• More on Social Security

    I wrote yesterday that Progressives should lead the way to fix Social Security now, both because it needs fixing as well as to focus the deficit debate on health care costs (the main driver of the long term deficit).  With Social Security fixed, opponents of the Affordable Care Act (ACA) will no longer be able to get away with only saying what they are against, but instead will have to make clear what they are for.  Then perhaps a policy-oriented health reform debate will ensue.

    Several wrote to me asking that I say more about what I like about Jed Graham’s suggested Social Security reform. What I most like about Graham’s ideas:

    • His old-age risk sharing proposal provides increased protection against outliving your private retirement savings. Old age risk sharing sets a lower level of benefits at younger retirement ages but the amount of your benefit rises with age, addressing the very real problem of persons outliving their private savings.
    • It incentivizes people to work longer but maintains a more flexible safety net for those who need to retire younger.  In short, the average person would get a bigger benefit penalty for early retirement, but the penalty wouldn’t remain constant for the rest of their life.  For example, if the retirement age is moved to 70 without old-age risk sharing, someone who retires at age 62 would receive 81.4% of the full (age 70) retirement benefits for the rest of their life (receive same amount at age 62 as age 92).  Under old age risk sharing with a standard retirement age of 68, a person retiring at age 62 would receive 57% of full benefits in that year, but at age 70 it would be 87%, rise to 96.9% at age 80, and be 100% of full benefits from age 85 on.  So, retiring early wouldn’t ‘haunt you’ for the remainder of your life.  Old age risk sharing is simply more flexible than an across-the-board raising of the retirement age.  These figures are based on a person with average earnings defined as $42,000 in 2009.
    • It is a progressive reform given the constraint of no payroll tax increase.  My understanding of Graham’s plan is that it fixes Social Security without raising the payroll tax in any way (rate or amount of wages to which it applies).  The early retirement penalty would be less for lower income workers as compared to the average worker example noted above, and higher for workers with higher incomes.  Because lower income persons tend to have a shorter life expectancy, this lessens that differential amount of lifetime benefits they will receive, certainly as compared to an across the board retirement age increase. These changes are solidly progressive.

    Under current law, when all the trust fund bonds have been redeemed (sometime around 2037) then Social Security outflows will have to match payroll tax receipts which would require across the board benefit cuts of around 20-25% with the retirement age at 67 where it is currently set to rise by 2025.  Similarly, it would take an increase in retirement age to between 71 and 72 (I think I have that correct; a bit back of the envelope) to maintain current benefits with no increase in taxes.  Given the constraint of no payroll tax increase, Graham’s plan is certainly preferable to both of these options, and far more progressive.

    What would I change about Graham’s proposal? I would add Richard Pozen’s suggestion of increasing the amount of wages subjected to the Social Security payroll tax.  He suggests the tax should max out at the 90th percentile of wages, which is where is was tagged in 1983 by the Greenspan Commission (but has not kept pace because of how it was indexed). This year, that would mean an increase from $106,800 to $170,000.  What could be done with this extra revenue?

    • Minimum benefit levels could be increased
    • The degree of early retirement penalty could be lessened
    • The extra revenue could be used to reduce the size of the annual deficit
    • The payroll tax rate could be lessened for lower income workers, which would make the payroll tax less regressive

    My preferred alternative would be to boost the minimum benefit for low income persons and use the remainder for deficit reduction.  I am operating on the assumption that a substantial tax reform is needed and inevitable, and further that if we are ever going to have a balanced budget the proportion of GDP collected in taxes will have to rise over what is currently collected today. In the short run, the increase in the wage limit of the payroll tax is a placeholder for that larger discussion.  These are my preferences for Social Security reform, but my strongest preference is that we develop a compromise Social Security fix sooner rather than later so that we can turn our full policy attention to the biggest long range deficit problem: health care costs.

    Note: the post uses Graham’s numbers, I have not done any empirical analysis. I have also ordered, but not read his book A Well-Tailored Safety Net.

    • What I, and many others, find objectionable about the early retirement penalty is its potential to hurt actual workers. It’s easy for those of us with graduate degrees who work at our computer all day to talk about raising the retirement age, but what about people who work for a living? It’s great that Graham’s plan doesn’t fix the penalty at the higher rate throughout, but do we really believe the average worker can survive on 57% of full benefits? It would seem to me that minimum benefit levels would have to be increased dramatically to offset this penalty. Absent that, we’re telling blue collar workers that they ought to suck it up and keep busting their backs for another 6 years.

    • @Justin Anderson
      I agree, I suspect I can prattle on blogging until 70 no problem, but my grandfather was a Farmer so not as straight forward. I would love a ‘except for people who really need to retire early for health reasons’ exception but I am unsure how to do it without harming the incentive to work longer which is important fiscally. Graham says the penalty less for lower income…..and you could make this even more so if raise payroll tax limit. This (old age risk sharing) still better than raise retirement age across board and have early penalty apply forever I think.

      • Agreed. I cannot imagine a workable system where we classify people who need to retire younger due to their occupation. The costs alone would be ridiculous. Which I suppose is why I come back to keeping the retirement age on its current trajectory, with the current penalty for retiring early. My own preference for funding is to eliminate the cap on payroll taxes altogether.

        Do you worry that Graham’s reliance on income is not the best proxy for occupational category? Or, is it just a means for progressivity?

    • I really appreciate you attempts to fix, really fix as opposed to destroy while calling reform, Social Security.

      What you need to do is to defend the concept and the program of Social Security. There is a constant drumbeat to eliminate Social Security and replace it with individual retirement accounts of various types.

      Much of the information false – e.g. the assertion that the trust fund has no money, only worthless IOUs. These IOUs are government obligations.

      The important concept is that Social Security, FICA, is insurance where all the individual retirement accounts are self-insurance. People must be aware of the consequences of the running out of money in retirement accounts without having insurance.