Against this backdrop, it's a mistake to look at Social Security in isolation. We have to look at our overall retirement security "policy." And when we do that, it's obvious that we're throwing billions of dollars away.

That money is being wasted on tax subsidies for "private" retirement accounts such as 401(k)s and IRAs. In 2012, these subsidies added up to $199 billion, or about 1.3 percent of GDP. (See Toder, Harris, and Lim, Table 5.) The motivation to protect these accounts isn't totally crazy. Since we want people to save for retirement, we offer tax breaks for doing so.



More Tax Breaks, But Not More Savings

There are two major problems with these subsidies.

The first is that they go overwhelmingly to people who don't need them -- like my wife and me. As two university professors living in Western Massachusetts, where the cost of living is low, we make more than we need to support our lifestyle. We max out our defined contribution plans every year, and because we're in a relatively high tax bracket (28%, I think), we save thousands of dollars a year on our taxes. This is the problem with most subsidies that are delivered as tax deductions. Their cash value depends on the amount you can deduct and on your marginal tax rate. In this case, fully 80 percent of retirement savings tax subsidies goes to households in the top income quintile. (See Toder, Harris, and Lim, Table 5.)

The second problem is that these tax incentives don't work. They don't cause people to save more. In my case, the amount we save is just our income minus our consumption, and our consumption isn't affected by the tax code. If there were no tax subsidy, we would save the same amount and just pay more in taxes. And it's not just us. A recent and widely discussed paper by Raj Chetty, John Friedman, Soren Leth-Petersen, Torben Heien Nielsen, and Tore Olsen looked at what happened when the Danish government reduced tax subsidies for retirement savings by rich people. The short answer is that decreases in retirement savings were almost perfectly matched by increases in non-retirement savings. The overall effect, they estimate, is that for every dollar in tax subsidies, total savings go up by one cent. The other ninety-nine cents is just a handout to people who would have saved anyway.

In White House Burning, we did not propose eliminating these tax subsidies because we did not want to remove incentives for people to save more. Since it turns out that those incentives don't work, I now say, get rid of them.

The Right Retirement Policy

The single most important step we can take toward improving retirement security for all Americans is eliminating tax preferences for private retirement accounts and earmarking the resulting tax revenue for the Social Security trust funds. There would have to be some transition period for existing defined benefit pension plans, but once phased in, this would increase tax revenues by about 1.3 percent of GDP.