The Rich Don't Need That Retirement Check
Andrew G. Biggs is a senior fellow at the American Enterprise Institute.
Federal spending on retirement benefits is running riot. Social Security swallows nearly a quarter of the federal budget and is less than a decade away from insolvency. The government loses hundreds of billions per year on tax breaks for retirement savings.
And who gets most of this money? It isn’t the most vulnerable seniors. It’s the richest.
The wealthiest fifth of households receives 38 percent of taxpayer dollars spent on Social Security and retirement tax preferences, more than the bottom 60 percent. But Congress can solve the problem by capping federal retirement benefits at middle-class levels. The change would eliminate most of Social Security’s funding gap, reduce federal deficits and improve economic growth — all without threatening low- and middle-income seniors.
Though it is intended to be a safety-net program, Social Security drives the bulk of this inequality. The highest-earning quintile of Americans born in the 1960s will receive $33,000 in annual Social Security benefits, compared with just $13,000 for the lowest. Affluent Americans also collect more checks in their lifetimes. On average, a wealthy 62-year-old can expect to live to be roughly 88, while the poorest Americans the same age live only to around 80. Since top earners collect more and live longer, they take 33 percent of total Social Security benefits, leaving a mere 8 percent for the lowest-earning quintile.
The federal tax preference for retirement savings is even more skewed. Contributions to retirement plans are largely exempt from taxes on dividends and capital gains, and those exclusions amount to an eye-popping $300 billion in forgone tax revenue annually. But the highest-income quintile keeps 58 percent of those unpaid taxes, leaving a meager 17 percent for the bottom three quintiles combined.
This disparity exists for two reasons. First, high-income Americans simply save more for retirement. Second, couples with incomes below $98,900 already pay no dividend and capital gains taxes. The retirement tax preference exempts them from taxes they wouldn’t have paid anyway, benefiting only the rich.
These federal benefits are expensive, but it’s not clear what they buy. They are ostensibly to promote financial security and encourage saving for retirement. But researchers find that households, particularly wealthier ones, offset higher Social Security benefits by reducing their personal retirement savings. Absent these extensive government benefits, top earners would save more on their own. Tax breaks also do little to grow savings. High earners shift their existing savings from taxable accounts to tax-preferred retirement plans rather than actually setting aside more money.
To address the inequality, Congress could cap both Social Security benefits and retirement tax preferences at the level received by middle-income households. For Social Security, this would limit annual benefits to $24,000 per person — the average benefit paid to the middle-income quintile — fixing roughly 60 percent of Social Security’s long-term deficit. Benefits for low earners wouldn’t be cut, and a retired couple could still receive Social Security benefits equal to 2.5 times the federal poverty threshold. Moreover, reducing Social Security benefits for higher earners would spur them to work and save more, boosting economic growth.
Capping tax breaks at middle-class levels, meanwhile, would reduce the cost of the exemptions by 62 percent and cut the annual budget deficit by roughly 14 percent. If lawmakers were concerned that cutting the tax preference would discourage employers from offering retirement plans, Congress could establish an automatic federal retirement plan for employees lacking coverage. A similar British policy doubled private-sector retirement plan participation from 34 to 74 percent from 2012 to 2019.
It’s true that higher-income workers pay substantially more payroll and income taxes than other workers, and these taxes fund federal retirement benefits. But given the multitrillion-dollar deficits facing Social Security and the total federal budget, the question is whether taxpayers should continue subsidizing retirement incomes far above what seniors need to prevent destitution.
With the nation’s financial health on the line, federal retirement programs should prevent old-age poverty and encourage saving — not bankroll retirement lifestyles that affluent Americans can pay for themselves.