Hubbard suggested turning Social Security and Medicare into smaller programs that help “the least well off among us.” With smaller social-insurance programs, the government can prevent tax increases and shrink the debt burden. That, he said, would lead to broad economic growth.
As he spoke, I began seeing the arc in my mind: a young boy grows up in Central Florida reading Hayek, charts Social Security’s distortions in graduate school and eventually argues to overturn the system. Hubbard would go on to become the architect of George W. Bush’s famous tax cuts, which slashed taxation on dividends and capital gains. His views all seemed to coalesce around a fairly simple idea: the U.S. economy is better off when the government gets out of the way. Cutting the entitlement programs was an extension of this. It could free up more capital to further enable virtually everyone to contribute to the economy.Why not replace Social Security for the middle class with private savings, perhaps by expanding 401(k) accounts?
Summers’s worldview seemed to take into account more moving pieces. “It would surely be better to address long-run fiscal issues sooner rather than later,” he said. “But this needs to be done in a balanced way. The highest priority is getting the economy growing.”
... [Summers] had told me that if tax rates were so dominant in determining economic health, “it wouldn’t be the case that the economy grew fastest when top tax rates were highest.” After all, the U.S. economy did grow quite quickly in the 1950s and 1960s when top tax rates were far higher (income tax was once as high as 91 percent). Lowering taxes on the rich and cutting benefits to the middle class, he said, could also have the opposite of Hubbard’s intended effect. Ambitious middle-class people might see no point in taking risks, fearing that the fix was in and that only the rich could get richer. At some point, Summers became emotional in his defense. He told me that Social Security and Medicare were among the best things about America. They took the group of people that were most vulnerable in our society — the elderly — and made them secure. “Why would you want to get rid of that?” Summers asked rhetorically.
Here's the essential shape of 401(k) as a backbone of the retirement system:Brad Plumer: The case for expanding Social Security, not cutting it. ... a big new report (pdf) from the New America Foundation suggests that the conventional wisdom is exactly backward. Congress should be looking at ways to expand Social Security, not shrink it — particularly at a time when traditional corporate pensions are disappearing, and 401(k)s have proved fairly risky.
— Poor people get absolutely nothing.
— Wealthy people who would have had large savings anyway get a nice tax cut that offers no meaningful incentive effect.
— For people in the middle, the quantity of subsidy you receive is linked to the marginal tax rate you pay—in other words, it's inverse to need.
— A small minority of middle-class people manage to file the paperwork to save an adequate amount and then select a prudent low-fee, broadly diversified fund as their savings vehicle.
— Most middle-class savers end up either undersaving, overtrading, investing in excessively high-fee vehicles or some combination of the three.
— A small number of highly compensated folks now have lucrative careers offering bad investment products to a middle-class mass market based on their ability to swindle people.
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