I wrote last week that Progressives should lead the charge to reform Social Security, and followed up here. In doing so, I said that I liked Jed Graham’s Old Age Risk Sharing concept as part of a Social Security reform. Several have written saying the scenario I wrote about in invoking his plan was was overly rosy. This charge is true due to my incompleteness in writing up Mr. Graham’s ideas. So, a bit more detail is required from me in fairness to Mr. Graham and to the debate, generally. He and I have communicated via email over the weekend, and I am grateful for that clarification. I do intend to read his book, but did want to get these thoughts out.
The big idea in Old Age Risk Sharing (OARS) is that the amount of income provided by Social Security rises with your age. This addresses the problem of outliving your private savings. This problem is particularly acute for early retirees who have benefit cuts that hold for the remainder of their life, and this issue will be exacerbated under the default Social Security system as the retirement age rises to age 67. Graham has built in a progressive feature to the OARS so that lower income workers have less of an early retirement penalty than do higher wage workers. The table below shows 3 career wages for illustrative purposes, and retirement at age 65, three years prior to a standard retirement age of 68 (after 20 year phase in of the revenue changes noted below).
% Scheduled Benefits Career Wage Age < $21,501 43,000 64,500 % % % 65 90 80 70 70 92.5 85 77.5 75 95 90 85 80 97.5 95 92.5 85 100 100 100 source: from Jed Graham, via email. After 20 year phase in of revenue changes.
The effect of OARS is seen by moving down the columns; a retiree with $43,000 average career wage would get 80% of current scheduled benefits at age 65, 85% at age 70, but 100% at age 85 and older. Retirement income rises with age, protecting against outliving private assets. The progressive nature of the reform is shown by looking across the age rows. At age 65, a person with less than $21,501 average career wage would get 90% of scheduled Social Security benefit, while those with higher wages would get less (80% for wage of $43,000, and 70% for wage of $64,500). It is the case that these are substantial benefit cuts, but they are less for lower income persons. Further, doing nothing will require across the board benefit cuts in the future generally, and for early retirees, in particular. Mr. Graham sums up his idea this way in an email to me:
In the book, I characterize the OARS + 68-retirement-age half of the solution as “scaling back the promise of early retirement in a progressive way to avoid the need for benefit cuts in very old age.”
Graham’s proposal not only includes OARS, but increases revenues flowing into Social Security. I did not describe these in my prior post and that was the source of people writing and saying the numbers I outlined didn’t make sense. That was my error. Here are the revenue side changes suggested by Graham:
- Add a Social Security payroll tax of 2 percentage points on wages above the current Social Security tax wage cap. In the current year, that would mean wages above $106,800 would be subjected to a 2% point payroll tax; currently there is no such payroll tax on wages above the cap. Note: I believe this would be an employee-only tax, not shared employee/employer.
- Cap the tax exclusion of employer paid health insurance and move to end this tax expenditure completely. He notes that if this is not done because too controversial, he would suggest a 3% point instead of 2% point payroll tax on wages above the current payroll tax cap.
- Forced employee savings in the form of an extra 1.5% of wages collected from all workers. This money would be invested in private accounts that could hold Treasury bills only and/or flow into Social Security depending upon wage level. The full amount (1.5% of wages) would go into the private account for high wage earners; 1.0% into the private account for average earners, with the 0.5% into a supplemental savings account to help early retirees adapt to lower benefits; and 0.5% into the private account for low wage earners, with 1.0% into a supplemental savings account.
- His plan also includes some tax incentives designed to make the hiring of workers age 62 and over more attractive (exempting the first $10,000 of their wages from employer-side payroll taxes).
My bottom line is that I believe Progressives should support a reform of Social Security now, and I believe that the idea of OARS is worth considering in doing so. It is true that health care costs are the biggest long term driver of the federal deficit, but Social Security faces a real problem that must be fixed. I believe that Progressives are better off leading the effort to reform Social Security while the Democratic Party controls the Senate and the White House. Further, if Social Security is reformed, the attention of anyone claiming to be interested in a balanced budget will have to turn to health care reform and the opponents of the Affordable Care Act have yet to lay out a coherent plan of what they would do to address health care costs after they repeal the Affordable Care Act. Remember the replace part? The country needs for them to provide a concrete alternative so that an issue-based health reform discussion can take place, which hopefully will result in a compromise on coverage approaches that allows us to move ahead to address health care costs. Reforming Social Security now can help us get to that debate.
Update: clarified the portion on private accounts.