Quick fix for Social Security could create false hope
Elected officials’ concerns tend to reflect those of the constituency they serve. The concerns of seniors are of particular importance since seniors are more likely to vote than members of any other age demographic.
Proposals to increase Social Security benefits, address the program’s sustainability 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 generations of workers.
The challenge many current retirees face was predicated on the belief that Social Security benefits would provide an adequate income in retirement, despite warnings and red flags raised by financial observers that those benefits were only meant to supplement retirement savings.
Even congressional lawmakers long ago recognized the need to encourage workers to save for their retirement when tax-deferred savings plans were established under the federal Internal Revenue Code. Plans including 401(k)s, 403(b)s, SEPs and 457(b)s, which allow workers to save pretax dollars for retirement, were adopted with the realization that workers needed an incentive to put money away for their sunset years.
Although officials, as well as financial advisers, continue to underscore the point that Social Security benefits are a supplement, workers tend to put off saving until the later years of their careers. For Baby Boomers, now entering retirement, the reality is 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 plan for which employers put away funds for the employees’ benefit. Instead, many of these soon-to-be retirees were given the option of participating in tax-sheltered or tax-deferred savings plans. However, it seems many of these workers looked at Social Security benefits as their “retirement plan” thinking those benefits would suffice. As many retirees have learned, Social Security benefits are not enough to live on, especially here in Hawaii.
To pander to senior voters, elected officials have proposed the amount of benefits be sweetened by as much as $65 per month and the cost of living adjustments be more generous. 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. Will 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 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. 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 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 their own retirement savings. Such a proposal would create false hope for millions of future retirees and shift the burden for financing the system forward.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.