The CARES Act was not designed for what the Covid-19 crisis has turned out to be. Lockdowns are lasting longer than many people anticipated back in March. A drawn-out reopening and the possibility of future lockdowns make a V-shaped recovery unlikely. That will mean many Americans will be out of work for the foreseeable future and in need of cash. Low-income workers, who tend work in the service sector and are less likely to have substantial savings, will bear the brunt of the economic pain.
Thus, more support may be needed. Options include cutting the payroll tax so that employers are more inclined to keep workers, another universal stimulus payment like the $1,200 disbursed to almost everyone in April, or extending the extra $600 payment from unemployment benefits. But several economists and a law professor have a better idea: let people borrow against their future Social Security benefits.
This could work a number of different ways. One plan by AEI scholar Andrew Biggs and Stanford economist Josh Rauh involves taking out a loan against Social Security benefits, $5,000 or $10,000 depending on what the borrower wants or needs, and then delaying when the borrower can begin to access Social Security benefits. They estimate that this would result in beneficiaries forgoing only a few months of Social Security income. Another plan by University of Pennsylvania professors Sylvain Catherine, Max Miller, and Natasha Sarin involves permanently lower benefits in exchange for taking about $2,500 or 1 percent of the value of their projected benefits today.
The relatively small reductions to benefits anticipated by both plans are modest because interest rates are at present so low. An interesting feature of both programs is that the interest rate is fixed, similar to the situation when an individual sells a long-term bond to the government, which assumes the interest rate risk.
With the low rates interest rates, either of these plans is a great deal for individuals. One purpose of Social Security is to serve as a forced saving program, which ensures that people will have retirement income one day even if they lack the discipline, foresight, or means to save. Normally that would be a reason to not touch the benefits, but these are extraordinary times. The goal of saving is not only to have money in the future, but it can finance present income shocks.
Either plan would worsen the finances of the Social Security system because it involves the payment of benefits today—if interest rates increase the Social Security Trust Fund will have less money in the future than it otherwise would have. But taking on interest rate risk will probably be cheaper than a payroll tax holiday, which would result in much less revenue coming into the system for months. The option of borrowing against future benefits may also mean more people who would have taken an early retirement to access income, will reconsider and go back to work instead.
Allowing this kind of borrowing would target Americans who need help. Borrowing against or withdrawing from a 401(k) only helps the relatively affluent who have a plan through their workplace. Universal payments are expensive and help people who don’t need it. A payroll tax holiday helps people who have a job or might be hired in the near future. These loan plans result in costs being shared between individuals and the government. Unlike an extension of unemployment bonus payments, which discourages returning to work, a loan preserves the incentive to work when it is possible.
One potential concern is whether the benefit reductions involved in these plans are politically realistic. The elderly have a great deal of political power, exercised through various lobbying groups, and there are already calls to increase Social Security benefits. Even if one of these approaches were to receive enough political support to be enacted, there could be significant political pressure later on to undo the agreement of borrowers to accept deferred or reduced benefits. But assuming such a plan is politically achievable, borrowing against future benefits could be our best option to provide many households with financial relief.
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