Tom Donelson, Project Director, Americas Majority Foundation & Frontiers of Freedom Senior Fellow
Clara Del Villar, Director of Retirement Readiness, 60 Plus Foundation
JD Johannes, VCreek/AMG
OUTINE OF OUR FINDINGS
Few years back we reviewed the coming retirement as many Americans are facing a retirement crisis including 35% of working Republicans over the age of 50. A poll commissioned by the Transamerica Center for Retirement Studies and by Harris Poll found that 30% percent of Baby Boomers (age 55-73) have less than $100,000 in retirement savings and 45% percent of Generation X (age 41- 54) have less than $100,000 in retirement savings.
There is rich data on emerging trends of retirement preparation however most polls about retirement savings and readiness do not ask questions about partisan political identification and ideological world view.
This project was designed to illuminate how a retirement crisis could manifest and affect elections.
We used three separate polling firms—Cygnal, Evolving Strategies, VCreek/AMG.
Our pollsters found similar trends that match other public polling: 48% overall of people retired and those still working age 50+ had retirement nest eggs under $100K.
Nearly a third of workers retired due to factors outside of their control. This has an impact on their retirement nest eggs, if they were unable to continue working to reach their savings goals. Nearly half of people surveyed confirm they were living comfortably and only 14% viewed themselves as struggling but the real question centers on 39% of those “getting by.”
How many of this group is one major illness away from “getting by” to “struggling” and how do they define a “safety net”? We will examine this more closely in the Political Impact section.
POLITICAL IMPACT
Nearly fifty percent of all working as well as retired voters age 50+ have less than $100,000 saved for retirement. The demographic group least prepared for retirement is the base of the Trump/Conservative coalition: Middle Class, skilled workers. Republicans without a college degree account for 73% of Republican workers age 50+ who have saved less than $100,000. For workers with some college or who completed a trade education the average is $51,000 and only $36,000 for High School graduates. Average retirement savings for a 50+ college graduate is $154,000. (Which is hardly a robust nest egg.)
In 2016, only 17% of workers had an employer sponsored pension plan so in the last three decades, retirement shifted from employer obligation to worker responsibility. To make up for this preparation gap many plan on working in retirement. Transamerica finds that 57% of people with some college or less plan on working in retirement. But if the economy slows down or slips into a recession, it is probable that even fewer people will be able to stay on the job longer or find supplemental retirement work.
A future economic downtown would also likely cause a marked decline in the size of retirement nest eggs.
The Liberals and Progressives are positioning themselves to take advantage of this crisis with proposals to increase Social Security Payments funded by a tax increases and allowing workers over the age of 50 to “buy in” to Medicare for health insurance. Both of these proposals are popular even with voters who identify as Republican.
Across the three separate polling firms commissioned for this project there were several critical trends:
• Strong relationship between education and retirement preparation.
• Significant share of Republicans support increased Social Security benefits paid for by tax increases on the rich.
• Significant percentage of Republicans think individual workers should have less responsibility for their retirement than the current system
*Large share of Republicans support expanded Medicare Benefits from “Buy In” to “No out of Pocket Expenses.”
*The growing “divide that explains American politics” also illuminates this retirement crisis. For many higher income college educated voters, there is no retirement crisis.
*The Trump/Conservative coalition whose significant base of support are people who did not graduate from college –are open to Liberal/Progressive ideas to resolve the retirement crisis.
VCreek asked all respondents “What do you believe is the most important factor making it difficult for Americans to prepare for retirement?
There is a strong impression among voters that wages and salaries have not kept up and that they are just treading water financially.
Debt, particularly student loan debt, and the costs of healthcare and health insurance, which rises faster than inflation, take a huge portion of workers earnings. Among voters age 50+, health care is a major expense, and they are looking for a solution.
VCreek asked “Who SHOULD bear the most responsibility for a person’s retirement? The individual worker? Their employer? The Government? Or a mix of all three?”
The Mix of All Three ranking was so high should not be surprising as it reflects reality. Social Security is designed to cover around 35% of a worker’s average lifetime earnings.
Of the 38% of Republicans who indicated “Mix of all three,” 78% think individual workers should be responsible for only 50% OR LESS of their retirement.
These results show that a sizeable portion of Republicans over the age of 50 are open to tax increases to fund larger Social Security payments and think that Government and employers should contribute a larger share to a worker’s retirement income and savings.
NEXT STEPS
The challenge for Republicans is to protect their base among older voters, while designing a strategy that appeals to voters age 18 to 49 and college graduates.
Younger voters are facing their own financial distress with student loan debt that could slow down their accumulation of wealth for retirement.
For older voters, conservatives are lacking policy solutions that focus on looming challenges to retirement savings and health care risks. Fortunately, 401K legislation (RESA, now called Secure Act) initiated last year is back on track with the most significant and pragmatic changes to enhance retirement plans since 2006.
In addition to addressing social security issues, conservatives need to emphasize economic growth not only as a key for full employment but as an absolute necessity for maintaining and increasing retirement savings.
The number of voters willing to increase taxes on the wealthy as a solution to shore up and even increase Social Security benefits is something conservatives must realize.
Seniors will not allow their own benefits to decline in any future budget crunch. They feel entitled to the benefits of both Social Security and Medicare because they have been contributing to the system.
The current base of the Conservative Coalition is the hard-working Middle class and many of them are facing a retirement crisis including 35% of working Republicans over the age of 50 who are likely to face an income shortfall in retirement. These are the people most likely to have to stop working younger due to health reasons and most likely to depend on Social Security for retirement income.
Cutting Social Security or delaying payment of full retirement benefits hits the base of the Conservative Coalition very hard. In our survey among Senior voters, a third of Republicans along with two thirds of independents supported taxing the wealthy to ensure Social Security solvency and even add additional benefits.1
To understand the retirement crisis, it helps to look at how it plays out at the individual level. A 55-year-old currently making $50,000 year could expect to receive $1,090 a month if they started taking Social Security at age 62 or $1,600 a month if they waited to age 67. If this person has $100,000 saved by age 67 and expects to live to 80, they can reasonably plan to draw $8773 in monthly income from their retirement savings for an annual income of about $30,000 (before taxes) if they can wait till age 67 to draw Social Security.
If this same person has to retire at due to a health problem at 62 and has $85,000 saved, their monthly income from Social Security and savings drops to $1,678 a month or $20,000 a year.
Polling by VCreek/AMG has found that more than 40% of retirees with savings of less than $100,000 retired because of a health problem or downsizing.
These illustrations could easily apply to 35% of Republicans over the age of 50. The impact of the retirement crisis could dramatically realign the electorate as a significant share of those who would be hit the hardest are members of the current Trump/Conservative coalition.
The Social Security Trustees currently estimate the Trust Fund will be depleted in 2032 which will likely necessitate a cut in benefits. The Democrats have already proposed their plan the Social Security 2100 act which includes phrasing out the cap on Social Security taxes and increased rates to fund increased payments to retirees during the first Trump administration . This proposal has been renewed by Republican Bernie Morano and Democratic Elizabeth Warren but at a lower rate than originally proposed in the first Trump administration.
The Republican Study Committee advocated a plan that would not raise taxes and extend the life of Social Security by realigning “full retirement age to account for increases in life expectancy since the program’s creation” by gradually increasing “the normal retirement age at a rate of three months per year until it reaches 69 for those reaching age 62 in 2030.” The Republican plan would also make adjustments to encourage Seniors to stay in the workforce longer and increase payments for workers who had lower life-time earnings.
Both the Democrat and Republican plans are actuarily sound. The Republican plan, though accurate in terms of life expectancy, does not account for working longevity. People may be living longer, but their productive working years have not increased at the same rate of life expectancy. The people most likely to need Social Security earlier because health problems reduce their capacity for work are more likely to have lower savings, lower life-time earnings and have engaged in blue collar or skilled trades work—the types of workers who are currently forming the base of the Conservative Coalition.
The Democrat plan with its tax increases does not take into the account the secondary effect that taxes have on the economy by reducing monetary elasticity. Historically, higher tax rates coincide with more frequent recessions. Recessions and their associated drops in the stock market wipe out the retirement savings of the middle and working classes and in terms of jobs tend hit the working classes that form the base of Conservative Coalition the hardest.
The main tax paid by working Americans earning less than $200,000 a year is the Social Security Payroll Tax. Among all the taxes, Social Security is the most accepted by the voting public because they understand the direct benefit they will receive. Everyone pays into the program, and everyone knows several people who benefit from it which is why it is regarded as a fair tax.
The goal is this research project to start a conversation among conservatives about the framework of a plan that is actuarily sound, accounts for the realities of work expectancy and the rates at which older workers retire due to health reasons, reduces taxes on the middle class, extends the life of the Social Security Trust Fund into the next century and does not drag on the economy by increasing the overall tax burden and its associated effects on monetary elasticity and uses supply side economics to expand multifactor productivity.
We believe we have found a middle ground to start the conversation. If you lower social security tax by 1 percentage point, the break-even point to be revenue neutral is raising the cap to $168,000 and if you eliminate the cap totally, you will add $88 billion dollar per year and close to $1.7 trillion dollars of revenue to Social Security over 20 years. This will add years to trust fund.
The Trump philosophy begins with reducing tax rates across the board, reducing regulations and reducing the impact of the administrative state. It is not just the amount of money sloshing around in the economy that creates growth, but the freedom to do something productive with the money free from regulations.
Our proposal is simple, reduce the tax burdens upon the Middle Class by cutting the payroll tax rate while extending its reach and allowing for more production in the economy through other income tax and corporate tax reforms, cutting regulations and reducing unnecessary spending on agencies and programs that have outlived their usefulness. The goal is to provide a stable safety net for those in need while allowing for opportunities to succeed.
Our plan is a small first step toward the policy deliberations needed to build coalition to extend Social Security and expand economic productivity.
Conclusion
The current Republican Social Security plan proposed in the first Trump adminstration though actuarily sound does not match the reality of older workers and is unlikely to be politically feasible. The current base of the Conservative Coalition is made up of workers who are the least prepared for retirement and most likely to need Social Security for retirement income due to being unable to continue working due to a health problem.
Large shares of Republican and independent voters are very open to an increase in Social Security taxes, and the program is extremely popular. This project is a start to develop a conversation around how to treat Social Security Payroll taxes as part of larger conservative plan for economic growth that addresses regulation, discretionary spending, business taxes and income taxes.
Tax Foundation John Olson concluded, “Payroll taxes are a highly effective way to raise revenue, for three main reasons: First of all, the payroll tax base is very broad. Payroll taxes apply to all wages and salaries up to a cap, which nearly 83% of wages and salaries fall under. Furthermore, unlike the personal income tax, payroll taxes do not include dozens of deductions, exemptions, and credits that narrow the tax base. This means that payroll taxes can raise a large amount of revenue at a relatively low rate, to the tune of over $1 trillion a year…Second, due to the inelasticity of the supply of labor, payroll taxes generate a comparatively small amount of deadweight loss compared to other forms of taxation. This means that payroll taxes lead to a relatively small amount of economic inefficiency, since the quantity of labor in the market does not dramatically decline as a result. Overall, payroll taxes do much less economic harm than taxes on capital. This is evidenced by our analysis of Senator Bernie Sanders’ tax proposals, whose payroll tax rate increase raised nearly four times as much revenue as his proposed increases on capital gains and dividends, but with a fourth less of the impact on GDP…Finally, payroll taxes are very hard to evade. According to the IRS’ criminal enforcement data, investigations into payroll tax abuse make up less than 3 percent of all tax investigations, despite payroll taxes generating about a third of all federal tax revenue.”11
Olson view is that overall burden of eliminating the tax cap would have less of damaging impact upon the economy but there is still an impact to consider. The benefit of lower the tax rate would be a Middle-Class tax cut that can be seen by the average voters and present an alternative to the Democrat plan that would include raising the payroll tax in their proposal in the first Truman administration and less than Morano-Warren proposal that leaves the payroll tax at present level.
Republicans can now not only present a fair tax that would be no longer regressive but also as Olson noted, “Furthermore, this additional revenue could be used to lower marginal rates on corporate and personal income, growing both wages and GDP by 2.2%, while still raising revenue.”12 Republicans can present a plan that is growth oriented while lower taxes upon all Americans. There would be win- win.
The other part is what we already mention that we need to review both spending and regulations. Trump administration efforts to deregulate the economy is showing some benefit and is pro-growth by reducing the government impact upon the economy. On the budget side, no one can disagree that spending has substantially increased and there is very little stomach at this point to reform the entitlement program. Democrats are not only looking to expand entitlements including Medicare for all that would expand the entitlement program to almost all Americans, so first battle may just be keeping the welfare state from exploding. The best strategy may be to review spending either by repeating what Republicans forced Obama to accept sequester to reduce the growth of spending or simply start reviewing departments and look for either elimination or cut back just as Department of Energy, especially since the fracking revolution has made the Department obsolete. Any serious budget cuts and entitlements reform will have to wait until 2029 if Republican keep the White House and get back control of the Congress.
As for the entitlement, no reform will come until there is a bipartisan agreement and many Republicans are no more willing to cut entitlements than Independents or Democrats. The present Democratic Party is the socialist party and after the 2026 midterms, the push to the left will speed up. The GOP need a plan to reform social security. The battle over tariffs can still have a negative impact on the economy and will Trump use them to liberalize trade, or will he lead to and protectionist regime? The former will lead to a more liberalized trading system, but the latter can have some negative impact. And in 2026, tariffs were not popular and Democrats used tariffs as the tax that raised prices.
I wrote about past trade policies, “Throughout our history, it was not uncommon for American presidents to seek temporary economic rehabilitation against other countries to open up trade opportunities for American goods and services. Both President Reagan and President George H.W. Bush did this, putting “tariffs” on selected goods and industries from other countries. But their goal was to liberalize trade not to restrict it, and both presidents made sure these steps were temporary, and used as a means to open up trade and reduce barriers to American goods.”13 Free trade Presidents have been willing to use tariffs to open up trade.
Republicans are the Party of main street and Republicans without a college degree account for 73% of Republican workers age 50+ who have saved less than $100,000.14 These Republicans will not support any reductions in social security and with 25% of Americans retire due to health reason and another 8% retired due to downsizing, it will be difficult to convince Americans to support an increase in retirement age to collect benefits even if it is over decades.
Lowering the social security by 1 percentage point will give middle class taxpayers an additional tax cuts and contrast to the Democrat plans which means a massive tax increase for the middle class. Social Security Act of 2100 proposed in the first Trump term has already plugged in 2.4% additional percentage points for the Middle Class. When Colorado and Vermont calculated the cost of statewide Medicare for All, the cost to the middle class was an additional 10% to 11.5% additional payroll tax on top what they are already paying. It was estimated that sales tax would increase from 6% to 39% to cover proposed Medicare for All in Florida. 15 Democrats expansion of social security and Medicare for All means a massive tax increase for the Middle Class, a point that Bernie Sanders acknowledged in the Democratic debate held June 27, 2019.
Republicans can base an economic reform on the following principles:
1. Lower the social security tax by 1% and and eliminate the cap. Eliminating the cap totally would add an additional 88 billion dollars per year of extra revenues.
2. Lower corporation and marginal tax rates to encourage economic growth.
3. Continue to reform regulations to reduce the cost upon individuals and businesses.
4. Review each department for cuts and consider a sequester on the Federal budget to begin controlling spending.
5. Review some of the ideas that have been generated by Senator Cassidy who has called for 1.5 trillion-dollar investment fund separate from social security and help stabilized Social Security trust funds.
6. Trump funds which opens a IRA for children born 2025-2026 which begins to help a younger generation save for their future.
This proposal allows for the Middle Class to receive a tax cuts while maintaining the sustainability of the social security system. A growth-oriented tax plan combining it with Regulations reforms and budget restraints will allow growth to continue and redefine Supply side economics to encompass more than just taxes. As for any serious reforms, it will have to wait until 2029 only if GOP wins the 2028 elections. As for social security, would the left accept a lower rate combined with eliminating the cap without a Medicare for all included? I doubt it but the GOP at least can begin the debate.
Endnotes:
1. Politics of Retirement a Report on Voters Age 50 + by Tom Donelson, JD Johannes, and Clara Del Villar, Americas Majority Foundation
2. The Balance, History of Recession in the US https://www.thebalance.com/the-history-of-recessions-in-the-united-states-3306011
3. Balance History of Recession in the US https://www.thebalance.com/the-history-of-recessions-in-the-united-states-3306011, JFK and the Reagan Revolution, A Secret History of American Prosperity by Larry Kudlow and Brian Domitrovic
4. Balance History of Recession in the US https://www.thebalance.com/the-history-of-recessions-in-the-united-states-3306011, JFK and the Reagan Revolution, A Secret History of American Prosperity by Larry Kudlow and Brian Domitrovic
5. New Report Shows the Burdens of Payroll and Income Taxes by Robert Bellfiore March 26, 2016, Tax Foundation
6. The Decline of the Investor Class and Rise of Minority Entrepreneur by Tom Donelson and JD Johannes Produced by Americas Majority Foundation http://amermaj.org/pdf/Investor-Minority.pdf
7. “The Rise of National Populism and Democratic Socialism what Our Response should be” by Tom Donelson, Post Hill Press
8. Politics of Retirement a Report on Voters Age 50 + by Tom Donelson, JD Johannes, and Clara Del Villar, Americas Majority Foundation
9. Politics of Retirement a Report on Voters Age 50 + by Tom Donelson, JD Johannes, and Clara Del Villar, Americas Majority Foundation
10. Separating Economics Facts from Fiction on the Trump Tax Cuts October 3rd. 2018
11. Payroll taxes good, bad and solution by John Olson Tax Foundation August 2, 2016
12. Payroll taxes good, bad and solution by John Olson Tax Foundation August 2, 2016
13. “The Rise of National Populism and Democratic Socialism what Our Response should be” by Tom Donelson, Post Hill Press
14. Politics of Retirement a Report on Voters Age 50 + by Tom Donelson, JD Johannes, and Clara Del Villar, Americas Majority Foundation
15. Some State Officials Want to Adopt Bernie-Style Health Care, What would it cost by Nina Owcharenko Schaefer November 5, 2018 Heritage Foundation