Once again, the Trump administration is floating possible changes for Social Security benefits, employer taxes and withholding holding – all with a lean toward more private investment.
The idea is to follow an Australia approach to its retirement system. At heart, it is a mandatory savings program that requires employers to contribute 12% of a worker’s ordinary earnings into tax-favored retirement accounts managed largely by private funds.
Even the suggestion of Social Security changes can create instant political problems, and this unfinished thought will probably undergo lots of review before it moves towards any kind of practical proposal.
The existence of such an idea came on the launch of the new Trump Accounts program that offers eligible children a $1,000 tax-advantaged, government deposit at birth between 2025 and 2028, and up to $5,000 in annual contributions from philanthropists — all to be managed by private companies.
Naturally, the early list of such philanthropists, including $6.25 billion from Michael and Susan Dell and Dell Computers, mesh nicely with corporate donors to Trump political campaigns.
Indeed, Trump described the thinking as similar to that behind the Trump Accounts – only for “grownups as opposed to children. ” Trump frequently floats ideas before they have been vetted, to gauge any public support or criticism.
While seniors don’t get rich from Social Security into which they have paid for years, it is steady, monthly, predictable income that along with Medicaid can allow them or disabled recipients to gauge how much more they may need to earn through personal savings, investments, property sales or the like. It is the steadiness that since the FDR years has provided an economic and political anchor. With population shifts and various bureaucratic shuffling, that has become less than sure without specific action.
Of course, there are more direct ways to support a Social Security system that experts constantly warn will run out of money, including taxes or raising the age of eligibility. But those involve significant political problems, and the strong preference among Trump and Republicans in Congress has been to look to private individual investment plans rather than government supports.
The most recent report by Social Security’s trustees said they will need new support to maintain full benefits by the end of 2032. In a radio broadcast, House Speaker Mike Johnson said that “entitlement programs like Medicare, Medicaid, and things like Social Security” need to be “adjusted and fixed,” euphemistic language for benefit cuts.
Someone should remind the Speaker that we all pay into our Social Security; there is nothing “entitled” about it.
What We Know
Trump says he is looking “very strongly” at an Australia-style retirement system, “Taking that, making it sharper,” without any detail. He suggested the investment model could put people in “much better shape” by retirement age than relying on Social Security.
It would be interesting to see how an America that cannot agree on compulsory vaccinations for the health of workers or its children would react to a required government savings program.
Australia’s retirement system is built around “superannuation,” a mandatory savings program that requires employers to contribute 12% of a worker’s regular earnings into a privately managed fund. The current tax rate for Social Security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total.
The Australian retirement system includes a government-managed Age Pension which, like Social Security is based on taxes and paid to seniors and the disabled, this mandatory “superannuation” planning account that requires a 9 % (soon to be 12%) employer payment per worker, and voluntary savings by individuals. The pension is needs-based, allowing the government to limit spending on individuals with secure finances. The superannuation can be thought of as a compulsory 401(k) program with private accounts required by the government.
The Australian government hopes to guarantee that all citizens will have enough savings to fund successful retirements on their own.
The Center for Retirement Research at Boston College has argued that while Australia’s system is highly rated internationally, the U.S. would still need to shore up Social Security and expand access to workplace retirement plans to meaningfully improve retirement security.
Experts suggest that mandatory employer savings plans may be acceptable during a normal economy, but more problematic during times of duress. Employers would want exemption from required payments during times of economic recovery. The Australian Age Pension has many of the same problems as Social Security, though officials hope any pension underfunding will be offset by the private investment plans. The required savings plan has been in place only for 10 years.
Australian savings per capita have greatly surpassed those of average Americans. Over 50 percent of American workers do not have a 401(k) plan, and not all of those with access make use of it. Of the portion of the population that does use a 401(k), the average contribution rate is about 3 percent. By comparison, Australia has 90 percent participation in a program that requires employer contributions.
Meanwhile, Wall Street Speaks
As this administration discusses mandatory private savings for retirement, Wall Street is lobbying Trump for more leeway in regulations over 401(k) retirement investments.
Trump has called for retirement plans to include less-regulated investments like private equity and cryptocurrency. His government is softening a legal protection by which workers have the right to hold an employer accountable when retirement savings are mishandled. Reporting at ProPublica says that the change is designed to give employers cover if those accounts are deflated by expensive, opaque or unproven investments.
Wall Street firms want a bigger piece of the $10 trillion in America’s 401(k) plans. Large corporations want to avoid class-action lawsuits from their employees.
When the 401(k) replaced pensions as the main way Americans fund their retirement, the investment risk shifted from employers to employees. There are no guarantees of how that investment will grow but employers are responsible for overseeing the company’s plan. Employers turn to aggregate investment companies like Fidelity or Vanguard for investment advice. There is no guarantee their choices are the most financially rewarding or secure in the long run.
Over the last 15 years, employees have increasingly sued large employers over unnecessarily high fees or inferior investment options. Now the Labor Department’s Employee Benefits Security Administration is devising complicated rules aimed at guaranteeing that various investment review steps are taken and shared, but more difficult to sue once those steps can be shown to be in place. The rules make it more difficult for workers to second-guess whether investments were the best.
At the same time, investors are eyeing riskier bets, including cybercurrency products.
The changes in financial investment rules add one more element to the privatization of Social Security.
Bottom line, we have the government considering moving more money from public Social Security accounts to privately managed accounts just as rule changes could make it more difficult to hold those making investment decisions on retirement funds accountable for the value of those funds.
If the goal is to remove government responsibility for retirement fund management, good thinking. If it is to assure workers of an easier retirement, these ideas may need more time in the processing oven.
Terry H. Schwadron retired as a senior editor at The New York Times, Deputy Managing Editor at The Los Angeles Times and leadership jobs at The Providence (RI) Journal-Bulletin. He was part of a Pulitzer Gold Medal team in Los Angeles, and his team part of several Pulitzers in New York.
