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Michael Meeropol: Hillary Clinton's Policy Views On Social Security

Where does Hillary Clinton stand on the various issues related to Social Security?    Does she agree with former President Bush that Social Security is going bankrupt or with former Texas Governor Rick Perry that it is a “Ponzi scheme”?   [I have commented on this issue before but just to re-iterate – a Ponzi scheme is a situation where a fraudster sells future profits of an organization that actually has no revenue stream other than the “income” from selling share to the next round of buyers.   In other words, I sell you something for $1000 and promise a 20% return.  The only way I get that money to you is to sell two other people something for $1000.  Now I have $2000 and I give you $1200 and keep the $800 for myself.   Then I have to find four people to sell “shares” for $1000 each, give, the two new people $2400 and keep the $1600 for myself.  It works until I run out of people to sell to or until someone figures out that there’s no way my organization is truly “earning” the money I claim.   Social Security is nothing like that.  It has a guaranteed revenue stream from the payroll tax.]

Is she in favor of taxing benefits or raising the retirement age to 70 as has been proposed by NJ Governor Chris Christie?

Alternatively, does she agree with the populist wing of the Democratic Party that the cap on the payroll tax should be removed and the total level of benefits should be raised?

[Under the current system, raising the cap would over time lead to large payouts to affluent social security recipients since there is some connection between the amount one pays in and the amount one collects when one retires.   However, since the payout rates are lower for higher income people, it would be possible to alter those rates at very high incomes to avoid things like $200,000 social security pensions.   For details on this and other proposals to actually increase social security payment see, Nancy Altman and Eric Kingson,  Social Security Works!: Why Social Security Isn't Going Broke and How Expanding It Will Help Us All (New Press, 2015)

If you ever run into her on the campaign trail, please ask her.

Back in 2005 as soon as President Bush was re-elected he presented a scheme to Congress to partially privatize social security.   Anyone under the age of 55 would have some of their payroll tax payments diverted to buy a portfolio of stocks.  The prediction was that the stocks would do better than the returns built into the current social security system and retirees in the future would have larger nest eggs to draw on.   That would more than compensate for the reduced social security payments caused by the diversion of payroll taxes.

In the 2004 Economic Report of the President the Bush Council of Economic Advisers devoted a whole chapter to the need for social security reform (through privatization and reduced guarantees).  Here is their exact language in case people forget that that is what they wanted --

“… a Social Security reform plan should have two components. First, it should restrain the growth of future pay-as-you-go benefits for those not currently in or near retirement to bring the cost rate of the program in line with the income rate in the long term.”  (Meeropol translation:  guaranteed benefits have to be cut.)   “Second, it should establish personal retirement accounts for each worker. The personal retirement accounts serve a dual purpose. First, because the accounts can be located outside of the government’s budget, the accumulation of assets in

these accounts would not provide any impetus for higher government spending in the non-Social Security part of the budget. Second, the personal retirement accounts would provide a way for individual workers to accumulate assets to offset the reduction in their total retirement income that otherwise would occur due to the lower benefits in the pay-as-you-go part of the system.” (page 142)   This quotation makes it clear that even though President Bush later proposed that the diversion of payroll tax revenues by those under 55 covered by the proposal would be “voluntary” it would in fact become mandatory because the guaranteed benefits would be cut.

In fact, of course, what Bush was asking was for future retirees to trade in their social security guarantees for the lottery ticket of the stock market.  Having seen what happened when the dot.com bubble burst in 2000,  people took one look at the Bush proposal and reacted negatively.  A bill never made it out of committee.

Ten years later, politicians are reviving the same old mantra that Social Security will not be there for the younger generation and that it needs to be fixed – either through privatization, reducing benefits for higher income recipients or increases in the retirement age.   (By the way, the retirement age has already been increased to 66 and is scheduled to increase to 67 by 2017.)

Hillary Clinton has spoken out against privatization, but at times in the past she has not been as certain about things like raising the retirement age.   Means testing social security benefits has often been considered by Democrats.  

Some of us may remember that the Obama Administration floated a proposal to change the rate at which social security payments are automatically increased to compensate for inflation (known as “indexing”).  Currently, the consumer price index is used to increase benefits every year but the Obama proposal was to use a lower rate of increase which over time, of course, would have led to significant benefit cuts for long-lived retirees.

What is encouraging these days is that many Democrats (but not yet Hillary Clinton) have stopped playing defense re Social Security and started demanding that benefits be increased and that the increased revenue be raised by removing the cap on taxable payrolls.   Currently, only $118,000 of wage, salary or proprietors’ income is subject to the payroll tax.   That means that an accountant earning $118 thousand and a professional athlete earning $18 million pay the exact same amount in social security taxes.    

Removing the cap would raise significant revenue.   Some of that revenue could then be used to raise the benefits for lower income workers to guarantee, for example, that everyone who has paid into the system for 30 years or more will receive a pension sufficient to lift that individual out of poverty.

It has always been argued that a good retirement strategy is for every individual to depend on a “three-legged stool” which consists of Social Security, a private defined benefit plan from one’s employer and personal savings.   The beauty of a defined benefit plan is that once you qualify for it, you are guaranteed a certain payment every year

Unfortunately, there has been a great decrease in the coverage of private sector defined benefit plans.  According to the Employee Benefit Research Institute, the percentage of private sector workers with access to a defined benefit plan fell from 38% in 1979 to 14% in 2011.  That reduction has increased the insecurity of many workers -- making social security the only guaranteed resource for post-retirement income.  (For details see http://www.ebri.org/publications/benfaq/index.cfm?fa=retfaq14)

The third leg of the retirement support stool --- private savings --- are woefully inadequate.According to a survey conducted by bankrate.com, More than one-third of all working-age adults haven't managed to save any money toward retirement.

(For the results of the survey see  http://www.cbsnews.com/news/shocking-number-of-americans-have-no-retirement-savings/ )

Thus, increasing the social security payout to low and moderate income workers is an important substitute for the absence of defined benefit plans and the inability of many to put away enough money. 

So --- is Hillary Clinton in agreement with the populist wing of her party?  Please pressure her to answer that question.

[After this commentary was recorded, Senator Bernard Sanders of Vermont declared his candidacy for the Democratic Party’s nomination for President – even though he is an Independent, he has routinely caucused with the Democrats both when he was in the House and since becoming a Senator.  He is an explicit Democratic Socialist and has already endorsed the demand for lifting the cap on Social Security payrolls for taxation purposes as well as the proposals to increase Social Security benefits.   Hopefully, his candidacy will spur candidate Clinton to answer these and other important questions about her policy preferences.)

Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author (with Howard Sherman) of Principles of Macroeconomics: Activist vs. Austerity Policies.

The views expressed by commentators are solely those of the authors. They do not necessarily reflect the views of this station or its management.

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