“I think expanding Social Security benefits is incredibly important… the current Social Security benefits are not covering the cost of living for seniors.”
– Shenna Bellows, Democrat, candidate for U.S. Senate, Maine, as quoted in Fiscal Times article “Liberal Dems’ New Goal: Boost Social Security Benefits,”
The debate over what role, if any, government should play in ensuring retirement security for all Americans, ought to be creating strange bedfellows. Liberal Democrats like Shenna Bellows want to expand Social Security. Many conservative Republicans want to reform public sector pensions by eliminating them in favor of individual 401K accounts. They ought to be working together.
There is only one equitable and affordable way to expand Social Security benefits, and that is by requiring all public sector employees, with no exceptions, to participate in Social Security from now on.
The reason for this is because Social Security, unlike typical public sector defined benefits, are progressive. This means that the more you earn and contribute to Social Security during your career, the less you get back. For example, low wage earners will typically get 35% to 40% of their final yearly income back as an annual Social Security benefit. A high wage earner will be lucky to get 20% of their final income back.
Because the average wages of public employees are significantly higher than for private workers, adding tens of millions of public sector workers to the Social Security rolls will fundamentally alter the current and future cash flow of the system. Relative to the general population of workers, with government workers, far more money will be going in than goes out. Liberals should support this, insofar as it is a textbook example of progressive principles in practice. And since government workers are supported by taxpayers, this form of progressive redistribution might even be palatable to conservatives. But there are additional compelling reasons for conservatives to support enrolling all public employees in Social Security.
Giving Social Security to public employees along with individual 401K accounts provides a secure supplement to whatever retirement annuity their 401K savings may enable. The 10 year minimum requirement to vest Social Security can be waived so all public employees are immediately enrolled, even those nearing retirement. They may keep their defined benefits for work performed to-date (subject of course to reductions in order to avoid municipal bankruptcies – or as a result of bankruptcies) and they may accrue Social Security benefits and contribute to individual 401K plans for the remainder of their careers. Enrolling public employees in Social Security eliminates the objection that 401Ks are not enough – perhaps in some cases they aren’t – but it is reasonable to expect anyone who has a contributory 401K and a Social Security benefit to be able to financially prepare for retirement.
Liberal Democrats, who want to expand Social Security benefits, are the last people who ought to be defending public sector pensions that rob Social Security of vital funds. Imagine if another thirty million people, or more – all of them highly compensated government workers – were suddenly contributing 6.4% of their pay to Social Security? Along with the employer’s matching 6.4%, there would be an immediate jump to deposits into the Social Security fund of approximately 300 billion per year. Because high-income workers put far more into Social Security than they ever get back, the system would return to a cash-positive status and would remain there for years, possibly forever.
Conservatives love to call Social Security a “Ponzi scheme,” despite the fact it lacks most characteristics of a Ponzi scheme: It doesn’t promise unrealistic investment returns, nor does it promise participants an eventual return of principal. And while in practice Social Security uses collections from existing workers to pay retirees, it is a leap of ideological faith to equate any pay-as-you-go system to a Ponzi scheme.
Liberal bias in favor of public sector pensions is harder to defend, because it lacks any ideological coherence. Liberals support public sector pensions because public sector unions give their campaigns money. Period. Otherwise they would object to a system that truly is a Ponzi scheme – promising unrealistic returns while racking up unfunded liabilities that defraud new entrants of what they are promised, and justifying it all on the notion that extraordinary corporate profits will propel these funds to achieve over-market returns forever.
To remain true to their beliefs, liberals would apply the principles that make Social Security a financially sustainable system to public sector union reform. That is:
(1) Progressive so high wage earners do not get the same return in retirement as low wage earners.
(2) Invest in risk-free financial instruments, or not invest at all, since such investments distort the markets, encourage speculation, and create a system dependent on corporate profits.
(3) Calculate retirement benefits on the top 35 years of career earnings instead of the final year, or few years.
(4) Impose a ceiling on maximum possible retirement benefits.
(5) Adjust benefits upwards or downwards to maintain solvency without allegedly “constitutionally protected vested contractual rights” getting in the way.
Or better yet, liberals might simply support enrolling every public sector worker in Social Security. Then they might focus on that one program, Social Security for everyone, and determine to what extent it can be expanded in a manner that is financially sustainable. And they would make those calculations while taking into account a new $300 billion per year infusion from the public sector workforce!
Liberals and conservatives alike ought to support the notion that every American worker – to the extent they earn and benefit from any government collected and government administered retirement plan – face an identical set of challenges and incentives. Social Security is a good place to start. And finish.
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Ed Ring is the executive director of the California Policy Center