• Taking Social Security Off the Table by Fixing It

    Social Security faces a purely demographic problem–fewer workers paying taxes per beneficiary claiming benefits–while Medicare joins the same demographic problem with the fact that it purchases health care that has risen in cost several times faster than overall inflation for both private and public insurers for years.  Health care costs are the primary driver of the long term deficit, and addressing health care costs is a necessary, but not a sufficient condition to ever having a balanced budget. However, it seems nearly impossible to make further moves ahead on health reform prior to the 2012 election.

    Richard Posen makes the liberal case for fixing Social Security now and argues that his preferred reform would make the program more progressive. The outline of the plan:

    • Raise the income subjected to the payroll tax to the 90% percentile of wages (the essence of the 1980s Greenspan Commission compromise [from $106,800 to $170,000])
    • Slow benefit growth for high wage earners
    • Raise retirement age to 70 (it is set to rise to 67), but exempt low income workers from the increase

    Reihan Salam weighs in favorably on Posen’s idea, though he favors Jed Graham’s proposed fix. Graham’s plan is based on the notion of ‘old age risk sharing.’  Graham:

    In “A Well-Tailored Safety Net,” (his book) I introduce a new solvency approach called Old-Age Risk-Sharing, under which the steepest benefit cuts would come in the initial year of retirement; the cuts would be progressively smaller for lower earners; and they would gradually unwind over 20 years to provide robust support for retirees of all income levels in very old age, when almost everyone will depend on it.Under Old-Age Risk-Sharing, a career-average earner ($42,000 in 2009) retiring after 2032 would face an upfront benefit cut of 20%, which would gradually unwind over 20 years to keep the safety net intact. However, thanks to enhanced incentives for delayed retirement, that worker could fully overcome this upfront cut and attain an extra measure of income security in very old age by working two years past the official retirement age.

    This approach addresses the shorter life expectancy of low-income workers by having their initial benefits cut less in early retirement years than high earners, but benefits would rise generally for all retirees the older one got, as the risk of outliving private savings increases.  Graham’s system would provide an incentive for longer working for those who are able, while providing flexibility in retirement age with a protection for lower wage earners.  Graham claims that a default retirement age of 68 with his ‘old age risk sharing’ could reach solvency for the program that would require a retirement age of 70 under standard benefits. I would prefer either of the above proposed plans, or a combination of them, to inaction, though I think I like Graham’s plan the best, even as it is probably harder to explain.

    I believe that Progressives need a balanced budget more than Conservatives because of their view of the role of government in modern life.  Likewise, because Social Security is such a policy priority for Progressives, they should lead the way on Social Security reform now for several reasons.  First, there is a problem that must be fixed, and the earlier we reach an agreement, the more options we will have.  Second, Democrats control the White House and the Senate, so will be in a position to shape the reform.  Third, it is possible that a Social Security deal could build policy momentum that could spill over into the health reform sphere and make some sort of deal to do more on costs possible.

    If we could pass a Social Security reform plan in this Congress, that would be a great step toward long range fiscal stability that would move Social Security off the table by fixing it.  For anyone worried about the deficit, attention would then have to turn to the biggest long term deficit problem–health care costs.  Progressives could then legitimately say they led the way to reform Social Security and passed a health reform bill that expanded coverage and can address costs if we stick to it.  At some point, opponents of the ACA are going to have to say what they are for and get clear about the ‘replace’ part.  Passing a Social Security reform plan this Congress makes it much more likely it will have to be before the next election.

    Update: Letter from economists serving past Republican and Democratic administrations urging immediate action on a long range plan to address the debt similar to the Fiscal Commission proposal.

     

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    • I agree that it would be a good idea to fix Social Security now.
      Social Security is relatively easy to fix. Even the current regime will not have problems until 2037. A small increase in the tax now (either the tax rate and/or increase in the wage cap) could make it solvent for many more years.
      I would, however, avoid increasing the retirement age. The reality of the job market now is that it is impossible for someone over 50 to get a job (other than at Walmart). Also, many private and government pension plans permit retirement as early as 50. Raising the retirement age to 70 could leave many workers who do not have a private pension without income for as many as 20 years. The proposals to income adjust benefits are interesting and could help low wage workers who have to stop working early.

    • When Mark says the fund is solvent until 2037, what he means, I believe, is that is the date the trust fund numbers go to zero.
      He is assuming, apparently, that when the trust fund has a positive balance, that is a real liquid asset being tapped.
      Instead, the real liquid assets, the surplus FICA dollars, have been lent to the Treasury, spent for current expenses, and (artificially) lowered the deficits for many years.
      The interest paid into the trust fund is imaginary as well, as it is represented by debt, not cash, with no immediate budget impact.
      So, the entire trust fund, principal and interest, is merely numbers on a calculator.
      Tapping the positive numbers in the trust find is the same financial mechanics used to pay for battleships – out of current revenue and debt. The trust fund is not like an insurer who has reserves, and simply liquidates reserves to pay claims. Instead, the trust find must go after new money, just as if the trust fund didn’t exist.
      Don Levit

    • I like the Jed Graham’s proposed fix but I think that better yet is to welfarie SS. That is end the retirement plan fraud by getting rid the FICA and medicare taxes and pay the same amount of benefit to everyone who retires at a given age.

    • @DonL,
      The Social Security Trust Fund holds US Government securities. These are similar to Treasury Bonds or US EE savings bonds in that they are included in the national debt as an amount which the US has borrowed and they must be paid back on demand. It would be serious for the US to default on these securities and this could not be done without an act of Congress. If the US defaulted on these bonds, then all US bondholders would also be at risk and this is just not going to happen.
      So these are not “imaginary” funds, they are real funds which have been used to buy securities and must be paid back when needed. There is no reason to consider them worthless.

    • 2 problems with Posen’s proposed fixes:

      1) Making Social Security more progressive sounds great, but it will discourage savings and encourage consumption. By most accounts, we should be incenting the opposite behavior.

      2) Raising taxes to improve “solvency” means nothing if Congress is allowed to loot the new tax revenue as they have over the past 70 years.

      I don’t know much about the Graham plan, but it seems like a far better approach.

    • Mark:
      You are correct that they are included in the national debt, as intragovernmental holdings. The other component of debt is debt held by the public.
      Intragovernmental holdings debt is considered level 4 debt, the weakest federal commitment to fulfill.
      Debt held by the public is level 1, the strongest government commitment to fulfill.
      Intragovernmental debt is debt the Treasury owes the various trust funds, due ti the treasury tapping those funds to pay for current expenses and (artificially) lower the deficits.
      Included in these trust funds (about 20 of them) is the Civil Service and Military Retirees’ trust funds. These funds too have been used by the Treasury to pay current expenses, so when these funds are tapped, it is the same mechanism government uses to pay for battleships – out of current revenues and debt.
      It doesn’t work like a regular pension plan where actual dollars are set aside in investments that are simply liquidated. No new money is needed to pay the retirees, as is the case for federal retirees.
      As I understand Modern Monetary Theory, there is no way the federal government can go broke, for it can always create money out of thin air.
      While we cannot go broke, I wonder how prosperous the citizens are and will be.
      By the way, I can provide reputable government citations for all the statements I made.
      Don Levit

    • If Social Security Trust Funds are included in the National Debt then borrowing these funds would increase the Debt and this would included in the budget deficit so there is no “artificial” lowering of the deficit or the debt. It is the same as if we had borrowed these funds from China. The SS securities will be (in the future since the SS budget is currently in surplus) “liquidated” to pay for benefits as needed.
      There is no “looting” of tax revenue (as @pipster states) since the government buys and sell SS securities just the same as it buys and sells bonds to China.
      Politicians might be tempted to default on these securities (just as they might be tempted to default on bonds sold to China) but this would have grave market and political consequences.

    • Mark:
      When the Treasury borrowed from the Social Security trust fund, it did increase the debt, but it lowered the deficit. This is because instead of borrowing from the public, the government borrowed from itself (one department borrowing from another). It does not increase the deficit, for the loan is a liability to the Treasury and an asset to the trust fund, so it nets out to zero.
      There is a budget distinction when debt is owed to outsiders, like Chuina, and debt is owed to yourself (the federal government is the set, Treasury and Social Security are the subsets).
      The looting occurred prior to the special non marketable Treasury securities being issued. In fact, they were issued because of the looting so that the trust fund could be eventually paid back the surplus FICA dollars that were lent (or looted by) to the Treasury.
      Do you want government citations for any of my statements?
      If so, which.
      You’re not arguing with me.
      You are arguing with the CBO, the GAO, the Treasury, and even the Social Security Administration itself!
      Don Levit

    • who put the “liberal case” imprimatur on ron posen’s suggestion case for this season’s social security fix

    • I would set the tax to the 90% of income rate mentioned by Posen, then modify accordingly with Graham’s plan. If income keeps getting concentrated at the top, we need to expand and capture more of that income.

      Steve

    • @steve
      That (adding a payroll tax increase to the 90th percentile) is what I meant by ‘or a combination of them’. I think the old age risk sharing is important to address the outliving of private savings problem. Could use extra tax revenue to expand benefits close to planned schedule and/or decrease deficit, but only so much savings to be had from Soc Sec.
      Don

    • All these suggestions are great, if the surplus FICA dollars remain in the trust fund and are not lent to the Treasury. In adition, the interest should be paid in cash, and not credited to additional debt.
      Otherwise, all you’re doing is providing the trust fund the ability to draw funds from the Treasury without an authorization.
      The same financial scenario happens with all government expenditures, with or without a trust fund, except those without a trust fund need to be authorized by Congress.
      I can provide reputable government citations to support my statements.
      Do you agree that the trust fund makes it no easier to pay beneficiaries, from a financial scenbario, than without the trust fund?
      Don Levit

    • @Don Levit
      I basically agree….the ins must match the outs at some point. As you say there are some legal differences in terms of ability to spend with/without congress explicitly saying so. I am operating under the notion that the % of GDP collected in taxes will have to go up if we are to ever have a balanced budget. Need a full scale tax reform.
      Don T