For years, politicians have known that the existing structure of the Social Security Administration is unsustainable. A longer life span — combined with the population bubble of the aging Baby Boomers — has placed pressure on available funds. Projections suggest that Social Security will run out of funds completely by 2030.
That’s what motivated Ali Shourideh, Assistant Professor of Economics, Frank A. and Helen E. Risch Faculty Development Professor of Business, and his co-author to pursue a new model that would reform retirement financing and make it more sustainable. In his paper “Retirement Financing: An Optimal Reform Approach,” Shourideh sought to strike a balance that would appeal to policymakers across the political spectrum.
“Politically, the reason these policies are not materializing is because they create winners and losers,” said Shourideh. Existing proposals include removing the cap on payroll taxes for the wealthy (favored by the left) and privatizing Social Security so people can invest money on their own (favored by the right). But neither idea came to fruition.
Shourideh’s proposal strives for neutrality by creating progressive subsidies on savings and focusing on annuities.
The basic principle is that living longer is costly. In addition, longer life spans correlate with higher wealth. Shourideh’s paper suggests offering subsidies to people while they are young and still working to encourage them to save money for retirement. Higher subsidies would be offered to people with the least amount of savings, allowing them to contribute to their own retirement without dipping into resources needed to make ends meet while they are young.
The paper suggests that the model is easier than reforming tax laws because it simply adjusts the existing structure of Social Security: Instead of tying benefits to earnings, it ties them to savings. But there is no need to build a new administration.
“This is the easiest and most politically expedient way” to reform retirement, Shourideh says. ―