Fixing Social Security: Let’s use subsidies for retirement plans
January 28, 2024 | by stockcoin.net
In the article “Fixing Social Security: Let’s use subsidies for retirement plans,” the author discusses the potential use of subsidies for retirement plans as a solution to address Social Security’s funding gap. The author highlights a rare agreement between economists Andrew Biggs and themselves, who typically hold opposing views. Both experts agree that the current subsidies for private-sector retirement plans do little to increase private saving, and the revenue generated from repealing these tax expenditures could be better allocated towards fixing Social Security. The article delves into the details of the tax expenditures, who benefits from them, and how they impact overall household saving. Ultimately, the author proposes reallocating government resources from retirement plans to Social Security, arguing that this would have a more significant impact on retirement security for individuals.
Subsidies for Retirement Plans and Social Security
The Need for Fixing Social Security
Social Security is facing a funding gap that needs to be addressed. The current system is not sustainable in the long term, and without changes, it may not be able to provide the same level of benefits to future retirees. This funding gap is caused by several factors, including an aging population, declining birth rates, and longer life expectancy. It is crucial to find solutions to ensure the financial stability of Social Security for future generations.
The Role of Subsidies in Private-Sector Retirement Plans
Private-sector retirement plans, such as 401(k)s and individual retirement accounts (IRAs), receive subsidies in the form of tax breaks. These tax expenditures allow individuals to defer taxes on their retirement savings, reducing their lifetime tax burden. However, studies show that these subsidies do little to increase private saving and primarily benefit higher-income households. The revenues raised from repealing these tax expenditures could be better allocated to address the funding gap in Social Security.
Cost and Distribution of Tax Expenditures in Retirement Saving
Tax expenditures for retirement saving cost the government a significant amount of money. In 2020, these tax breaks amounted to $185 billion, equivalent to 0.9% of GDP. However, the distribution of these tax expenditures is heavily skewed towards higher-income households. Approximately 59% of the current tax expenditures for retirement saving flow to the top quintile of the income distribution. This pattern highlights the inequity of the current system, where those with higher incomes benefit the most from these subsidies.
Impact of Tax Expenditures on National Saving
The goal of tax preferences for retirement saving is to increase national saving. However, theory does not provide a strong basis for assuming that these tax preferences achieve this goal. The economists’ lifecycle model suggests that individuals may simply shift their savings from taxable investment accounts to tax-advantaged retirement accounts. Evidence from studies, including a comprehensive 2014 study using Danish tax data, supports the predictions of the lifecycle model. The study found that reductions in the subsidy for retirement contributions primarily led to individuals shifting their saving from taxable to tax-advantaged retirement accounts, rather than increasing overall household saving.
Evidence from Studies on Tax Expenditures
The Danish study mentioned earlier provides valuable insights into the effectiveness of tax expenditures for retirement contributions. The study found that when the subsidy for retirement contributions was reduced for individuals in the top tax bracket, pension contributions declined. However, this decline was nearly offset by an increase in other types of saving. The study’s findings support the notion that tax subsidies primarily incentivize individuals to shift their saving from taxable to tax-advantaged retirement accounts, rather than encouraging additional saving.
Advantages of Reallocating Tax Breaks to Social Security
Reallocating the tax breaks from retirement plans to Social Security has several advantages. Firstly, it addresses the actuarial deficit that Social Security is facing. Over the next 75 years, Social Security is projected to face a deficit of 1.3% of GDP. Applying the revenues from eliminating tax expenditures for retirement plans could solve 70% of this problem. Additionally, reallocating tax breaks to Social Security would have a more significant impact than the estimate suggests, as the government would continue to collect income taxes on past tax-preferred contributions, and payroll tax revenues would also increase.
Projected Actuarial Deficit of Social Security
The actuarial deficit of Social Security refers to the shortfall between projected benefits and revenues over a specific time period. Social Security is currently projected to face a deficit of 1.3% of GDP over the next 75 years. This deficit highlights the urgency of finding solutions to ensure the long-term financial stability of the program. Reallocating revenues from the elimination of tax expenditures for retirement plans could play a significant role in closing this gap.
Potential Solutions Through Reallocated Revenues
The revenues obtained from eliminating tax expenditures for retirement plans could be directly applied to address Social Security’s funding gap. These reallocated revenues would help offset a substantial portion of the projected actuarial deficit. Additionally, there is a correlation between tax expenditures and government income and payroll taxes. As tax breaks are eliminated, income and payroll tax revenues would also increase. This combination of factors could have a substantial impact on reducing Social Security’s funding gap.
Additional Benefits of Eliminating Tax Expenditures
In addition to addressing Social Security’s funding gap, eliminating tax expenditures for retirement plans would have other benefits. It would create a more equitable system, as the current subsidies primarily benefit higher-income households. By reallocating these tax breaks to Social Security, the funds would be directed towards a program that provides essential benefits for retirees across all income levels. This would help enhance retirement security for all Americans and promote a more balanced distribution of resources.
Moving Government Resources to Social Security
Shifting government resources from retirement plans to Social Security makes sense for several reasons. The current incentives for retirement saving provided through tax breaks have limited impact on retirement security. On the other hand, Social Security is an essential safety net for retirees, providing a stable and predictable source of income. By optimizing the use of government resources and reallocating them to Social Security, policymakers can enhance the stability and financial security of the program.
Conclusion
Fixing Social Security’s funding gap requires a comprehensive approach that includes addressing the role of tax expenditures in private-sector retirement plans. Reallocating tax breaks from retirement plans to Social Security offers a promising solution. Not only would this help close the projected actuarial deficit of Social Security, but it would also create a more equitable system and enhance retirement security for all Americans. By moving government resources to Social Security, policymakers can ensure the long-term financial stability of the program and promote the well-being of future retirees.
RELATED POSTS
View all