Social Security advocates long have had doubts about President Obama's support for the program (as we reported as recently as last month). But that ended Wednesday, when in a speech in Elkhart, Ind., he suddenly called for expanding the program.
“It’s time we finally made Social Security more generous,” he said, “and increased its benefits so that today’s retirees and future generations get the dignified retirement that they’ve earned.” He endorsed raising the payroll tax on the wealthiest Americans, whose responsibility for contributing to the program is capped at $118,500 of wage income this year. “We could start paying for it by asking the wealthiest Americans to contribute a little bit more,” Obama said. “They can afford it. I can afford it.”
Obama's statement shows that he has backed away from his earlier willingness to place benefit cuts on the table in the interest of reaching a "grand bargain" on federal fiscal policy, as he was trying to do as recently as 2013. More to the point, his pitch recognizes that two of the three pillars of retirement security — personal savings and employer benefits — have been crumbling in recent decades, while Social Security has remained strong.
Gratifyingly, Obama's position has knocked Social Security's conservative attackers seriously back on their heels. Andrew Biggs of the American Enterprise Institute, for instance, fulminated in Forbes that Obama was merely parroting what "was once a fringe idea in the Democratic Party, a view held by a small number of activists who had no interest in compromise or conciliation."
It's important to know where Biggs is coming from, however: He's convinced that Americans are far better equipped for retirement than they think — that the retirement crisis is "phony." As it happens, however, this notion is based on some very suspect figures, including a gross mathematical error that was admitted by the Congressional Budget Office, a source for Biggs' calculations.
Biggs, like other conservatives, implies that Social Security is especially generous to "high earners"; the subtext here is that too much is paid out to the Warren Buffetts and Bill Gateses of the world and that this is undermining the program. We've addressed this issue again and again by pointing out that it's utterly wrong.
A minuscule portion of Social Security benefits goes to upper-income recipients — only 2.3% goes to people earning $100,000 or more outside of Social Security benefits, and 0.6% to those earning more than $200,000, according to 2009 figures compiled in 2011 by Dean Baker and Hye Jin Rho.
To have a material effect on Social Security's financial balance, means testing would have to result in phasing out benefits for retirees earning $20,000 to $30,000. Means-testing there — or in fact at any level — would result in undermining popular support for Social Security. That may be what conservatives desire, but it's not an honest approach to the retirement crisis.
Even some progressives have come to believe that changes in the pension landscape have kept Americans' retirement resources steady, and possibly even improved them. Their idea is that defined-contribution plans such as 401(k)s offer overlooked virtues compared to traditional defined-benefit pensions: DC plans are portable, can be withdrawn in a lump sum if you need a chunk of money and can be passed down to your heirs.
This is all true, but the positives are overrated and are counterbalanced by the negatives. If a 401(k) is a retiree's major or sole source of retirement income, withdrawing a lump sum could be a terrible idea — it may not leave enough in the kitty to support someone through a long retirement. Passing 401(k) funds down to one's children may be gratifying for the children, but it necessarily means taking less for one's own retirement — and wasn't that the point?
By their nature, 401(k) plans shift the risk of retirement investing to the employee from the employer, who's responsible for the funding of a defined benefit plan. Some critics of DB plans note that they have risks too, but most are protected by federal law and the Pension Benefit Guarantee Corp., which insures the benefits of more than 40 million workers and retirees. Defined Contribution plans have no such backup; if your stock and bond portfolio is eviscerated by a market crash, like those that occurred in 2000 and 2008, you're on your own.
The biggest problem with defined contribution plans is that middle- and low-income workers have difficulty setting aside the money to fund them. As a result, they're heavily skewed toward high-income households. This phenomenon is obscured by figures showing that Americans' average retirement assets haven't changed as a percentage of wages and salaries even as traditional pensions have yielded in the workplace to 401(k) plans. (See graph above.)
But what those overall figures fail to reveal is that defined-contribution assets are overwhelmingly concentrated among the wealthy. As the Economic Policy Institute has documented, more than two-thirds of households among the top 20% of earners have defined-contribution plans. Among the bottom 20%, participation is only 4%, and in the middle it's only 38%. The breakdown for defined benefit pensions is much more even.
In consequences, 401(k) plans have widened the inequality gulf: The bottom 40% of American earners receive 7% of all income but have only 1% of total retirement account savings. The top 20%, however, receive 63% of all income and a whopping 74% of all retirement assets.
This is the reality President Obama recognized by calling for expanding Social Security. He wasn't very clear about what exactly he had in mind, and his staff says greater detail probably won't be forthcoming during his remaining term in office. But they alluded to ideas that have been floating around in Democratic circles for some time and have been embraced by Sanders or Hillary Clinton or both. Sanders advocates a general benefit increase and a higher minimum benefit for low-income retirees, Clinton proposes higher survivor benefits and both call for a caregiver credit that gives women who have spent their working lives raising a family or caring for elderly or sick family members a claim on retirement benefits of their own. Both also advocate raising the payroll tax cap to bring more revenue into the system.
Among the issues progressives have had with Obama has been his seeming indifference to Social Security. Some have mistrusted him on the topic since he offered the chained-CPI, an inflation adjustment that almost certainly would have yielded lower cost-of-living raises over time, as a budget bargaining chip to Republicans. He later dropped the idea, and White House Press Secretary Josh Earnest implied to reporters Thursday that it was never considered very seriously. Earnest also gave the administration's implied blessing to a plan that would raise the payroll tax on earnings over $250,000.
Is Obama's pitch a political statement? Of course it is. But nothing could set Democrats and Republicans apart for voters in this election year than turning the national debate over Social Security away from how to cut benefits and toward how to make the program more relevant to more workers and their families.
Obama essentially gave an additional shove to a ball that Warren got rolling in 2013, when she took steps to reestablish Social Security at the center of America's progressive tradition. "This is partly about our values," she said at the time. "This is about what kind of a people we are, what kind of a country we are trying to build." And he openly echoed her assertion that the country believes that "fundamentally, everyone should be able to retire with dignity."