In the aftermath of the great recession, a debate over the American national pension system, known as social security, is heating up. This debate raises fundamental questions about what kind of society America wishes to be. The debate so far has been between those deficit busters who say social security must be trimmed back to reduce government indebtedness, and others who want to maintain it as is.



But the New America Foundation just released a study (which I authored) that proposes a different approach: doubling the current social security payout, and making it a true national retirement system. Creating a more robust system of "social security plus" would be good not onlyfor America's retirees, but also for the macro-economy at large.



Here's the dilemma the US faces. Since the second world war, retirement has been conceived as a "three-legged stool", with the three legs being social security, pensions and personal savings focused on home ownership. Today, though, most private sector employers have quit providing pensions, and state and local government public pensions are drastically underfunded.



In addition, a collapsed housing and stockmarket, combined with inequality that was growing even before the recession, have drastically reduced Americans' personal savings. In short, the "retirement stool" is no longer stable and secure – and suddenly, social security, which always has been viewed as a supplement to private savings, is the only leg left for millions of Americans.



Studies show that people in the bottom two income quartiles depend on social security for 84% of their retirement income, and even the second richest quartile depends on social security for 55% of its retirement income. Only the richest 25% of Americans don't rely heavily on social security.



But the real problem with social security is not, as its critics say, that it is underfunded. As Dean Baker points out in a column for the Huffington Post, contrary to gloomy predictions, the programme is on solid financial footing, with the congressional budget office projecting that social security can pay all scheduled benefits out of its own tax revenue stream through at least 2037.



The bigger problem is that social security's payout is so meagre, and this is problematic since it has been thrust into this new role as a de facto national retirement plan. Currently, the level of payout replaces only about 33-40% of a worker's average wage from the year prior to retirement (compared to Germany where it replaces 70%). That is simply not enough money to live on when it is your primary – perhaps your only – source of retirement income.



Doubling social security's individual payout would cost about $650bn annually for the 51 million Americans who receive benefits. Here are some ways to pay for it.



First, lift social security's payroll cap that favours the wealthy. Presently, social security only taxes wages up to $106,800 a year, and any income earned above that is not taxed. The net result is that poor, middle-class, and even moderately upper middle-class, Americans are taxed 12.4% (split between employee and employer) on 100% of their income, but the wealthy pay a much lower percentage. Millionaire bankers effectively pay a paltry 1.2%.



Making all income levels pay the same percentage – that's how Medicare works – is popular with Americans and would raise about $377bn.



Second, with all Americans receiving social security plus, employer-based pensions would be redundant, so businesses would no longer need to receive the substantial federal deductions they currently accrue for providing employees' retirement plans. These deductions total a whopping $126bn annually.



Those two alone would provide three-fourths of the revenue needed to double social security's payout. Other possible revenue streams exist, such as reducing or eliminating other unfair deductions in the tax code that benefit higher income people. We could also implement this in stages, targeting first those who are most in need, or devoting an estate tax to it or cutting the bloated defence budget. We also could allow active seniors who have not yet reached full retirement age to take a half pension and work half-time without losing their right to a full pension upon retirement.



An expansion of social security – one of the most successful and popular social programmes in American history, currently celebrating its 75th year – would be good for the macro-economy as well, because it would keep money in retirees' pockets and stimulate consumer demand. It would act as an "automatic stabiliser" during economic downturns, and make benefits portable when changing from one job to another. It also would help American businesses trying to compete with foreign companies that don't provide pensions to their employees, since those countries already have generous national retirement plans. And it would be broadly fair, since even those higher-income Americans who are losing their tax deductions would see part of it returned to them in the form of a greater social security payout.



In short, social security plus would provide a stable, secure retirement for every American and contribute greatly toward a solid foundation from which to build a strong and vibrant 21st-century US economy.

