A Thoughtful Look at Social Security Reform

Bobby: “Psssst. Don”t tell anyone. It”s our secret! There”s an elephant in the living room, but we”re pretending it”s not really there and it”s not really an elephant.”

align: justify; padding-left: 30px;”>Billy: “But it smells and it”s enormous!”

Bobby: “Just ignore it. Maybe it will go away.”

(Source: Diane Hunter, “Elephant in the Living Room, Acknowledging Alcoholism Can Begin Recovery.”)

The supercommittee has been…ah hem…hard at work this week as they considering how to cut $1.2 trillion from the budget over the next 10 years without miffing their constituents and lobbyists. If no agreement is reached by November 23, across-the-board cuts will begin in 2013. Democrats would like to see less than $1 in spending cuts for every dollar in tax increases on the wealthy. Republicans would like to see cuts in spending while extending the Bush tax cuts beyond 2012. And it appears that the two sides are still far apart.

In October, there was a short-lived bit of positive energy and willingness as Sen. Patty Murray (D-Wa.) said, “Everything is on the table, and we’ve made no decisions.” Note the operative word here: everything. Three weeks later, that is not so much the case. Special interest groups are swarming to prevent possible cuts in defense, health care, and a host of other necessary (or not) programs. Of course, what is going largely ignored, as the elephant in the living room, is the burden of entitlement programs – Social Security, Medicare and Medicaid. It is nearly impossible to eliminate the budget deficit, or at least carve a good-sized chunk out of it, without taking a serious look at entitlement programs. The mention of reforming Social Security or Medicare, however, seems to instill panic and mental images of seniors going over cliffs in their wheelchairs of many voters and lawmakers. In other words, hysteria replaces serious and thoughtful consideration.

The NCPA recently published a study that analyzes a few potential Social Security reforms. These reforms are not a result of fringe thinking. They are even on the Social Security Administration”s website and have been discussed by lawmakers and retirement experts alike. Liqun Liu and NCPA senior fellow Andy Rettenmaier calculated the impact of each reform on the long-term funding gap. They are: raising the retirement age, changing the benefit formula, progressive price indexing of benefits and eliminating the payroll tax cap.

Social Security currently has an unfunded liability of about $20 trillion. This means that the federal government would have to have $20 trillion in the bank today earning interest at the government borrowing rate, in order to pay Social Security benefits into perpetuity. This amount is in addition to the payroll tax revenues already received to fund benefits. If the supercommittee, or anyone else in Congress, took the bold step of proposing to close this gap and maintain current Social Security benefits, it would require an additional 3.2 percent in payroll taxes (or a solvency tax, as referred to in the study).

But under four possible reforms, the benefits would change (indeed, in many cases they would be reduced), but the payroll tax burden would be reduced as well, and in each case, the Social Security system would become solvent. For example, for an average wage worker currently age 41, progressive price indexing (adjusting a worker”s future benefits to changes in prices instead of changes in the average wage) would reduce his lifetime benefits by $20,522. (See the table below).

But the worker”s lifetime taxes would fall by $50.783, compared to a fully-funded current system. Changing the benefit formula would reduce benefits paid to all income groups, compared to the current system, but would also reduce lifetime taxes, compared to fully funding the current system.

Of course some reforms may make some income groups worse off in terms of the benefit/tax ratio. For example, raising the retirement age would reduce lifetime benefits for an average or lower-income worker more than it would reduce his tax burden.

All in all, these four reform scenarios would require a lower solvency tax than fully funding and sustaining the current system. It is no doubt possible to implement reforms without radical changes to the system that would polarize the right and the left. But hey, it”s hard enough for Congress to acknowledge the elephant in the room, much less trying to put him on a diet.

Change in Lifetime Taxes and Benefits for Average Income Single Male,
age 41 (in 2011 dollars)

Reform

Lifetime Taxes

Lifetime Benefits

Gain/Loss

Progressive Price Indexing

-$50,793

-$20,522

$30,271

Change the Benefit Formula

-$63,709

-$59,123

$4,586

Raise the Retirement Age

-$38,687

-$59,047

-$20,360

Eliminate the Taxable Maximum

-$37,458

$0

$37,458

Change in Lifetime Taxes and Benefits for
Average Income Single Male, age 26 (in 2011 dollars)

Reform

Lifetime Taxes

Lifetime Benefits

Gain/Loss

Progressive Price Indexing

-$106,288

-$52,406

$53,882

Change the benefit formula

-$133,316

-$135,260

-$1,944

Raise the Retirement Age

-$80,957

-$85,284

-$4,327

Eliminate the Taxable Maximum

-$78,384

$0

$78,384

 

Comments (5)

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  1. Jack Obchan says:

    A government committee that’s super?! Bah, humbug! Everybody should note that living within our means, not Washington’s, is kryptonite for this committee and the government it represents.

  2. Ernest Wilson says:

    I still maintain that the key to Social Security solvency is smarter investment of the current & future surplus. A larger return using solid acturial concepts used in most pension plans would solve most of the problem. Some minor benefit tweaking may also be needed. I have yet to hear any good reason for oposing this approach. Let’s put government on a honest accounting & let real trustees manage the “Trust Fund”

  3. Brian says:

    They say “everything is on the table”. If “everything” were on the table, there should be a lot more being talked about in the area reducing taxation besides just extending the Bush-era tax cuts.

    Also, I really think that big government liberals like deficits just because it makes it harder to cut taxes politically.

  4. Jersey Boll says:

    This comment isn’t directly related to SSI issues, but had to comment on your Tax & Spending item of 12/8/11; “Municipal Millionaires.”
    Here in North Jersey(different from South Jersey), there are lots of “municipal millionaires.” NYC cops want jobs here – 3now employed in my town. WHY? After 5 years,they’re making 100K as patrolmen,sergeants $120K.
    Teachers; $65-$70K + common.Other municipal workers are lower,but classified very good.Those salaries + handsome pensions makes for handsome retiree dollars.
    And that’s only part of the picture, and why we here pay the highest property taxes in the US.Lucky us. UPS drivers; over 60K; the “cable guy”, 55-65K. But it’s a nice place, for me, to live; (life-long). Yes,
    there’s lots of them here.

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