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30 options for reforming Social Security -- and how much they'll save

As I've said, my preference is to make Social Security more, rather than less, generous. There are a lot of areas in which the federal government should be spending a lot less -- but I don't think Social Security is one of them. Still, Social Security reform is likely to be a big issue in the fall, and so it's worth getting a sense of the wide range of potential changes available. This chart comes from the Congressional Budget Office's report on 'Policy Options in Social Security,' and it shows both what people think they are, and how much they'll save. Click for a larger version.

allsocialsecurityfixes.jpg

Straightforward options like raising the retirement age and applying payroll taxes to all income get the most attention, as people can actually understand them. But for that exact reason, I'd guess that more opaque changes, such as "progressive price indexing," which ties benefits to prices rather than earnings, are more likely.

By Ezra Klein  |  September 7, 2010; 11:00 AM ET
Categories:  Charts and Graphs , Social Security  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   Del.icio.us   StumbleUpon   Technorati   Google Buzz   Previous: Don't cut Social Security, cont'd
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Comments

PIA = ???

Posted by: sold2u | September 7, 2010 11:32 AM | Report abuse

Would be helpful to know what the values in the chart mean. What total do you have to get to for system to be independently balanced for next 50-100 years?

Posted by: edwardlahoa | September 7, 2010 11:39 AM | Report abuse

Answering my own question (after clicking on CBO link): 1.4% of GDP.

Posted by: edwardlahoa | September 7, 2010 11:40 AM | Report abuse

edwardlahoa, does that mean independently balanced with the current surplus, or just never dipping into the red?

Posted by: MosBen | September 7, 2010 11:48 AM | Report abuse

Why is there so much discussion of planning for SS decades into the future? Nothing else in national politics has a time horizon extending beyond the next election.

Posted by: tl_houston | September 7, 2010 11:56 AM | Report abuse

First graph I've seen that even touches on reducing benefits for higher incomes.

Instead of 'Lower Initial Benefits for Top 70% of Earners' how about 'no benefits' if you have adequate retirement income.

Make Social Security an 'insurance' program so that you pay in, but only get benefits if you actually 'need' them.

Remember, Bill Gates and Warren Buffett are going to be getting Social Security benefits. Do they *really* need them?

Posted by: rpixley220 | September 7, 2010 12:04 PM | Report abuse

And if we keep it as is? I assume that's the baseline/zero here. It would still be working great for decades, right? Well, good thing you aren't defending it as is. That would be, like, liberal.

Posted by: stonedone | September 7, 2010 12:13 PM | Report abuse

"Instead of 'Lower Initial Benefits for Top 70% of Earners' how about 'no benefits' if you have adequate retirement income.

Make Social Security an 'insurance' program so that you pay in, but only get benefits if you actually 'need' them.

Remember, Bill Gates and Warren Buffett are going to be getting Social Security benefits. Do they *really* need them?"

Not really, but there are not that many Bill Gates's in the world.

If you start means testing, you encourage people not to save, or encourage people to hide their assets.

But let's be honest. People at the taxable maximum already get a rotten deal on their SS benefits when it comes to a PV calculation of lifetime taxes vs lifetime benefits.

If you continue to increase the taxable maximum, you turn SS into a welfare program. Let's call it what it is.

Posted by: krazen1211 | September 7, 2010 12:15 PM | Report abuse

@tl_houston wrote:
"Why is there so much discussion of planning for SS decades into the future? "

Are you saving for children's college fund? your own retirement? Do you own life insurance? or an annuity?

that's planning decades into the future too...

Posted by: rpixley220 | September 7, 2010 12:15 PM | Report abuse

ti_houston:

It's pretty simple. For the most part, cutting Social Security takes money from many, many people, and hurts the poor the most. Cutting Medicare payments hurts hospitals and doctors, and so is unpopular with Congress. Easier to cut the poor seniors' benefits a little, which is why they don't tackle Medicare, even though it is the real entitlement problem. And much easier to cut SS than let the Bush tax cuts expire.

If they want to worry about a problem with a long time horizon, global warming is likely to do a whole lot more damage than SS.

But it isn't asbout the deficit or the future, it is really about saving the Bush tax cuts for the top 2%.

Posted by: Mimikatz | September 7, 2010 12:16 PM | Report abuse

@krazen1211:
You say means testing like it will destroy things.

Means testing happens each and every day and it manages to do more good than bad. Sure some people will try to game the system, but the vast majority won't.

People try to cheat on taxes all the time too, many get caught, but the vast majority don't because it just isn't worth it for them; or, gasp, they aren't lying cheats which you seem to assume everybody else is.

Posted by: rpixley220 | September 7, 2010 1:32 PM | Report abuse

PIA = ???

sold2u,

This is the primary insurance amount, or the benefits available at normal retirement age.

The PIA is calculated by looking at the average indexed monthly earnings of an individual and it replaces 90% of average earnings up to $761, 32% between $761 and $4,586, and 15% of earnings from there until the maximum covered earnings threshold.

"Instead of 'Lower Initial Benefits for Top 70% of Earners' how about 'no benefits' if you have adequate retirement income."

rpixley220,

Means testing Social Security would create a huge implicit marginal tax on saving for the upper middle class. When deciding whether or not to save an extra dollar, an investor already needs to take into account market risk and the impact of extra taxes. It will be hard to justify saving up to, say, a nest egg of $750,000 in a 401(k) if you expect the government to take $100,000 in income taxes, potentially another $100,000 through a VAT, and yet another $200,000 through taking away Social Security benefits. Better to keep a modest nest egg of $150,000, keep the Social Security checks and spend the rest now.

Of course, you could set the threshold for denying Social Security benefits very high to avoid this, but then it has little effect on Social Security's finances.

Posted by: justin84 | September 7, 2010 1:40 PM | Report abuse

@justin84:
That's exactly the situation we have today. The 'rich' are being given a benefit and they are saving differently because of it.

So according to you, no difference than the current situation. Next argument?

Posted by: rpixley220 | September 7, 2010 2:04 PM | Report abuse

"Sure some people will try to game the system, but the vast majority won't."

rpixley220,

It's not 'gaming the system', it's about reducing the expected rate of return on investment to below zero.

Think of a family, head of household at age 30, earning $80,000/yr through retirement at 67. This household can expect $31,938 of promised benefits from Social Security (set both inflation and wage increases to 0%).

http://www.mortgageloan.com/calculator/social-security-benefits-calculator

If the people in this household expect to live to age 82, that's $479,070 in promised benefits expected by the household.

Suppose that $800,000 is the value of financial assets at which a household receives no Social Security benefit. Note most people have no where near this much in financial assets, and so cutting off Social Security benefits at $800,000 doesn't do a whole lot for Social Security's finances.

Saving 10% yr at a 6% real return in a 401(k) has the household sitting on $1,018,145 at age 66 (I assume a 4% real return in a 3% inflation environment). This generates a $4,860 annuity a month, inflation adjusted, for 30 years. Let's ignore taxes for now.

If the household saves 5%, it has $509,072 at age 66, generating a 30 year annuity of $2,430. Add in Social Security of $2,661.50 per month, and the household takes in $5,091.50. We can make assumptions about taxes, but I believe taxes are lighter on Social Security than other forms of income (could be wrong here).

Social Security is also insulated from a VAT tax, because the Social Security benefits are indexed to prices, whereas private savings would not be.

Given all this, and given that a 6% real rate of return is far from guaranteed and the fact you might not live to enjoy retirement, the household rationally would save only 5% rather than 10% of their income (perhaps even less).

Even a family that can save up to $2,000,000 would see a major disincentive to save. A family that earns $200,000/yr from 30-67 would receive $41,812/yr from Social Security, or $627,180 over 15 years. The loss of Social Security benefits is effectively a 31.4% implicit flat tax on this household's $2,000,000 nest egg. If you assume this family has to pay income tax on this nest egg at an average 15% rate, the nest egg is taxed at 46.4%. Then you need to consider the risk of a VAT, market risk, risk of dying before retirement, estate taxes etc. The young family might well decide to spend more on vacations to the Carribbean, wine from France and luxury cars from Germany rather than save.

This decrease in saving will reduce resources available for investment, reducing long run economic growth and living standards, while doing little to shore up Social Security. Setting the theshold even lower is likely to be ineffective because more and more households will rationally see saving for their retirement as a fool's errand.

Posted by: justin84 | September 7, 2010 2:17 PM | Report abuse

"That's exactly the situation we have today. The 'rich' are being given a benefit and they are saving differently because of it.

So according to you, no difference than the current situation. Next argument?"

rpixley220,

It's completely different that the situation we have today.

I agree the upper middle class probably saves less than it otherwise would without Social Security.

It will be much much worse if in addition to providing a benefit, you also tell the upper middle class you will take said benefit away if they save too much. Saving will fall further. This behavioral reaction to the implicit tax on savings will offset much of the expected improvement in Social Security's finances.

Posted by: justin84 | September 7, 2010 2:34 PM | Report abuse

"You say means testing like it will destroy things.

Means testing happens each and every day and it manages to do more good than bad. Sure some people will try to game the system, but the vast majority won't.

People try to cheat on taxes all the time too, many get caught, but the vast majority don't because it just isn't worth it for them; or, gasp, they aren't lying cheats which you seem to assume everybody else is."

Obviously you do not live in the real world, where the tax gap is something like $300-400 billion dollars, last time I checked.

Posted by: krazen1211 | September 7, 2010 6:33 PM | Report abuse

Tables like the above should list this option:

'The problem is 30 years in the future. If the Trust Fund is depleted by then, and pay as you go doesn't cover all the expenses, just cover the difference from general revenue.'

That's the Sawicky option and it works for me. Then again, this squabble really has nothing to do with the end of the Trust Fund. It has everything to do with not repaying a single penny of it.

Posted by: Nat_51 | September 8, 2010 12:41 AM | Report abuse

"The 'rich' are being given a benefit..."

What benefit do you imagine they are being "given"? They pay for what they get in return for their contribution, and it ain't a good value.

If high wage earners (those earning at or above the annual cap) were allowed to opt out of Social Security, they would be very foolish not to do so. With the $$$ paid into the system, they could purchase for themselves much better disability insurance (more coverage per $1 and less stringent disability criteria), survivor benefits, and retirement annuity than they will get from Social Security.

It is low wage earners who are "given" a benefit, getting back a many times greater rate of return on their contributions than those at the top.

You can if you want argue that the "rich" should do even more than they currently do to subsidize the Social Security benefits of low wage earners. It is untruthful, though, to say that the "rich" (earning >$106K a year qualifies one as "rich"?!) are currently being "given" a Social Security benefit. The truth is they pay rather dearly for what they get.

Posted by: 2ndopinion | September 8, 2010 11:53 PM | Report abuse

"The 'rich' are being given a benefit..."

What benefit do you imagine they are being "given"? They pay for what they get in return for their contribution, and it ain't a good value.

If high wage earners (those earning at or above the annual cap) were allowed to opt out of Social Security, they would be very foolish not to do so. With the $$$ paid into the system, they could purchase for themselves much better disability insurance (more coverage per $1 and less stringent disability criteria), survivor benefits, and retirement annuity than they will get from Social Security.

It is low wage earners who are "given" a benefit, getting back a many times greater rate of return on their contributions than those at the top.

You can if you want argue that the "rich" should do even more than they currently do to subsidize the Social Security benefits of low wage earners. It is untruthful, though, to say that the "rich" (earning >$106K a year qualifies one as "rich"?!) are currently being "given" a Social Security benefit. The truth is they pay rather dearly for what they get.

Posted by: 2ndopinion | September 8, 2010 11:53 PM | Report abuse

Pardon my obtuseness, but can someone explain to me what the numbers next to those 30 different options are supposed to represent. What for example does the 0.3 next to "increase the payroll tax by 1% in 2012" signify? Is it a measure of how many people favor that option, how much the measure would bolster Social Security reserves, or what? (I assume it is the later, since the 0.6 next to a 2% increase is twice the 0.3 next to the 1% increase, but what is the measure employed?)

Posted by: 2ndopinion | September 9, 2010 12:39 AM | Report abuse

Cut Defense spending by 15% and dedicate all the savings to making Social Security solvent. Problem Solved.

Also, options in graph are from an organization more concerned about balancing the budget then they are about maintaining an adequate social insurance program.

Every piece of data presented by the CBO while it may be numerically correct is presented in such a way to make the reader think that Social Security benefits need to be cut.

Notice this set of proposals has 18 options that cut benefits and only 12 options that raise revenues or increase benefits.

Posted by: cautious | September 9, 2010 5:12 AM | Report abuse


Presently, Social Security is working. However, the system will soon be overwhelmed to the point of self-destruction as tens of millions of new recipients enter the system and plan to receive their monthly checks. Privatization or partial privatization may be the answer. How I wish all the moneys I contributed had been privatized from the outset of my contribution history. How secure is Social Security, and Can Social Security be Saved? http://www.christianretirement.com Social Security can and will be saved in some form in the future. However, its metamorphosis, in both dollars received and the age at which one may receive them, may be unrecognizable to the average retiree of today.

Posted by: rroad2111 | September 9, 2010 9:46 AM | Report abuse

Glad to see another study that duplicates:

http://www.socialsecurity.gov/OACT/solvency/provisions/summary.html

Posted by: AndrewDover | September 12, 2010 1:30 PM | Report abuse

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