Quick fix for Social Security could create false hopes
Apparently when one is an elected official, one has to make sure that his concerns reflect the concerns of his constituency, and obviously the concerns of seniors is right up there at the top of the list as seniors – more than any other age demographic – are more likely to cast their ballots in any given election.
Therefore, it should come as no surprise that proposals to increase Social Security benefits address the sustainability of the program and shift the burden of taxation to others are popular with elected officials. Unfortunately, those well-intended initiatives run counter to efforts to encourage prudence in the current and future generation of workers. They perpetuate the myth that Social Security will be able to provide a comfortable retirement income when that time comes.
Indeed, the challenge that many current retirees face today was predicated on the false belief that Social Security benefits would provide an adequate income in retirement despite the numerous warnings and red flags raised by financial observers that constantly proclaimed that those benefits were only meant to supplement whatever workers could put aside for their retirement years.
Even congressional lawmakers long ago recognized the need to encourage workers to save for their retirement when tax-deferred saving plans were established under the federal Internal Revenue Code. Savings plans like 401(k)s, 403(b)s, SEPs and 457(b)s, which allow workers to save pre-tax dollars for their retirement nest egg, were adopted over the years with the realization that workers needed an added incentive to put money away for their retirement years.
Although officials, as well as financial advisers, continue to underscore and point out that Social Security benefits are a supplement to the retirement savings of workers, workers seem to ignore the advice and put off saving for retirement until the later years of their career. For baby boomers who are now entering retirement, the cold, hard reality is finally hitting them squarely between the eyes. This is probably the first generation of retirees, especially in the private sector, who will have no defined benefit pension plan – a pension plan for which employers put away funds for the benefit of their employees. Instead, many of those workers who will be joining the ranks of retirees were given the option of participating in tax-sheltered or tax-deferred savings plans like 401(k)s and 403(b)s. However, it seems many of these workers looked at Social Security benefits as their retirement plan, thinking that those benefits would be sufficient for their retirement. As many who have retired have learned, Social Security benefits are not enough to live on, especially here in Hawaii.
So now, elected officials, wanting to pander to the senior voters, proposed that the amount of benefits be sweetened by as much as $65 a month and that the cost-of-living adjustments be more generous to take into account the true costs to seniors. And to pay for this enhancement of benefits, they propose removing the cap on salaries, which are currently capped at $113,700. After all, elected officials argue, those workers earning more than that cap are sheltered from paying into Social Security as the majority of hardworking Americans do.
But as those familiar with Social Security benefits know, the amount of the benefits received in retirement is based on earnings over a 35-year period. So, will those same elected officials support a calculation of benefits for those who continue to pay the Social Security tax based on the total earnings on which they will be required to pay the tax?
If taxpayers believe that the Social Security system is already headed for a financial cliff, wait until they understand how the benefits payable on an unlimited wage base will sap the system. Thus, if elected officials believe they can address the solvency of the Social Security system and provide a more generous benefit to current retirees by shifting the burden of financing to high-income earners, it is truly a reflection of the ignorance of those elected officials.
Not only would such an ill-conceived proposal ruin the system, but it also runs counter to all the efforts being made to encourage the American workforce to set aside personal savings for retirement. Such a proposal would create false hopes for millions of future retirees and shift the burden for financing the system forward.
* Lowell L. Kalapa is the president of the Tax Foundation of Hawaii.