Expand Social Security Now!: How to Ensure Americans Get the Retirement They Deserve - Steven Hill (2016)

Chapter 5. The Solution: Expanding Social Security

The Great Recession inflicted a lot of pain on many American households, and the recovery has been weak for all but the wealthiest, piling on to decades of wage and safety-net stagnation. In addition, the economic collapse was a catalyst in hitting “reset” on the US economy, flinging many occupations and industries toward a new and worrisome trajectory. More and more workers are losing the “good jobs” created by the New Deal economy, and instead are becoming contractors, freelancers, temps, and part timers in what is sometimes called the “new economy.” Estimates vary, but it’s clear that a high percentage of jobs are at risk of elimination from computers, robots, and artificial intelligence over the next twenty years—will those jobs be replaced by other forms of employment, just as when tractors replaced the horse and plow? No one really knows.¹ But many experts are growing concerned because already the quality and quantity of jobs has degraded in many occupations and industries, with less job security, lower wages, and a disappearing safety net.

Consequently, we as a nation are finding ourselves backed into a retirement corner. We have little choice but to view Social Security as an even more critical pillar of economic security. All Americans should have retirement benefits they can count on, not a casino of privatized 401(k)s run by the same Wall Street bankers and financial managers who drove the economy off the cliff in 2008. The three-legged stool of retirement security—Social Security, employer-based retirement plans, and private savings based on homeownership—has become wobbly and unstable. Despite all the “government is the problem” rhetoric that has pervaded US political discourse since the time of President Reagan, what’s clear is that the privately held alternatives to Social Security have failed for most people. Those who keep proselytizing in their favor are like a drought-stricken farmer who keeps returning to the same dry well, hoping this time when he looks down the shaft, the outcome will turn out differently.

But it won’t. Rather than hoping that private sources of retirement income will show better results or become more profitable in the future, we should reduce the reliance of most American workers on these unreliable schemes. We have to be pragmatic and evidence-based in making these assessments, and not blinded by rigid ideology. The best way—indeed, the only possible way, it seems—is to expand the popular, efficient, and successful Social Security system. While concern over too much “big government” is valid and real, the current failed system composed of hundreds of billions of dollars in federal subsidies going to wealthier Americans has the fingerprints of government all over it, too. The evidence is overwhelming that the public version of our retirement system has vastly outperformed the private system. Social Security emerges as the “least worst choice” for providing a degree of security for America’s retirees. According to PBS NewsHour’s Philip Moeller, a retirement expert and coauthor of the best-selling book Get What’s Yours, “What makes more sense—an expansion of a voluntary retirement savings program that hasn’t worked well, or expansion of Social Security, which has worked well, is already available to nearly all workers, is very inexpensive to administer, and offers guaranteed payments that include inflation protection?”²

Social Security is now the only stable leg remaining that is reliably capable of delivering retirement security for tens of millions of Americans. In the decades ahead, the vast majority of baby boomers and other retirees will be almost completely dependent on the single leg of Social Security for their retirement. Social Security has become the nation’s de facto national retirement system, the single pillar, a role for which it was never intended. As Moeller adds, “Social Security was never designed to be a provider of most of an older person’s retirement income. But it has become so for most retirees. We need to recognize this reality as well as the limited success of the private retirement savings industry.”³

There is only one major drawback to Social Security—currently its monthly payout to each individual is too low to play this fulcrum role. It has been designed to replace only about 30-40 percent of a worker’s wages at retirement, but most financial advisors say that each individual will need approximately 70-80 percent of preretirement earnings in order to maintain a decent standard of living.⁴ So the best solution is not only to expand Social Security, but in fact to double its monthly payout to each individual. That would bring us closer to a replacement level of around 60-80 percent, similar to the standard of national retirement systems in many other developed countries. Expanding Social Security into a more robust system of retirement income would result in a more secure workforce that enjoys complete portability when it comes to their individual retirement plans. Workers would be able to relocate in order to change jobs and not be worried about “job-lock,” which plagues individuals who lose their pension benefit when they change jobs. That in turn would allow a degree of labor flexibility, which would contribute to better conditions for job creation. And it would unleash the natural genius of American workers, allowing them to work where they want instead of for the employer where they have the better retirement plan.

But will the public really get behind a plan to double the Social Security monthly benefit? I believe it will. Not only do polls show that the program is extremely popular, but those same polls indicate that a central reason the public supports Social Security is because they see it as an earned benefit. It’s something all working Americans have paid into and believe they deserve to receive. Polls also show that Americans are in favor of expanding this extremely popular program. And why wouldn’t they be in favor? The overwhelming evidence shows that it works. If, on top of that, the public recognizes how badly the private components of the retirement system have failed most Americans, the truth will create a powerful constituency for reform.

The Solution: “Social Security Plus”—Expanding Social Security

Social Security’s monthly benefit should be expanded so that it provides approximately twice its current levels. The name I have given to this modified system of expanded benefits is Social Security Plus.

Currently, about 43 million retired seniors or their spouses are collecting retirement benefits, and the bill for providing those benefits to that senior population amounts to about $662 billion per year. So in order to double the current payout, we have to find another $662 billion.⁵ That’s a tall order, to be sure. But we can do it by making our tax system more fair, innovative, and stable—and more geared for today’s modern economies. We need a way for workers to be able to pay into a portable and robust retirement system regardless of where they work, and when they finally retire, to receive a monthly benefit that is approximately double the current payout. Here’s how we can do that.

Financing Social Security Plus could be accomplished in a number of ways. And its implementation could occur incrementally, in stages, which would ease any transition issues. As we will see, there are multiple possibilities for how to structure this, including for funding mechanisms. But the three best funding options come from modifying the US tax code in the following ways: (1) lift the unfair Social Security payroll cap currently in place, which taxes wealthy people at a much lower rate than middle- and working-class Americans; (2) eliminate tax subsidies granted to employers for sponsoring retirement plans; and (3) reduce, or even eliminate, the unfairness inherent in the tax code in general, which allows hundreds of billions of dollars in deductions that favor wealthier people over middle- and working-class Americans when it comes to investment, savings, housing, and more.

Let’s look at each of these in turn.

Lift Social Security’s payroll cap. As we saw in chapter 1, anyone making up to $118,500 a year in wage or salary has 6.2 percent of their wages for Social Security deducted from their paycheck (plus another 1.45 percent for Medicare); if they have an employer, the employer matches that amount, and if they are a contractor, freelancer, or self-employed, they are responsible for paying the employer’s half as well. While all Americans earning wage income are subjected to this rule, any income they earn over the $118,500 threshold is not taxed by Social Security. The net result of this is that working-, middle-, and even moderately upper-middle-class Americans, as well as their employers, are taxed the full rate of 12.4 percent on 100 percent of their income, but the wealthiest Americans are treated differently. They pay tax only on a portion of their income.

Hence, while a janitor’s earnings of $35,000 per year are taxed the full 6.2 percent (with the employer paying another 6.2 percent), a corporate executive making $600,000 a year effectively is taxed at a rate of 1.2 percent of income. And millionaire bankers pay a paltry 0.73 percent of income (and neither the corporate exec or banker pay any Social Security tax at all on the considerable income they reap from investments, stocks, and dividends, known as capital gains—more on that later). The janitor is paying at least eight times the percentage of the banker. The banker is paying $55,000 less per year in Social Security payroll taxes than what he or she should be paying. So this payroll tax is very regressive.

Applying the same rules to everyone via a flat tax would be the fair thing to do—and increasingly it is the right thing to do. Many conservatives favor a flat tax on income, but for Social Security, suddenly they lose their enthusiasm. Yet higher-income workers and employers with large numbers of higher-income workers would have little to complain about because they have already been the beneficiaries of exceptionally large tax deductions in various ways (and like everyone else, they will benefit from a doubling of their monthly Social Security benefit).

Moreover, there is a precedent for removing this limitation on taxable earnings. Medicare used to have a cap on taxable earnings but no longer does. The wealthy have accepted that being fully taxed is fair when it comes to health care for seniors, even though it does not translate into additional benefits for them. As a candidate in 2008, President Barack Obama stated that he supported raising the cap on the Social Security tax to help fund the program, proposing a Social Security tax of 4 percent on the amount of any income earned over $250,000 per year.⁶ That would have been a good step in the right direction—if he had ever gotten around to actually proposing it to Congress—but it still begs the question: Why should wealthy people earning over $250,000, or even those earning between $118,500 and $250,000, pay a lower rate of taxation than their house cleaners and auto mechanics?

So, requiring all income levels to pay their fair share—meaning a flat tax in which everyone pays the same percentage rate on all of their income, not just a small chunk of it—would make the system’s financing less regressive. If we completely lifted the payroll cap, how much revenue would that generate toward our goal of finding another $662 billion? Quite a lot, it turns out.

According to the Center for Economic and Policy Research, there are approximately 9 million Americans (out of the approximately 145 million Americans in the labor force) who earned incomes above the $118,500 cap for Social Security payroll tax.⁷ If all of that income is taxed at the same 12.4 percent rate (both the worker’s and the employer’s share) as those Americans making less than $118,500, that would raise about $135 billion for the retirement portion of the Trust Fund, year after year, according to data from Social Security’s chief actuary.⁸ So taxing all income brackets equally would raise a sizable chunk of the revenue needed to double the Social Security payout from the current 30-40 percent of an individual’s final salary to 60-80 percent.

Eliminating the payroll cap is a very big deal, because so much wealthy income goes untaxed for Social Security purposes. Higher-income Americans already receive a larger Social Security monthly benefit than middle-income or low-income Americans. They receive the maximum benefit of around $2,660 per month, or $32,000 each per year. For a married, two-income couple (assuming both earn a high income), that would total nearly $64,000 a year together (if they began taking their benefits at sixty-six). Since we are looking to double the Social Security payout, higher-income individuals would receive up to $64,000 per year, and high-income couples around $128,000 a year—for the rest of their lives in retirement. So affluent people would be well compensated in return for the elimination of the payroll cap.

Some critics opposed to getting rid of the payroll cap have said that those wealthy people paying the full tax of 6.2 percent on all of their income should receive an even more enormous increase in their benefit, one commensurate with the higher amount of tax they are paying. That could amount to a Social Security benefit of hundreds of thousands of dollars per year, conceivably, for the very wealthy. But even private pensions are prohibited by law from giving extremely large benefits to high-salaried employees, so a rule limiting the annual benefit to $64,000 per individual would not be unusual.

By lifting the payroll cap, we have already raised a significant sum, $135 billion, toward our goal of $662 billion.

Eliminate employer tax exclusions for sponsoring retirement plans. With a doubling of the Social Security payout available to all Americans, employer-based pensions and 401(k)s become much less crucial to the retirement system. By implementing Social Security Plus, employers would be liberated from the responsibility of providing retirement for their employees. That also means it would no longer be necessary to provide to employers the substantial deductions they currently receive from the federal government for providing a retirement plan for their employees.

Not many people realize it, but every tax-paying American subsidizes the retirement plans provided by companies, even though a small minority of Americans—disproportionately the better-off—benefit from them.⁹ This is accomplished via the tax code, which allows employers to exclude from their taxable income any contributions they make on behalf of their employees to their defined-benefit pensions and defined contribution 401(k)-type plans. This has the effect of lowering employers’ taxes by billions of dollars. Employers also are allowed to exempt from their taxable income any costs they incur in the implementation and administration of a retirement plan. The employer can also shield from taxes any earnings it reaps from investing the funds stashed away in the company’s pension/retirement fund. In other words, all pension/retirement contributions from employers are exempt from corporate income and Social Security payroll taxes (and most pension contributions an employer receives from employees are exempt from income tax as well).¹⁰ These federal tax incentives are intended to motivate employers to sponsor retirement plans for their employees. The exemptions granted to qualified retirement plans are one of the largest tax expenditures in the federal budget, totaling some $113 billion in 2015.¹¹

However, some of these employers also have to pay taxes when their employees start withdrawing their retirement benefits (because at that point the contributions are counted as income, and so both employer and employee pay the usual taxes associated with paid income, such as income, Social Security, and Medicare taxes). Still, after deductions, deferments, and tax payments are taken into account, employers still receive a hefty federal subsidy, which amounted to about $91 billion in 2015.

To be clear: although these federal subsidies are applied through the tax code, their effect is just the same as if the government were writing checks to deposit into the accounts of these companies that provide a retirement plan. That’s why in official government tables, these subsidies are called “tax expenditures,” because it’s as if the government is spending tax dollars on these programs. These expenditures are used to encourage certain kinds of government-supported behavior by subsidizing it. Yet, because they are enacted through the tax code—reducing government revenue from what it otherwise would be, rather than appearing on the balance sheet as increased government spending—they mask the reality of what this is: it is a federal subsidy for companies that provide a pension/retirement plan for their employees, as well as an indirect subsidy of those employees.

As we have seen, most of the Americans who benefit from such private retirement plans have higher incomes. It’s easy to criticize government programs for poor people and welfare recipients, because that appears in the budget—and in the media headlines—as government spending (on people who some view as undeserving). But in fact more tax dollars are spent on behalf of better-off Americans—that is, they are more subsidized than the poor—yet that is masked from the headlines and public scrutiny because it appears as exclusions, deductions, and deferrals, not as a budgetary spending item. These hidden subsidies are why economists like Mark Zandi have stated that tax expenditures should be considered a form of government spending.¹²

But if we are doubling the Social Security payout, all of these federal subsidies are no longer necessary. The vast majority of Americans would be better off if employers directed their pension money into a Social Security Plus system. It makes sense to remove the tax advantages and government guarantees provided to employers for their retirement plans, and to use this revenue instead to boost Social Security. By doing that we would raise about $91 billion for the Social Security Plus kitty in our bid to reach $662 billion. Combined with the previous $135 billion, we are a third of the way to our goal.

Eliminate tax shelters for 1-percenter households and businesses. The tax code is riddled with loopholes and labyrinths that only tax attorneys and accountants can figure out. Some of these loopholes have odd, technical-sounding names that most Americans have never heard of: “capital gains,” “step-up in basis,” and “carried interest.”

Capital gains is the name given to profit made from investment income rather than wage-earned income, whether the investments come from real estate, investing in a business, or buying and selling in the stock market. As a way of encouraging business investment, the tax rates that are applied to long-term capital gains (defined as investments held for greater than a year) and dividends (made from investments such as stocks and bonds) are much lower than the rates for regular (wage- or salary-based) income. Someone earning a salaried income of $500,000 would be subject to the top income tax rate of 39.6 percent, but if they made that same $500,000 in the stock market or in real-estate investments, they are only taxed at a 20 percent rate (and in some cases even lower). Thus, they are paying half the taxes that the progressive income tax code calls for, and a lower tax rate than their mid-level managers or their doorman.

The Congressional Budget Office has estimated that this rule cost the federal treasury approximately $161 billion in 2013—and, surprise surprise—a whopping 93 percent of this subsidy is hoovered by Americans in the top 20 percent income bracket, and nearly 70 percent by the top 1 percent.¹³ Making matters worse, the US Federal Reserve published a study that found that “unrealized capital gains” (the technical term given to capital income that has not yet been taxed) make up 55 percent of the total value of estates worth more than $100 million.¹⁴ Economist Larry Summers coauthored a report that concluded, “More than half of the wealth accumulated within the richest estates has never been subject to income taxes.”¹⁵

That’s a lot of potential tax revenue lost due to the idiosyncrasies of the tax laws, which as recently as 1990 under President George H. W. Bush treated income from capital gains the same as any other type of income. But here’s the thing: as outrageous as it sounds to tax capital gains at only half the rate of regular income, none of this capital gains income is taxed for Social Security purposes at all. Not a single dime from this type of investment income was deposited into the Trust Fund as a contribution toward the nation’s retirement system. This is contrary to how other government programs work; for example, Medicare is partly funded by a 3.8 percent tax applied to the capital gains of higher-income taxpayers with adjusted gross incomes above $200,000 for single taxpayers and $250,000 for couples (who file jointly).¹⁶

Approximately $800 billion in capital gains income was earned in 2013. So, if that capital gains income had been taxed for Social Security purposes at the standard 6.2 percent, that would have generated around $50 billion for the Social Security Trust Fund. If we include the employer’s half, that would generate another $50 billion.

OK, that’s a lot of money, but there are other tax travesties that cause both the federal treasury and the Social Security Trust Fund to leak revenue. One of these has a name that sounds like an exercise workout that you might do at the gym: “step-up in basis.” But this is a tax exercise that only the wealthy are allowed to do. It’s yet another tax shelter for the affluent that in fact functions as a direct federal subsidy for inherited wealth. Here’s how it works.

Usually, when a home or a yacht or any other type of large expensive asset is sold, the seller realizes a capital gain, subject to the lower capital gains taxation rate of 15-20 percent (about half the tax rate of 39.6 percent that they pay on their earned income). Normally, the amount subject to taxation is the difference between the sale price and the amount that the seller originally paid for that particular asset. But it works differently for inherited property.

Instead of calculating the difference based on the amount originally paid, it’s calculated using a more recent value, that of the “fair market value” of the asset on the date that the previous owner died and left it to his or her heirs. By doing this, the appreciation in value is far less, and hence, so are the capital gains taxes paid. Using this date of when the owner died, instead of its original sale price, is termed—bingo!—a “step-up in basis.”

A better name for it might be a “step-up in privilege.” Wouldn’t it be lovely if all Americans could benefit from such an enormous inheritance loophole, rather than only the top 1 percent of 1 percent? In 2015, the step-up in basis rule reduced federal revenues by a whopping $63 billion.¹⁷ That’s a greater amount than the $42 billion spent on affordable housing programs for low-income people by the US Department of Housing and Urban Development. The Congressional Budget Office estimates that the step-up in basis rule will reduce federal revenues by $644 billion over the next ten years, with 21 percent of that subsidy going to the top 1 percent of income earners, and 65 percent going to the top 20 percent. The bottom 40 percent of income earners receive only 3 percent of these benefits.¹⁸ Of the more than two hundred federal tax expenditures in the individual and corporate income tax systems, this is one of the ten largest. And yet this little loophole in the tax code labyrinth, which is hardly ever talked about, is an extremely lucrative subsidy for the wealthiest estates. And of course none of the income received from the sale of these large assets is taxed for Social Security purposes. If that at least were done at the 6.2 percent rate, it would generate another $19 billion for the Trust Fund.¹⁹

Some defenders of a low capital gains tax who view it as an incentive for business investment will cry foul over taxing investment income at the same rate as wages and salaries. But one special type of capital gains is hard to defend. It’s called “carried interest.”

Carried interest is a big chunk of the compensation paid to hedge fund managers, private equity executives, and venture capital partners. It is derived from taking a 2 percent fee for managing the billions of dollars from those who have invested in their hedge fund or stock portfolios. In addition, these managers are compensated by skimming off the top 20 percent of the profits made on their investment portfolios. According to the New York Times, because the “carry” is tied to performance, it is treated like an investment and subjected to the lower capital gains tax rate, rather than as ordinary income, even though most managers don’t put any of their own money at risk.²⁰

The people who benefit from this preferential tax treatment are among the richest in the country. In 2014, the top twenty-five hedge fund managers together earned nearly $12 billion—an average of $467 million each—which is more than the amount of federal food assistance received by over 4 million poor Californians.²¹ According to the Internal Revenue Service, in 2012 the top four hundred earners in the United States, which includes a lot of hedge fund and private equity managers, paid the second-lowest average federal tax rate since the data has been collected, only 16.7 percent. Two decades ago, the “top 400” paid nearly 27 percent of their income in federal taxes. The change is mostly due to the fact that a lot more of their income is now taxed at the lower capital gains rate.²²

Former GOP presidential candidate Mitt Romney, as a former hedge fund partner at Bain Capital, benefited from substantial carried interest on his 2010 and 2011 income tax returns, the Boston Globe reported, resulting in his paying an income tax rate of only 14 percent.²³ Victor Fleischer, a law professor at the University of San Diego and an expert on the carried-interest loophole, says, “It symbolizes how the 1 percent, or the one-tenth of 1 percent, can exploit the tax and legal system to their own benefit in ways ordinary people cannot.” Adds Professor Fleischer, “If you’re a teacher or a firefighter or a journalist, you can’t transform your labor income into capital gains.” But if you’re a hedge fund manager, the Internal Revenue Service provides a posh loophole.²⁴

Just closing this part of the capital gains loophole would raise a ton of money, though the estimates of how much vary greatly. Professor Fleischer estimates that the amount would be approximately $18 billion per year.²⁵ And during the run up to the 2016 presidential election, a most unlikely source emerged as the Robin Hood wanting to go after it: Donald Trump. In the heat of the GOP presidential primary, Trump announced that one thing he would do if elected is close the carried-interest loophole. “The hedge fund guys didn’t build this country,” Trump told John Dickerson on CBS’s Face the Nation. “These are guys that shift paper around and they get lucky… . The hedge fund guys are getting away with murder.”²⁶

Jeb Bush, hardly a populist or one to buck the GOP establishment, soon jumped on the anti-carried-interest bandwagon. In September 2015, the New York Times wrote that Trump had “done more to put a stake in the heart of the carried-interest tax loophole in the last month than the Obama administration has in the last six and a half years.”²⁷

Again, it’s important to note here that not only is the federal treasury missing out on billions of dollars in income tax, but even if the beneficiaries of this policy are allowed to keep that carried interest, none of this income is being subjected to a Social Security payroll tax. These capital gains buccaneers get off with making no contributions on their sky-high investment income into the Social Security Trust Fund. A conservative, back-of-the-envelope calculation suggests that approximately $90 billion in carried interest income was earned in 2014, and if that income had been subjected to the 6.2 percent Social Security payroll tax, plus another 6.2 percent for the employer’s half, it would have yielded another $11.2 billion for Social Security.

So if we taxed long-term capital gains and dividends at the same rate as all other income, that would claw back $161 billion for the federal treasury, which can be put into the Social Security Plus kitty. And if we eliminated the “step-up in basis” rule for inherited wealth, that would add another $63 billion to the federal treasury. In addition, if all these different types of capital gains income are taxed for Social Security purposes at the 6.2 percent rate, as well as their employers where appropriate, that would add another $100 billion for capital gains, plus another $19 billion on the step-up in basis income and $11.2 billion for the carried-interest contribution to Social Security. Keep in mind, all I am doing in this exercise is taxing income derived from capital gains, carried interest, and step-up in basis in the same manner as how wages and salaries are taxed for the vast majority of Americans. What’s fair for one is fair for all.

At this point, we have found some $580 billion in funding for Social Security Plus, simply by lifting the payroll cap, doing away with the tax subsidies given to employers for providing a retirement plan for their employees, and taxing the different forms of capital gains like regular income. That provides nearly 88 percent of the $662 billion in revenue needed to double the monthly retirement benefit. We have almost reached our mark, so let’s keep going and look for more sources of revenue for our increasingly expanded and financially sound national retirement plan.

Reduce or Eliminate Other Unfair Deductions in the Tax Code That Disproportionally Benefit a Small Minority of Better-Off Americans

Another source of income for Social Security Plus would be to decrease or even eliminate many other deductions from the tax code that disproportionately favor upper-income people. As we saw in chapter 2, the US tax code has created a two-tier welfare state, in which better-off Americans benefit disproportionately from federal tax deductions and exclusions for private retirement savings and homeownership. These beneficiaries are positioned to take advantage of an enormous number of regressive components inlaid into our tax structure.

Financial instruments that encourage savings, including 401(k)s, 403(b)s, IRAs, and traditional pensions, are skewed toward helping better-off Americans. In fact, of the $165 billion that the federal government spends subsidizing individual retirement savings, nearly 80 percent of it goes to the top 20 percent of income earners. The middle class and poor can rarely take advantage of these deductions because they don’t make enough income to participate.

And the same is true for federal subsidies of homeownership. The federal subsidy for the home mortgage interest deduction amounts to around $70 billion per year, with Americans in the top 10 percent income bracket hoovering a whopping 86 percent of this federal subsidy. And the federal tax deduction allowed to homeowners to mitigate the cost of state and local property taxes they pay on their houses cost the federal budget another $32 billion in 2014; a study by the Congressional Budget Office found that Americans in the upper 20 percent income bracket reaped 80 percent of this federal subsidy.²⁸ And just to make sure everyone paying attention understands who the tax code favors, homeowners also do not have to pay taxes on up to $250,000 of their capital gains profits when they sell their home, which doubles to $500,000 for married taxpayers. That exclusion amounted to a federal subsidy to the tune of another $52 billion in 2014. Together, these three federal subsidies for homeownership total $154 billion—and for the most part they subsidize higher-income taxpayers. Renters and most low-income people don’t benefit at all, and while some middle-income people benefit, the total amount of their deductions and subsidies are comparatively small.

Changing these housing subventions that so grossly benefit politically powerful upper-income earners might seem legislatively impossible, yet it occurred in Germany in 1987. Germany once had a high rate of homeownership, but now its rate is below 50 percent (the rate in the United States is 65 percent, but before the housing bubble collapse in 2008 it was as high as 70 percent). The country eliminated its mortgage interest deduction along with other homeowner subsidies. Like Americans, homebuyers in Germany used to be able to deduct mortgage interest from their federal income taxes, but the country managed to eliminate that tax break under conservative chancellor Helmut Kohl. About a decade later, in 2006, under conservative chancellor Angela Merkel, the country also eliminated a large-scale subsidy program for homeowners, amounting to about $12 billion per year.²⁹ While the United States is usually viewed as the land of laissez-faire, where markets rule and government intervention is low, it actually provides far more subsidy to its housing market than Germany, and most of it benefits better-off Americans. The United States clearly needs a new tax policy for housing, one that is rooted in a recognition of the unfairness built into the current tax code.

So, if we got rid of the subsidies for homeownership, and added that revenue to the Social Security Plus Trust Fund, that would amount to another $154 billion; if we also deep-sixed federal subsidies for individuals contributing money into their 401(k)s, pensions, and the like, which will not be needed anymore once we double the Social Security pension annuity, that would add another $165 billion to the fund.

If we combine those budgetary add-backs with our previous savings, we now have reached nearly $900 billion, well over the $662 billion level we needed to reach in order to enact Social Security Plus and double this highly popular national retirement system’s payout. Just a few revenue streams—lifting Social Security’s payroll cap, eliminating the employer tax deduction for providing a retirement plan, and eliminating some unfair deductions that vastly oversubsidize wealthier Americans—would raise more than enough revenue needed for creating Social Security Plus, which would provide a stable, secure retirement for every American. That’s even enough revenue to take a major step toward covering the predicted Social Security shortfall in the 2030s, as well as the impending gap in funding for Social Security’s disability fund. And we were able to do this without spending a dime more in government money or national wealth than what is already being spent on the retirement system. We are just shifting expenditures that right now benefit a small number of individuals and special interests as a result of how the tax code is structured, and re-focusing these resources on the vast majority of Americans.

Some tax and retirement experts will counter that eliminating the identified loopholes and exclusions will raise less federal revenue than it might appear because people will modify their behavior in response. Or some will object that eliminating all of these loopholes and deductions will raise revenues by less than the sum of all those individual expenditures, because if all of the loopholes and subsidies were gone, more taxpayers would claim the standard income tax deduction (instead of itemizing exclusions and deductions). Undoubtedly there is truth to those points, and more precise modeling would be helpful. Yet this proposal has identified nearly a trillion dollars—far in excess of the $662 billion target. It’s certainly a good place to begin a badly needed discussion about how we can greatly expand the Social Security payout.

Thus, more tax fairness results in a Social Security Plus system that is both viable and fundable. With the deep cracks in America’s retirement benefits revealed by the Great Recession, it is now also desirable and necessary.

Beyond that, what’s truly eye opening about this exercise is how the tax code trumpets, loudly and brashly, that the rich are not like you and me. All of the exclusions, deductions, deferrals, and low tax rates being eliminated are ones that benefit a small minority of Americans. Most of these programs and savings instruments are hugely regressive because in most instances you have to earn a lot of income in order to take advantage of them. Or you have to receive your income through investments, such as in stocks and real estate, which most Americans don’t have. Higher-income people not only have the wealth but also access to the technical and legal expertise that makes it all possible, resulting in them paying lower taxes on their reduced taxable income, or in some cases paying a lower tax rate.

So as much as opponents such as Peter G. Peterson like to label Social Security and Medicare as “entitlements,” these tax code favoritisms are nothing more than entitlements for wealthier Americans. The current system perversely amounts to a hidden subsidy for better-off Americans at the expense of everyone else. These affluent recipients of federal largess are the true “welfare queens” because these advantages are mostly not available to middle- and lower-income Americans, especially to the working class, who rarely have enough income to divert for savings or investment. A phasing out of these various tax deductions, and gradually reducing the amount of private income that the wealthy can shelter from taxation, would result in more fairness, as well as more revenue available to convert Social Security into Social Security Plus.

An Alternative Funding Mechanism for Social Security Plus

One of the criticisms of this proposed plan is that raising the payroll tax on the full salary and wages of better-off Americans will hurt America’s businesses. That’s because these businesses also will have to pay a 6.2 percent payroll tax on the income above the $118,500 level. So, this would constitute what some label a “mandate” on business, which, like the word “entitlement,” has acquired the reputation of being a sinful economic vice. As businesses are the job creators, opponents say, ultimately applying the payroll tax equally to all income brackets will backfire by reducing the number of jobs.

Yet there is no evidence of a link between taxation rates and economic growth. A 2011 study by economists Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva found no correlation between reductions in top tax rates and growth. Another study, conducted by William Gale and Andrew Samwick at the Brookings Institution, found no evidence that increased economic growth resulted from major tax cuts under President Reagan in 1981 or President George W. Bush in 2001 and 2003. Likewise, the study found no evidence of reduced economic growth from tax increases under President Bill Clinton in 1993. A study by Danny Yagan of one of the largest reductions to a capital tax rate—the 2003 dividend tax cut—showed zero change in corporate investment and no effect on employee compensation. As with top tax rates generally, changes in capital gains tax rates are not correlated with a corresponding shift in economic growth.³⁰

Yet still these myths persist. Of course, those same critics had little negative to say all these years as the payroll tax was levied on 100 percent of wages for middle- and lower-income Americans. When the reforms of the Greenspan Commission in the early 1980s raised the payroll tax rate from 5.4 percent to the current 6.2 percent (which was phased-in over several years), those same critics said it was a fiscally responsible thing to do. US businesses have somehow survived paying the 6.2 percent payroll tax on the full wages for the 110 million working Americans whose entire earnings are subject to the payroll tax. Only now that it would be applied to millions of wealthier Americans do the doomsayers say it will be bad for the economy and hurt job creation. I find these sorts of arguments disingenuous.

Nevertheless, to demonstrate the many ways that exist to finance a significant expansion of the monthly payout for Social Security Plus, here is an alternative way to structure it without raising the payroll tax beyond current levels. This proposal, which is based on one I coauthored with Michael Lind and Joshua Freedman from the New America Foundation and Robert Hiltonsmith from De¯mos, expands the public pillar of retirement income in a way that is consistent with the goal of making the nation’s retirement system more robust, fully portable, and building on what we know has worked, instead of what has failed.

In this proposal, the current hybrid “public and private” system, which, as we have seen, is based on the three-legged stool of retirement security, would be replaced with a two-part, wholly public system. Just as Medicare already has different components called Medicare A, B, C, and D, this form of Social Security Plus would have two distinct parts. The first part, Social Security A, would be similar to the current Social Security program, which provides a retirement benefit based on earnings and the number of years worked. Those who earn more and work longer receive a greater monthly benefit than others. The second part would be a new universal flat benefit, Social Security B, funded by various mechanisms other than a payroll tax (which I will elaborate in a moment). It is intended to be redistributive—to prevent poverty in old age—and to ensure that retirees achieve some minimum standard of living.³¹

This kind of program, which is used in many other countries, has sometimes been referred to as a “double-decker” system, since it combines a basic flat public pension with a defined-benefit annuity based on earnings.³² By using these two parts like a kind of seesaw, adjusting one part in relation to the other, it’s possible to design a payout schedule in which, when Social Security A and B are pooled, most workers would be guaranteed around 60 percent of their average working wage in retirement income (compared to the current 30-40 percent of replacement income for the average worker). That would amount to a significant expansion of retirement income.

How would this double-decker system be financed? The two components of this plan for Social Security Plus would be paid for by separate revenue streams. Social Security A would be paid for by payroll taxes, just the way it works now, and at the same tax rate as the current program. But Social Security B, the new universal, flat benefit, would be financed by revenues other than payroll taxes—either from general revenues allocated by Congress as part of the budgetary process, or by a separate tax dedicated to Social Security B.

This is not as big of a change as it might seem. It’s very similar to how Medicare already works, since slightly more than half of Medicare benefits are paid for by general revenues. As we saw earlier, Medicare is also partly funded by a 3.8 percent tax on capital gains of higher-income taxpayers. It’s also similar to how Supplemental Security Income (SSI) is funded; SSI is a means-tested antipoverty program that helps poor children and the disabled, as well as the elderly, and it has always been funded out of general revenues. Medicare and SSI thus provide a precedent for expanding the funding base for Social Security out of general revenue funds. In fact, we could even convert SSI into Social Security B, and then expand it with more revenue commensurate with the greater role it would be taking on, which would further simplify the overall program.

Where will Congress get the money for Social Security B? The whole thing could be funded from the revenue sources identified in the previous plan: by closing the capital gains loopholes and by ending or at least greatly reducing the exclusions and deductions that disproportionately advantage better-off Americans. That would include ending or reducing subsidies for 401(k)s and pensions (both for businesses and their employees), for various home ownership deductions, for inherited wealth, and for capital gains income from investments. We could also levy a small financial transaction tax on the buying and selling of stocks and bonds; with millions of transactions bought and sold every day, this would raise an estimated $200 billion. It also would disincentivize speculative trading via “black box” algorithms, which automatically launch millions of transactions per second and have caused wild roller-coaster rides on Wall Street of stocks plunging in a matter of seconds.³³

All of this would result in much more progressive outcomes. As with the previous proposal, the highest-income earners would have to contribute their fair share to Social Security and would no longer be able to rely on their tax-favored federal subsidies. However, they would still receive a higher level of public retirement benefits than they do currently because of the addition of Social Security B, to which every American would be entitled.

Parts A and B together would provide a much greater share of retirement income than today’s Social Security does by itself. This would further provide a sensible reason to make 401(k)s, employer-based pensions, and other tax-favored individual deductions less necessary, and to redirect those federal tax expenditures into revenues that can be used to pay for this version of Social Security Plus. For persons with no earnings or very irregular earnings, Social Security B would provide at least a minimum monthly benefit to ensure no American falls through the floor of a livable quality of life. Replacing tax-favored private retirement programs with a substantial expansion in the public portion of the national retirement system would make the program as a whole more progressive, efficient, and stable.

Some critics contend that the public will never support another social insurance program that depends so substantially on general revenue. But if that is really the case, then public support for Medicare should be weaker than it is. On the contrary, Medicare enjoys strong public support, along with Social Security. Their popularity arises from the great need for them, and the perceived as well as the actual benefits, rather than from the specific details of how we pay for them. Americans value these programs, and poll after poll has shown that they are willing to see their taxes used for this purpose, even if it means paying higher taxes. Designed properly, a new retirement system could substantially boost retirement benefits and economic security for most Americans, even while costing the nation no more than the current amount devoted to retirement. Some version of this “double-decker” public system is already being used in many countries, including Japan, Canada, Belgium, Finland, South Korea, Switzerland, the United Kingdom, Luxembourg, and elsewhere.³⁴ All of these places utilize both a basic flat public pension and a public defined-benefit annuity program based on earnings.³⁵

As this and the previous plan show, we can replace a wobbly stool and its failing private components with a single, sturdy, portable, and purely public column made up of a strong pillar of Social Security. No component in either of these plans is contingent on benefits provided by particular employers, all are portable from job to job. By replacing the status quo of employer-provided, tax-favored retirement savings plans with either of these proposed Social Security plans, we would create a portability that completely delinks the retirement income of individual Americans from particular jobs and employers. And that would help American businesses trying to compete with foreign companies that don’t have to directly provide pensions to their employees, because those countries already have national retirement plans. The single pillar of Social Security Plus would go a long way toward preparing US workers and businesses for the new economy in the twenty-first century.

Responding to Criticisms

Some people reading this will no doubt mourn the loss of their own favorite tax deductions and personal subsidies. Certainly, some of these deductions have helped many people reach for their own version of the American dream. But take heart, perhaps we won’t have to eliminate all of them from the tax code—the first proposal identified sources of revenue for Social Security Plus that are almost twice as great as the need. So perhaps some of these entitlements for better-off Americans could just be scaled back a bit. But it’s clear from this exercise that we must urgently reevaluate how to better target these subsidies at the greatest need. There are different ways to restructure some of these programs, with one possibility being to treat capital gains as income that is subject to a Social Security contribution (like they already are for Medicare); or to direct a small financial transaction tax on all stock market transactions into the Social Security Trust Fund. We could also eliminate the provision that allows taxpayers aged sixty-five and older to claim an additional standard deduction on their income tax returns, which reduced federal tax revenues by an estimated $2.7 billion in 2015.³⁶ This special deduction won’t be necessary anymore, because these retirees already will be receiving twice their current Social Security payout.

While he was still living, Robert Ball, the former commissioner of Social Security who served under three presidents (Kennedy, Johnson, and Nixon), argued in favor of devoting the proceeds of an estate tax to Social Security. The tax perhaps would apply only to large estates of $3.5 million or more.³⁷ Still another possibility would be to use a flexible payroll tax, as Finland has done, in which payroll taxes are increased when the economy is going well and reduced when the country is hit by hard times. Such a counter-cyclical intervention acts as an automatic stabilizer to reduce the cost to employers of hiring workers during tough times, but during good times directs increased payroll-tax revenues toward a “rainy day fund” that can be deployed when needed.³⁸ A flexible payroll tax in the United States could deposit the extra revenues collected during prosperous years into a fund that helps finance an expansion of Social Security.

If Congress, after enacting a version of Social Security Plus, still wanted to promote private savings for middle-income Americans who can afford it, it could create a parallel system of simple, universal private retirement accounts with strict contribution limits that are more efficient and equitable than the failed 401(k) system. Every American with sufficient savings would be able to invest in government treasuries and other low-risk investments via this parallel plan of defined contributions. Like index funds, individual’s savings would be pooled, and the resulting economies of scale would lower management fees and other administrative costs.

That’s the rationale behind labor economist Teresa Ghilarducci’s proposal for Guaranteed Retirement Accounts (GRAs) and Senator Tom Harkin’s proposal for Universal, Secure, and Adaptable (USA) Retirement Funds, as well as proposals calling for all Americans, not just federal employees, to be allowed to invest in the federal government’s Thrift Savings Plan.³⁹ All of these plans, like any insurance policy, allow risk sharing and minimize administrative costs by creating large pools of savings that are invested in low-risk investments. The GRAs and USA Retirement Funds are designed to protect savers against the tumult of stock market fluctuations by guaranteeing an annual rate of return (about 2 percent) and paying out a small annuity for most income earners. Crucially, however, adding a private retirement savings component to Social Security Plus would need a cap on contributions so that the program helps middle-income earners without becoming an unaffordable subsidy for wealthier Americans, like the 401(k) system has become.⁴⁰

Social Security Plus also could be implemented in stages, targeting expanded benefits first to those who are most in need. For example, the conversion could begin by first focusing on the most needy—increasing the minimum Social Security benefit for the bottom 25 percent of seniors, most of whom live in poverty.⁴¹ Another option would be to allow active seniors over sixty-two years of age who have not yet reached full retirement age (sixty-six years old) to take a half pension and work half time without losing their right to a full pension upon their retirement. That would both reduce the strain on the Social Security system and ensure that seniors could ease their way into retirement while building up savings, clearing the way for younger people to find jobs.

If nothing else, it should be apparent from these examples that multiple funding mechanisms and implementation plans are possible toward the desired goal of providing retirement security for all Americans. It’s a matter of priorities and politics, not affordability or complex design.

Of course, all Americans should review these proposals and consider how they would affect their own individual and family circumstances. Ending public subsidies for employer-provided, defined-benefit pensions might raise concerns for some labor unions, which normally are natural allies to the idea of expanding Social Security. But I would argue that union members will gain far more by having a doubling of their retirement payout, and also by having employers relieved of that retirement responsibility (other than paying their employer contribution for each worker into Social Security), making that one less contentious issue subject to contract negotiations and collective bargaining. This would allow unions to focus more on wages and other benefits.

Some opponents of entitlements and Social Security will no doubt protest that this reformatting of the nation’s retirement system will hurt the overall economy. But nothing could be further from the truth. I have demonstrated how we could pay for it, so it is not going to add a penny to the debt. It’s just reallocating current national wealth more efficiently, and targeting it more directly at the nation’s retirement needs. Far from hurting the economy, reducing these tax advantages for the better-off will help the economy in a number of ways. An expansion of Social Security payouts would have a permanent stimulating effect on the economy because, as most economists know, low- and middle-income people are more likely to spend an extra dollar on goods and services than are affluent individuals. Non-wealthy people need to spend that money for their daily needs and ultimately for their retirement; better-off Americans tend to save the income. And as we have seen, contrary to conservative belief, there is little evidence that wealthy savers are job creators, or that they somehow use their surplus resources to grow the economy. They simply save their private wealth and then will it to their heirs.

Social Security Plus also would act as an automatic stabilizer during economic downturns and ensure that even when the economy is merely plodding along, retirees will still have a decent enough income. And by redirecting wealth from 401(k)s, pensions, the stock market, and other speculative activities, it also would discourage investment asset bubbles from developing in the future, which is a net positive since bubbles are very destabilizing when they burst.

In fact, it would be better if the new sources of revenue for Social Security Plus are invested in US treasuries, rather than the status quo of employers investing their pension funds—or employees their 401(k)s—in the stock market, and paying exorbitant fees to financial managers, most of whom can’t even beat the Dow Jones average for returns. Directing the investments into “Social Security Treasuries” would contribute to a system that better ensures more Americans against economic downturns, since the full faith and credit of the US government would be standing behind the promised benefits. Average Americans would not have to accumulate their own stockpile of financial assets to tide them over during a downturn, because their retirement security would be backstopped by these “Social Security Treasuries.” Workers wouldn’t have to pay manager fees that drain their pension funds, nor would they have to assume all that investment risk.

And because the doubling of the Social Security payout would be universal, even those better-off Americans who are losing their tax exclusions, deductions, and deferrals would see at least part of it returned back to them in the form of a much greater payout from Social Security. This would considerably simplify our tax code and our retirement system. It would be a win-win for the nation.

What we have seen is that it is possible to expand Social Security in a way that would greatly stabilize American workers’ retirement plans, as well as the national retirement system as a whole and also the broader macroeconomy. Indeed, the entire history of Social Security, stretching back to its founding in the late 1930s, can be viewed as an ever-evolving part of not only the social contract but the stability of the macroeconomy itself. This latest evolution would just take it to the next step along its destiny, laying an even more robust foundation for the nation as a whole.