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What the Social Security reforms might look like

It looks like the likeliest product of the fiscal commission will be a package to save some money in Social Security. There've been some concerns that this implies a privatization scheme, but that's not my sense of it. Rather, I'd watch for a proposal along the lines of what Laura Meckler is previewing:

In addition to raising the retirement age, which is now set to reach age 67 in 2027, specific cuts under consideration include lowering benefits for wealthier retires and trimming annual cost-of-living increases, perhaps only for wealthier retirees, people familiar with the talks said.

On the tax side, the leading idea is to increase the share of earned income that is subject to Social Security taxes, officials said. Under current law, income beyond $106,000 is exempt. Another idea is to increase the tax rate itself, said a Democrat on the commission.

Because this sort of reform wouldn't save all that much money, it's being sold as a "confidence-building measure." Depending on who you're talking to, the confidence being built is either between Democrats and Republicans or America and the hypothetical fears of the bond market.

By Ezra Klein  |  August 20, 2010; 10:44 AM ET
Categories:  Social Security  
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Comments

Will the elephant in the room - military spending - please step forward? We maintain over 700 military bases in over 130 countries, not including our infrastructure in the US. We're on the verge of spending more on our military ($684 billion/yr) than all other countries in the world combined. This isn't about 'supporting' our troops or 'defending' our country. We've redefined our national interest as world military hegemony.

But instead, what we really need to do is 'rein in' the domestic social safety net for our seniors (e.g. parents and grandparents). The free ride is over.

Posted by: Jaycal | August 20, 2010 11:22 AM | Report abuse

Social Security doesn't contribute to the deficit and won't until the combined Trust Funds start drawing down on principal in the Trust Fund, which event won't occur until around 2023 under current projections. On the other hand every year that Social Security runs a surplus it actually adds to Public Debt as that is defined by the Treasury. That is for Social Security 'debt' and 'deficit' actually run in mostly opposite directions even as the system is running either a 'primary' surplus or deficit as defined by CBO. And none of 'debt' 'deficit' 'primary deficit' have anything to do with 'unfunded liability' so often quoted by Peter G Peterson Foundation President and CEO David Walker, oops I meant studiously non-partisan, objective former Comptroller General of the US David Walker (as he is almost always referred to in the pages of a certain paper of record published in our Nation's capital).

Peddlers of Social Security crisis continuously play on the popular confusion between 'debt' 'deficit' 'primary deficit' and 'unfunded liability' to peddle their "solutions" that always end up gutting future Social Security benefits while doing little to nothing to move the official metrics for deficits or Public Debt.

These kind of measures are only 'confidence building' if directed at the sociopaths at the IMF and world bond markets generally in order to convince them that if push comes to shove it will be grandma floating away on the ice floe while bank profits and bond prices are preserved, The whole thing is a sham. Or dare I say it "a shame of a mockery of a travesty of a sham". The numbers show that you can install a 25 year fix to Social Security for less than a dollar a week tax increase for the typical worker. Yet somehow that option never makes it to the table from which "all options" are allegedly on. Why not? Well therein lies a tale. But this is not the time and place to tell it.

Posted by: BruceWebb | August 20, 2010 11:26 AM | Report abuse

Ezra, I'm convinced that we will need to stop this never-ending "debate" by eliminating (not raising) the cap on wages subject to social security taxes, and then imposing a cap on monthly payments. The payment cap should be middle-class high ($5,000 to $10,000 per month) and reachable only by people whose wages are far above anybody's definition of middle-class.

This move is simple and would put social security into the black now and probably forever. The government therefore could continue its habit of borrowing social security funds to pay for other things with no plans to ever pay it back, but these funds would no longer be the product of a regressive tax--the wealthy wage-earner also would provide for these funds. The trust fund would become huge, of course, but that's okay--insuring the future and making more of government debt internal to itself.

Posted by: pjro | August 20, 2010 11:27 AM | Report abuse

The increase in the social security tax rate in 1983 created massive surpluses; the trust fund currently has a balance of more than two and a half trillion dollars. Obviously what we need to do is raise the tax rate again.

Why is this even being discussed?

Posted by: thehersch | August 20, 2010 11:31 AM | Report abuse

The confidence being built is the confidence that the debt will be paid by the poor and not the rich.

Posted by: endaround | August 20, 2010 11:42 AM | Report abuse

There is already a benefits payment cap, tied to the same wage base that limits tax payments. A proposal to eliminate the cap on taxes while retaining the cap on benefits tells upper middle class and high-income people that they are now expected to make payments for which they will receive no benefit. That has *never* been the deal with Social Security, and I suspect if the deal were changed in that way, you'd see it lose popular support.
If you want to redistribute income from the rich to everybody else, there are lots of ways to do it that don't undermine the basic concept of Social Security.
Also, as has been pointed out before, while Social Security taxes are regressive (or, at least, not progressive), the benefits are very progressive. A low income earner gets much more out in proportion to what he or she put in than a high income earner.

Posted by: tl_houston | August 20, 2010 11:42 AM | Report abuse

Why not eliminate the wage cap on taxes and then sell it by reducing the tax rate a bit? Set the tax at wherever it needs to be to have modest surplusses forever.

I like pjro's idea of capping benefits at a middle-class level, but I don't know at all how benefits work now, so direct criticisms of this plan to him, as it just sounds good to me.

Jaycal, the reason military spending doesn't get discussed a lot is because it's a much more difficult argument, but also because it's not growing nearly as fast as domestic programs like Medicare. There's clearly waste in there, and cutting military spending would be a good avenue for addressing the short term deficit, but for our long term deficit problems Medicare is a much much bigger problem.

Posted by: MosBen | August 20, 2010 11:46 AM | Report abuse

The confidence question relates to the bond markets, which frankly don't seem at all unconfident now. I just don't understand how making a large number of Americans significantly poorer is the answer to the nation's economic ills, and if that's what Wall Street wants, it's an idiot.

pjro--The current maximum benefit available through SS is $27,876 for a single and 1.5x that for a couple. I don't think raising the maximum benefit to $120,000 is going to help sustain the fund's viability (although they probably will need to raise it some if the cap is removed--$60,000 might be okay). SS is supposed to provide income security in old age, not an income 3X the median wage. However, I don't think it should be means-tested, because then it will just become unpopular "welfare".

Raising the retirement age to 70, as is being debated, would be an average lifetime benefit cut of %20. It would also mean that a much larger number of people (mostly low-income) would never live long enough to retire. Many more people would just retire at 62 (unless they're raising that age, too) and take greatly reduced benefits. The individuals who held out for 70 would contribute to higher unemployment. All poverty-increasing effects meant to avoid raising income taxes on rich people. Sickening, really, that our government is even considering it.

Oh and this is another bonus: the defense contractor (?!) on the Deficit Commission thinks that the best way to save money in the military budget is to cut medical benefits for service members. Obama has to know that he won't get a second term and Democrats will be mortally wounded if the idiots he appointed to this commission get their way.

Posted by: julie18 | August 20, 2010 12:03 PM | Report abuse

I love the "hypothetical fears of the bond market" quote. Because interest rates are so low, we have no long term budget issues? Is that the logic? Sounds like "there is no housing bubble because every house sold has been bought."

Posted by: cdosquared5 | August 20, 2010 12:07 PM | Report abuse

I think it's important to clarify what the 'problem' with SS is.

(1) The federal government owes the Social Security program tons of money.

(2) There are people who would prefer that money never got paid back.


I don't see how any discussion on this topic can begin without those two points.

Posted by: eggnogfool | August 20, 2010 12:16 PM | Report abuse

The confidence question relates to the bond markets, which frankly don't seem at all unconfident now. I just don't understand how making a large number of Americans significantly poorer is the answer to the nation's economic ills, and if that's what Wall Street wants, it's an idiot.

pjro--The current maximum benefit available through SS is $27,876 for a single and 1.5x that for a couple. I don't think raising the maximum benefit to $120,000 is going to help sustain the fund's viability (although they probably will need to raise it some if the cap is removed--$60,000 might be okay). SS is supposed to provide income security in old age, not an income 3X the median wage. However, I don't think it should be means-tested, because then it will just become unpopular "welfare".

Raising the retirement age to 70, as is being debated, would be an average lifetime benefit cut of %20. It would also mean that a much larger number of people (mostly low-income) would never live long enough to retire. Many more people would just retire at 62 (unless they're raising that age, too) and take greatly reduced benefits. The individuals who held out for 70 would contribute to higher unemployment. All poverty-increasing effects meant to avoid raising income taxes on rich people. Sickening, really, that our government is even considering it.

Oh and this is another bonus: the defense contractor (?!) on the Deficit Commission thinks that the best way to save money in the military budget is to cut medical benefits for service members. Obama has to know that he won't get a second term and Democrats will be mortally wounded if the idiots he appointed to this commission get their way.

Posted by: julie18 | August 20, 2010 12:20 PM | Report abuse

"pjro--The current maximum benefit available through SS is $27,876 for a single and 1.5x that for a couple. I don't think raising the maximum benefit to $120,000 is going to help sustain the fund's viability (although they probably will need to raise it some if the cap is removed--$60,000 might be okay). SS is supposed to provide income security in old age, not an income 3X the median wage. However, I don't think it should be means-tested, because then it will just become unpopular "welfare"."

What you are suggesting is, in a way, means testing.

The cap is about $100k. Say you raise the cap to $200k. Does the $200k guy get 2x the current SS benefit, or are you just transferring his wealth?

Posted by: krazen1211 | August 20, 2010 12:29 PM | Report abuse

Sorry for the double post, everyone, accidentally clicked the back button.

Posted by: julie18 | August 20, 2010 12:30 PM | Report abuse

Let's see who profits from social security.

http://www.urban.org/publications/900746.html


The first thing to go should be the 1 earner couple massive windfall.

Posted by: krazen1211 | August 20, 2010 12:30 PM | Report abuse

With political paralysis the normal situation these days in Washington and various state capitals (notably Sacramento), I'm surprised that there aren't more proposals that tie various taxes or exemption levels to inflation or the consumer price index. For example, why not bump up the upper exemption level to $150,000 or so AND tie its level to inflation or the consumer price index so that it rises each year to keep up with inflation. Another example is liquor taxes in California, which haven't increased in many years and are probably far too low given alcohol's impact on public health. Why not tie them to inflation so that they don't get so out of whack? Or why not create an inflation-indexed gas tax?

Beyond the political difficulties, is there some kind of economic feedback loop that I might be missing here? E.g., tying economic indicators to inflation could affect the inflation rate?

Posted by: meander510 | August 20, 2010 12:31 PM | Report abuse

Here's a questions for your research desk -- what would it cost/save the program is there was an opt out provision after a certain point.

Example -- i'm 32. I've paid in since my first part time job as a teenager. Assume I paid the max tax for the past couple of years. At 35 I'm past the halfway point to retirement and have the option to just quit the program. Social Security keeps everything I've paid in and I decline future benefits. In return, I'm not taxed anymore. but i'm not owed on my previous contributions -- those are my fair share. you'd lose my future contributions, but i'm also off the books for future benefits.

Posted by: NoVAHockey | August 20, 2010 12:39 PM | Report abuse

I like MosBen's suggestion of raising the wage cap and lowering the tax rate a bit. This would make the SS tax less regressive and lower the tab for employers of low wage workers.

The retirement age should also be increased to 70. Spousal benefits for wealthy couples should be reduced/eliminated. Let the higher paid worker collect their full benefits when alive, but when they pass, reduce benefits to the surviving spouse. Under current law a non-working (non contributing) spouse can collect the full SS benefits of the deceased spouse. This makes sense for middle to low income couples, but not for upper income folks.

Posted by: Beagle1 | August 20, 2010 12:39 PM | Report abuse

In order to prevent possible future benefit cuts, let's cut benefits now. Great idea :(

Posted by: fuse | August 20, 2010 12:51 PM | Report abuse

@MosBen: "Why not eliminate the wage cap on taxes and then sell it by reducing the tax rate a bit? Set the tax at wherever it needs to be to have modest surplusses forever."

Why not just eliminate the wage cap, but have higher wages taxed (for ss) and much lower rates, so the next $500,000 pays 1% and the next million pays .5% and every million after that pays .25%. But benefits are still capped, so the ultrarich don't end up getting back as much as they paid in. But not so much that it interferes with their ability to buy $500,000 aquariums.

Posted by: Kevin_Willis | August 20, 2010 12:53 PM | Report abuse

BTW, I'm also for a wealth tax on the full increase of net worth of any politician while in office. So, if you show up in DC with a $200k in the bank and you leave DC with $14 million, you pay a nice big confiscatory tax on that money (minus the original $200k).

That's a tax I could get behind.

Posted by: Kevin_Willis | August 20, 2010 12:57 PM | Report abuse

One additional data point - the wage cap *is* indexed to inflation. It has been steadily increasing by 3-4% per year, and has doubled since 1990.

If you make around $100,000 the increase in your SS tax over the past decade dwarfs any "Bush Tax Cut" you may have received. I don't know how much you have to make to have seen a net federal tax decrease over the last decade, but it's well over $100K.

Posted by: tl_houston | August 20, 2010 12:59 PM | Report abuse

This raising of the retirement age thing is baloney. The US (and most other developed countries) has structural unemployment problems (NOT cyclical due to a downtown). Trade and automation have lead to more people of working age than jobs to be filled. I'd guess that half of the 10% unemployment rate is structural, and will never come back.

So, how does increasing the retirement age relate to structural unemployment. It is contra-rationality. We should be considering reducing to retirement age to 62 or less rather than increasing to 67. There are NO jobs for people in their mid-sixties - except for entry-level jobs that our teens and 20-somethings need to be filling without competition from oldsters.

Problems are not isolatable in an interconnected word. Unemployment and retirement are directly connected, but no one seems to make the connection in the public policy marketplace.

If jobs for 60-ers are not available, and social security ignores the problem by pushing out retirement age, only two outcomes are possible: going on unemployment compensation, or people saving to fund their post-work needs until they can "retire". This is nonsense.

Posted by: JimPortlandOR | August 20, 2010 1:02 PM | Report abuse

eggnofool,

great point that far too often goes overlooked and undermentioned.

Pay it back and then we won't have to cut a thing.

Posted by: visionbrkr | August 20, 2010 1:04 PM | Report abuse

Just to respond: First, Social Security does not have a payment cap. The maximum payment is a byproduct of the maximum that anybody can contribute (i.e., be taxed) over a lifetime. If you remove the cap on wages that are taxed, you remove the de facto payment cap.

Second, a high payment cap breaks the "promise" of a return for very few people, and they are NOT in the middle class. I haven't calculated it exactly, but I think a $10,000/month payment cap would be reached by people whose wages (not income) average, over 35 years, about a half-million dollars per year (inflation adjusted). Correct me if I'm wrong.

Last, with high earners feeding social security, I believe it will be in the black even with a $10,000/month payment cap. I suggested a cap that provides a middle-class income even for somebody living in a high cost-of-living area who made millions in wages but lost it all to the next Madoff or real estate and stock market crashes.

Posted by: pjro | August 20, 2010 1:21 PM | Report abuse

Kevin, I think decreasing the tax rates as you go up the income scale makes sense, and alleviates the feeling that the cap was letting the rich get a free ride I admit it's entirely possible that they aren't getting out as much as they're putting in now. I don't know the answer to that, but the cap does, I think, create that perception.

How much you decreased the tax rates on up the scale would depend on how much you needed to balance the budget. I'm much more interested in using the removal of the cap to pay for a reduction of the tax rate for income $100k and below as both a boost to employers who have lower paid workers and as a political tool to sell the reform to the public and shakey members of Congress.

Posted by: MosBen | August 20, 2010 1:22 PM | Report abuse

Raising the wage cap a bit and lowering the tax rate for everyone makes sense. So does eliminating the non-working spouse benefit for high earners. That is a vestige of an earlier time.

But some of the other proposals are running into sturctural problems in the economy. On the one hand, raising the retirement (full-benefit) age makes some sense because Boomers with jobs are going to have to work longer anyway because they don't have sufficient other savings for retirement. But can we really do thin is an age of high unemployment? Doesn't that mean that kids get no chance to get a start in the employment world? And don't we also hear that older people get fired frequently? Someone smarter than I needs to think about SS in the context of the structural unemployment we are facing.

And really, it seems much easier to just curt the military budget, especially for fancy weapons, although I realize that this is also considered a jobs program for contractors and manufacturers.

Posted by: Mimikatz | August 20, 2010 1:27 PM | Report abuse

The problem with raising the retirement age, as has been discussed here many times in the past, is that not all jobs wear evenly on workers. While our shift to a more white collar/service based economy requires fewer physically demanding jobs, there are still plenty of people out there than just aren't going to be able to make it to 70 in those jobs. I think a system where you could increase your benefits a bit by continuing to work, but where the minimum was enough to live on, would be a good trade.

pjro, thanks for the info. I wasn't thinking about it as going from a cap on taxable income to a cap on benefits, but that's an interesting way of thinking about it.

Posted by: MosBen | August 20, 2010 1:50 PM | Report abuse

Actually, eliminating the tax cap AND the benefit cap might result in a net gain to the system, because monthly income over $4000-and-some is only replaced at 15% during retirement. That's only a couple of percent above the tax rate, so it's unlikely that a retiree will ever get back what they put in on income above $4000/mo.

Any attempt at marketing "reforms" will have to take into account that SS is already a bad deal for marginal income over $40-some thousand per year.

Posted by: tl_houston | August 20, 2010 2:07 PM | Report abuse

People live longer, so extending the retirement age is reasonable. Increase the contributions as needed to account for the longer lifespan is also, of course, reasonable.

Increase contributions to make up for budget shortfalls because some idiots want to cut taxes? Absolutely not! Primarily because I think taxes should be raised. Secondarily because those who want to cut taxes claim that tax cuts pay for themselves.

Posted by: AMviennaVA | August 20, 2010 2:22 PM | Report abuse

NoVAHockey @ August 20, 2010 12:39 PM: An interesting proposal, to opt out. But you left out a possibility: f for some reason you find yourself destitute (say another 'Bush' is President and the economy tanks the way it did), will you expect 'society' to let you starve? Or will you rely on other peoples' sense of morality to at least feed, clothe, and house you?

Posted by: AMviennaVA | August 20, 2010 2:28 PM | Report abuse

I like MosBen's suggestion of raising the wage cap and lowering the tax rate a bit. This would make the SS tax less regressive and lower the tab for employers of low wage workers.

The retirement age should also be increased to 70. Spousal benefits for wealthy couples should be reduced/eliminated. Let the higher paid worker collect their full benefits when alive, but when they pass, reduce benefits to the surviving spouse. Under current law a non-working (non contributing) spouse can collect the full SS benefits of the deceased spouse. This makes sense for middle to low income couples, but not for upper income folks.

Posted by: Beagle1 | August 20, 2010 12:39 PM
================
How does that make sense? THEY PAID IN THE MONEY IT SHOULD BE THEIRS.

This is the real reason democrats hate the idea of privatizing social security. They view it as welfare and if you're "rich" even though you paid it you shouldn't get it.

Posted by: Cryos | August 20, 2010 2:31 PM | Report abuse

The accounting/rates/caps is pretty easy;

you could declare that the cap and rate both adjust every year or two by X%, where X% is the amount that sets the insolvency date say, 40 years in the future. That should require fairly negligible adjustments.

Posted by: eggnogfool | August 20, 2010 2:36 PM | Report abuse

Cryos,

While I'll first say that this issue would be moot if money wasn't being stolen from SS every day for other government programs I'd also say they are getting their money. If life expectancy increases then under what I'd expect is your ideal scenario they're getting MORE money than is theirs. Are they going to return every penny over what they put in? I doubt that.

If they want to view it as a forced savings plan because most of us are too stupid to adequately save for retirement (or too poor) then why should we get more if we live longer? Wouldn't the fairest thing to do be pay people up to the amount they put in? I agree this ignores means testing though which I think is valid although not truly fair.

Posted by: visionbrkr | August 20, 2010 4:45 PM | Report abuse

"will you expect 'society' to let you starve?" Yes, if you are defining "society" to mean the government.

If I opt out at 35, I'm well past the age of feeling invincible and should be held accountable for my decisions.

But you raise an interesting point. Social Security isn't just for the poor. I'd be much more supportive if it was means tested -- perhaps linked to Medicaid coverage or some percentage of the federal poverty level. But as it stands this program takes from a single mom and subsidizes my grandfather's golfing habit. that's seriously wrong. She needs that money now, and he can pay for his own round of golf.

Posted by: NoVAHockey | August 20, 2010 5:06 PM | Report abuse

Everyone making about $50,000 or more is subsidizing the system for the rest. I do not see why those making $105,000 should be able to escape the subsidization that others are doing.

The same applies for high income people. If you elect to opt out then they could zero your benefits and reduce your contributions by the appropriate actuarial amount. You still will be expected to subsidize the system along with the rest of us higher earners. That is the price we pay for having a guaranteed income for seniors (that is what Social Security really is - it is not a retirement program for individuals, but a way to collect revenue to guarantee folks, even those folks you never earned much of an income, a livelihood. Any talk about Social Security payback etc is meaningless until you provide for those individuals or decide to let them starve until they begin to do desperate things.

That is not to say that Social Security does not have issues with fairness, fraud, long term stability etc. In you look at Social Security in isolation, it is not the problem for the Federal government. The problem is the massive general spending and the failure to pay for it. If the only debt we had been rolling up had been S.S. debt, then we could deal with it. The piper has arrived.

Posted by: exhaustguy | August 20, 2010 6:16 PM | Report abuse

If you opt out at 35, you are essentially saying somebody who should receive benefits now won't. That isn't exactly true because the surplus would take care of it at the current time, but like most insurance programs it works best when the largest possible pool is used.

Posted by: williamcross1 | August 20, 2010 6:21 PM | Report abuse

krazen:"What you are suggesting is, in a way, means testing."

No, not really, because everyone who paid in would be eligible to receive benefits--I wouldn't exclude anyone from the program due to high income, high earners would still receive more benefits than low-earners, etc.

As far as exactly how much each earner should receive, I don't know--it should be calculated in the best way to insure the long-term fiscal sustainability of the program while providing enough supplemental income to high-earners to maintain their political support for the program. If it's possible to give some retirees $120,000 a year without cutting benefits to poorer people and also maintain the trust fund in long-term positive balance, then great--I'm all for it. I tend to think you'd need to remove the cap entirely to do something like that, though--I don't see how the benefit could possibly be that high based on $200,000 income.

Posted by: julie18 | August 21, 2010 12:56 PM | Report abuse

julie18: you are correct--with no earnings cap, a person would have to earn about $500,000 per year (average over 35 years) to get $120,000/year in social security benefits. (Assume all numbers would be inflation-adjusted.) My posts above were inspired by Dylan's post and the CRS study to which he links:

http://voices.washingtonpost.com/ezra-klein/2010/06/research_desk_responds_could_r.html

These data indicate that, with no earnings cap, the benefits cap can be higher than today's de facto cap ($2346/mo in 2010 according to the SSA website) but less than infinity. If you accept this approach, we then go into the weeds, where we lack data. I suspect but cannot prove that a benefit cap as high as $10,000/mo would put us very close to the 100 percent mark, and "very close" is the objective given the uncertainties of 75-year projections.

I don't think our political leaders would accept the general approach, but it's an interesting exercise on how to "fix" a supposed problem without "gutting" the system, as most seem to want to do.

Posted by: pjro | August 21, 2010 3:52 PM | Report abuse

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