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Elizabeth Warren’s Social Security expansion plan, explained

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Social Security is the old warhorse of the American welfare state. Founded in the 1930s, it’s still the government’s biggest, most expensive program. It does more than any other single program to lift households out of poverty and it’s probably the most popular aspect of the social safety net. It’s also been out of the political headlines in recent years, as once-raging debates about the program’s long-time sustainability have taken a back seat to clashes about health care, climate change, and various culture war topics.

But you can’t be the candidate who brags about having a plan for everything without a plan for Social Security, and Sen. Elizabeth Warren is out today with a dramatic proposal to expand benefits and make the tax base that funds the program sharply more progressive.

Warren’s proposal, which would levy a payroll tax on income over $250,000 and on income from investments in order to boost retirees’ average benefits by about $200 a month, doesn’t come out of nowhere. The Massachusetts lawmaker has been a proponent of expanding Social Security benefits since her first year in the Senate, and the idea that the government needs to do more to account for households’ basic financial needs has been integral to her thinking since long before that.

But the plan reflects both how far the contours of the national political dialogue of Social Security have transformed from where they were five to ten years ago, and raises some basic questions about how (if at all) Democrats can cut into Trump’s lead with older voters — and whether they ought to be trying. But more than that, it illustrates an important way that Warren’s view of the basic structure of economic policy differs from what we saw from Bill Clinton or Barack Obama — one that’s much less interested in targeting resources on the neediest and much more interested in the expansive possibilities that are unlocked by truly soaking the rich.

The basics of Social Security

There are a lot of ins-and-outs to Social Security, but the basic contour of the program is that it’s funded by a flat-rate payroll tax, half of which is paid by employees and half of which is paid by employers. The tax applies exclusively to the first $132,900 of a worker’s income and it applies exclusively to wage and salary income, so income from investments is excluded.

Consequently, someone really struggling to get by pays an identical tax rate to a person comfortably earning in the low six figures — and an affluent person will generally pay a lower rate than that, due to both the tax cap and the exclusion of investment income.

At the same time, Social Security benefits are in most cases (there are some small categories like orphans for whom the formula is different) a function of how much tax you paid during your working years. The formula works so that benefits don’t increase fully proportionally with taxes paid, so the program does wind up being mildly redistributive. But Social Security as a whole is much less redistributive than the bulk of the federal government. Rather than collecting highly progressive income taxes and then targeting the benefits at the neediest, Social Security collects from a broad and not-so-progressive tax base and then provides benefits to almost everyone.

In wonkspeak, this is “social insurance” that provides everyone with security against the risk of their retirement savings evaporating due to bad luck or unexpectedly long lifespan with a small amount of redistribution tacked on.

But the program is also not actuarially sound. A combination of growing life expectancy, slowing population growth, and slowing wage growth have created a situation where the program is scheduled to run out of money in 2035. In principle, the federal government could just keep paying benefits. The military doesn’t have a dedicated source of tax revenue or a special trust fund, but Congress just keeps authorizing higher and higher defense budgets because that’s what they want to do. But under current law, when Social Security’s trust fund runs dry the government is supposed to sharply cut benefits to keep things on track.

Warren’s plan aims to address solvency, expand benefits, and make Social Security much more redistributive.

The Warren Plan: More Social Security for everyone

The centerpiece of Warren’s plan is a proposal to increase Social Security benefits for all current and future retirees by about $200 per month — a sizable increase from the current average check of about $1,400 or so per month.

Warren also wants to further address several longstanding progressive concerns about Social Security, including the idea that it unfairly treats the poorest workers, the disabled, and people (primarily women) who spent many of their prime working years out of the paid workforce shouldering family care responsibilities. Those groups would all get additional benefits enhancements over and above the basic large increase in benefits that Warren is promising.

Obviously the idea of making benefits more generous across the board, paired with additional special enhancements, runs contrary to the notion that the big problem with Social Security is looming insolvency.

To address that, Warren is proposing a rather hefty tax increase on the top 2 percent or so of the population.

  • First, she wants to impose a 14.8 percent payroll tax (split evenly between workers and employers) on salaries above $250,000 a year. This would create a slightly odd program structure where the payroll tax phases out at $132,900 and then pops back into existence at $250,000. But the goal in creating that doughnut hole structure is to target the tax increase at the top 2 percent of American earners.
  • Second, she wants to also impose a 14.8 percent tax on the investment income of people earning over $250,000.

In combination, these proposals would change Social Security taxes from something that’s not really a big deal for truly wealthy Americans into one that is. And paired with the big and extremely broad increase in benefits, it also turns Social Security into a serious vehicle for redistribution — taking from the rich and giving broadly to the middle class.

The shifting politics of Social Security

Warren’s proposal on this is distinctive, but it also reflects a larger shift in the larger political dialogue around Social Security.

In the 1990s and 2000s the strong conventional wisdom around Social Security was that benefits needed to be cut — at least for the upper middle class — and the only real debate was about how to structure those cuts. In his first term, President Barack Obama repeatedly offered to cut Social Security benefits in the context of a larger deal with congressional Republicans that would also raise taxes on the rich. His demand was that cuts be “balanced” with tax increases as part of an overall deficit reduction strategy, but the basic need for cuts was a core conviction.

Then two things changed.

One is that left-of-center people became increasingly disillusioned with tax-subsidized savings accounts like 401(k) and IRAs as an approach to guaranteeing retirement security. In the 2016 cycle, Bernie Sanders proposed increasing Social Security benefits (his bill, which Kamala Harris and Cory Booker have cosponsored, offers a more modest $112/month boost and does a bit less in terms of some of Warren’s more targeted enhancements as well), Martin O’Malley proposed an even more ambitious plan to do the same, and Hillary Clinton responded with a more modest Social Security expansion plan. By June 2016, Obama was on the expansion bandwagon too. Warren, meanwhile, had been pushing broadly for expansion, though without a specific plan. Her efforts, along with those of a cohort of like-minded progressive House members, helped play an important role in ultimately killing off Obama’s interest in further pursuing the balanced cuts approach.

The other big change was Donald Trump, who shocked the world by running to the right on immigration but breaking sharply with conservative orthodoxy to oppose any cuts to Social Security and Medicare. By breaking with conservative activists on these two crucial questions, Trump helped obtain a reputation as a relatively moderate Republican — a reputation that helped him win in 2016.

The many versus the few

Of course this program, like pretty much all the other big legislative proposals Democrats are rolling out in the 2020 cycle, is relatively unlikely to be enacted.

But Warren’s Social Security pitch is a good guide to how she thinks about economic policy in general. The way both the Clinton and Obama administrations thought about the safety net was basically that tax revenue is scarce so it’s important to design programs that get the most bang for the buck in terms of helping the neediest. An across-the-board boost in Social Security benefits does not fare particularly well on this metric as a huge share of the new spending ends up going to households with average or above-average income and wealth levels.

The way Warren sees it, by contrast, is that the enormous run-up in inequality over the past 40 years creates a world in which economic resources are plentiful — they’ve just been captured by a small number of people at the very top. By taxing those people — and taxing them fairly heavily — you unlock the possibility of raising living standards for almost everyone.

Under her social security plan, the poor do end up benefitting disproportionately in the sense that an extra $200 a month is a much bigger boost to those at the bottom of the income distribution than to those at the top. But fundamentally, it’s an effort to unify the interests of low-income people with those around the median and even with college-educated professionals in the 80th or 90th percentile — against the concentrated economic power of the very rich.

This is an idea you see reflected in the design of Warren’s Social Security plan, but also her approach to student debt relief, her interest in taxing billionaires’ accumulated wealth, and her fundamental conception of the structure of political conflict. What exactly that would mean for governance relative to the continuation of the Clinton-Obama approach would inevitably depend more on political circumstances than the details of campaign proposals. But it’s a striking difference in philosophies visible not just in the details of Social Security plans but in the basic view of what’s important in economic policy.

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