration has abandoned the principle of generational responsibility and passed successive rounds of long-term tax cuts that have taken us giant steps backwards – contributing to an erosion of national savings to only 1.4 percent of GDP over the last seven quarters, the lowest level since 1934. Even in the wake of this deterioration, there is too little focus in policy discussions about Social Security on increasing savings now. Distressingly, the new gold standard for Social Security plans seems to be that they at best do no harm to national savings. With our national savings at historic lows and the baby boom retirement at our doorstep, it is absolutely essential that any Social Security reform plan move us back in the right direction by ensuring that we increase national savings now.
- Commitment to a Bipartisan Process: While Universal 401(k) accounts outside Social Security alongside mutual sacrifice and recommitment to increase national savings now could provide the substance for a deal on Social Security, the only times when Washington has actually been successful in taking on tough entitlement challenges in recent years without painful political backlash has been when there was a sustained commitment to bipartisanship. Both progressives and President Bush need to heed the lesson that brought Tip O’Neil and Ronald Reagan together on Social Security reform in 1983 and Bill Clinton and Newt Gingrich together on entitlement savings in the 1997 Balanced Budget Agreement. If these past leaders have been able to work together on a bipartisan process, the Bush administration and Democratic congressional leadership should be able to as well, but it will require President Bush to display a level of commitment to working through a bipartisan process that has to-date been absent from his fiscal policy approach.