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.