In a recent editorial the editors of the Washington Post, sounding more like the WSJ every day, call for reforming Social Security and Medicare by means~testing them. While I think the idea has some merit, I wanted to point out some short~comings in their analysis.
First, they illustrate the large amount of wealth that Americans hold in the form of retirement accounts, IRAs and the like, with an eye~catching graphic. It shows Americans holding more than 30% of their wealth in the form of them. Unfortunately, that finding isn’t durable across all income or wealth levels. The Congressional Budget Office (CBO) found that the majority of Americans hold rather little of such—6% or less. Contrary to what the editors imply what their graph actually illustrates is how much wealth is held by the wealthiest Americans. In short the majority of Americans don’t have much if anything in their IRAs.
Second, if most Americans start saving considerably more of their incomes, it will be cataclysmic for the economy. Target’s and WalMart’s sales will fall sharply; financial companies’ holdings will rise.
Third, editors don’t seem to realize that Social Security is already highly progressive: the benefit formula replaces a much larger share of lifetime earnings for low-wage workers than for high-wage workers. The editors are therefore proposing not merely greater progressivity but an additional test based on retirees’ current means.
Fourth, the editors seems to assume that equities always appreciate in value; they don’t. Between 1966 and 1982 the DJIA essentially moved sideways. It went largely unchanged. If the editors want the Fed to ensure that assets increase in value (the “Greenspan put”), they should say so.
Finally, without the cash surpluses that Social Security has realized over the last 90 years, income taxes would have needed to realize about 3% more revenue per year than we did. That’s quite a notable tax increase.
My proposal for Social Security is somewhat different. I think that whatever we do, we will need some federal plan to ensure that people who are too old to work aren’t desperately poor in their old age. We won’t just cut off their only sources of income and wish them the best. The editors should have explained how they would solve that problem. As noted above IRAs won’t cut it. I think that FICA max should be indexed to the same percentage of wage income remains subject to the tax. Had that been done in 1983, reform would not be necessary. Since it wasn’t a slightly higher percentage of wage income might need to be subject to the tax.
