The Heritage Foundation, a Conservative think tank, has released a comprehensive plan for reforming taxes and entitlements. It can be found at Heritage plan — Save the American Dream. It’s only 48 pages, including illustrations and graphs, and everyone should read it. Those who haven’t read this plan and/or the Ryan Plan, (found at — The Ryan Plan) can be considered ignorant. The word “ignorant” isn’t an insult – it just means you don’t know anything, and therefore are unqualified to have an opinion. Easily fixed – just take a few minutes to read the damned things. (I suspect that unfortunately, most of our current crop of presidential candidates are ignorant on retirement reform. The things they say, or don’t say, gives them away.)
Let’s look at the Social Security portion of each plan. Democrats accuse Republicans of wanting to cut Social Security. Actually, in some ways these plans make it pay more – at least for poorer retirees. And, over time, Social Security needs saving. These plans have sections that explain why.
Ryan’s plan was written into a bill and passed by the house in May of 2010. The Senate never looked at it. Here’s where you can read the actual bill. H. R. 6110
Legislation is very difficult to follow and understand. You can read this bill with your browser, such as Internet Explorer. Note that the sections aren’t always in order.
Both plans, Ryan and Heritage, need to be enacted in total to obtain the expected benefits. Tax reform affects the Social Security, Medicare, and Medicaid program reforms. Social Security is currently funded by a 12.4% payroll tax, which is paid equally by both the worker (6.2 percent) and his or her employer (6.2 percent). Employers correctly see their contribution as a part of the employee’s total compensation. It is like a Ponzi scheme, in that current workers pay into the system, but the money supports benefits for those already retired, who pay nothing after retirement. In time, fewer and fewer workers will pay for more and more retirees, as people live longer and the population ages. It has run a deficit since 2009, and will only get worse over time. In 2009, the last year for which accurate statistics are known, Social Security paid $685.8 billion in benefits. This is a large chunk of the budget.
Heritage plan: what’s good about it?
- Social Security will resemble an insurance policy more than a personal retirement plan, in that all wage earners will pay into it but means testing will prevent some from receiving benefits. However, if a person’s income goes below the limit, he/she can begin receiving them again. The program is designed for those who really need it.
- Standard (flat) payout amount, about $1200/month in 2010 dollars. Under today’s system, retirees can pay Social Security taxes for 35 years and still receive a benefit that is below the poverty level. The new flat benefit will ensure that every retiree is above the poverty level (about $857/month.) Note that some now make more than the flat amount, but will not be affected – it applies only to new retirees.
- Means testing, with reduced benefits for those with higher incomes. A single person earning more than $55,000 in other income will see a gradually diminishing benefit payment as his income increases to $110,000, and none above that. For married couples who file jointly, the limits are $110,000 to $165,000. They can also file as individuals and be treated as single persons. (Means testing would begin the next year after passage of this plan.)
- Retirement age advances, to 65 for early retirement and 68 for full retirement, in the next ten years. It will continue to slowly rise after that.
- Starting immediately, those who work past their full-benefit age receive a special annual tax deduction of $10,000, regardless of income level. For instance, once the new system is completely phased in, a worker earning $50,000 per year who delays Social Security payments will see a $200 per month increase in spendable income.
- Revised 401k retirement savings plan. The money put into these savings accounts will not be double-taxed, unlike today’s Social Security payments and many other savings mechanisms.
The entire Heritage Plan, including the Social Security portion, was carefully scored by it’s own Center for Data Analysis. The Heritage tax reforms are assumed to be in place, which involves including the current Social Security payroll taxes in the flat tax on all wages. This means the upper limit on the tax money paid into Social Security goes away.
Why will this plan result in a lower federal cost to support Social Security? There are three features that reduce total benefits paid:
- The flat benefit rate will increase much more slowly than the current version – this is the primary source of savings. (Explanation: current law says that the benefit amount paid to new retirees will increase in future years, based on expected wage advances. Heritage plans to use a different formula to advance the flat benefit rate more slowly.)
- Means testing reduces benefits for about 9% of the population above retirement age; it eliminates payouts altogether for 3.5% – according to Heritage.
- Retirement age advancement means that seniors must work longer, so that the proportion of working age people to elderly remains somewhat the same. However, a retirement age of 68 compared to an average life span of 78 means that the retired population still grows, and the percentage of working people must continue to shrink over time. Of course, there are usually fewer 68-year-olds than 65-year-olds, due to some unexplained natural phenomenon.
I don’t see this as a guaranteed fix, unless the economy picks up and many more people are employed. Mathematically, if the percentage of people working declines and the number receiving benefits increases, without tax rate increases, Social Security must eventually go into the red again. But it appears this will slow down the decline. It’s the best plan I’ve seen to date.
I believe the means testing ranges are too high – of course, congress could adjust them. I’d go with $50,000 to $80,000 for singles, $100,000 to $140,000 for married couples.
Now for the Ryan Plan:
- Workers over 55 and those already retired would see no change.
- The key feature of Ryan’s plan is an option workers will have to invest part of their payroll taxes into personal savings accounts. These funds would be managed by the U.S. government. These accounts would allow workers to build a significant nest egg for retirement that far exceeds what the current program can provide. Each account will be the property of the individual, and fully inheritable, which will allow workers to pass on any remaining balances in their accounts to their descendants.
- Personal savings accounts funds will be guaranteed by the U.S. government.
- In the traditional Social Security component of the plan, there will be enhanced benefits for lower income retirees. All qualified retirees will receive at least 120% of the poverty level amount.
- Retirement ages will advance, as will those under the Heritage Plan.
- A different method of computing initial benefit amounts for new retirees will reduce those amounts over time, with respect to the current system. In other words, new retirees who have paid more into the system may receive lower benefits.
Strangely, there is no provision for means testing in the Ryan Plan.
Overall, I rate the Heritage Plan as more effective than the Ryan plan in solving the long term sustainability of Social Security.