Means-testing solves

A means-tested benefit coupled with general revenue financing would be far more progressive than the current program, leaving low earners better off on both the tax and benefit sides of the program. But this would also shift more costs to higher-earning households. Since Social Security is underfunded, payroll tax and general revenue financing could conceivably be combined to help fill the funding gap. For instance, general revenues might initially be employed to ensure that no retirees received less than promised under the new benefit formula, even if they had worked most of their lives under the current benefit formula. Over time, as the maximum benefit payable by Social Security is phased down, the costs of the minimum benefit borne by general revenues might be increased and the payroll tax rate reduced when Social Security’s financial health allows. I here outline a specific policy proposal for budgetary analysis purposes. Implementing this proposal would make Social Security solvent and fix shortfalls that the current pay-as-you-go structure created. Emulating Australia’s retirement system, the federal government would provide all seniors with a benefit equal to 28 percent of the national average wage for single retirees and 41 percent of the average wage for couples. Each employee must be offered and enrolled in a workplace retirement plan, which could be either an employer-sponsored plan or a government-sponsored defined contribution plan similar to the Thrift Savings Plan offered to federal government employees. As in Australia, contributions would be set at 12 percent of employee wages. Unlike in Australia, however, employers, employees, and the federal government would split the contributions. Employers and employees would each contribute an amount equal to 5 percent of employee wages. The federal government would contribute an amount equal to 2 percent of employee wages, up to the national average wage. This federal contribution would be funded by reductions in the tax preference for private retirement savings, with a focus on reducing the net preference for the highest-income fifth of taxpayers. Universal retirement-plan coverage and participation would reduce the need for the federal tax preference. Moreover, higher-income households have demonstrated little difficulty in saving for retirement on their own. All these provisions would be phased in, including introducing the minimum benefit, scaling down the maximum benefit that Social Security pays, introducing mandatory retirement-plan coverage and participation, and scaling up the contribution rate, perhaps by starting at 1 percent of employee wages and increasing each year until the 5 percent ultimate contribution rate is reached. Other provisions would also need to be filled out, such as whether and to what degree retirement-plan balances must be converted to annuities rather than being available as lump sums. CONCLUSION The United States needs innovative thinking on a range of public policy issues, including Social Security and retirement savings. Unfortunately, anyone advocating a more focused Social Security program and increased private retirement savings will likely be accused of wishing to “privatize” the program. But Australia, Canada, New Zealand, and the United Kingdom clearly demonstrate ways to address retirement security that reduce budgetary costs and increase private retirement savings while agreeing with our political and economic traditions. Reforming Social Security to focus on low-earning Americans could eradicate old-age poverty while making the program financially sustainable. The nation should reform its private retirement savings system to close coverage gaps and automatically enroll employees in retirement plans. Compared to other public policy challenges facing the United States, such as health care and education, Social Security and retirement savings are eminently solvable—but only if policymakers willingly step up with creative solutions to politically difficult issues.