This is the second post on social security. Today, we’ll explore if the program will exist down the road. (Spoiler Alert) We will have social security until 2033, even if Congress does absolutely nothing. (Quite frankly, it seems quite plausible that nothing will be done for 21 years).
While it’s difficult to project exactly when the Social Security trust fund will run out, most estimates put the year between 2033 and 2037. In a post by the progressive Center on Budgets and Policies (CBPP), 10 Facts about Social Security, Fact #10 states, “Social Security can pay full benefits through 2037 without any changes, and relatively modest changes would place the program on a sound financial footing for 75 years and beyond.” CFBB also acknowledges that even after the program runs out, there will be enough to pay three-quarters of the benefits.
So good news, with some modest changes, social security can be saved way beyond 2037. But what steps do we need to take? What does “modest changes” really mean? Before we answer that question, there’s an interesting quote from CBPP that gives some insights to how Washington often works:
“The long-term gap between Social Security’s projected income and promised benefits is estimated at 0.7 percent of gross domestic product (GDP) over the next 75 years (and 1.4 percent of GDP in 2084). By coincidence, that roughly matches the revenue loss over the next 75 years from extending the Bush tax cuts for people making over $250,000. Members of Congress cannot simultaneously claim that the tax cuts for the richest 2 percent of Americans are affordable while the Social Security shortfall constitutes a dire fiscal threat.”
So what can we do to avoid Social Security’s long-term budget shortfall? Sadly, it is one of the most politically unpopular situations, and to grossly oversimplify a solution, reduce benefits, increase taxes. This can be done to protect the most vulnerable, and reductions can be phased in so as to not harm current recipients. In order to get there, it requires a commitment from leaders to a thoughtful and insightful debate on tax policy. (The thought of a “thoughtful discussion on tax policy” reminds me of a song my Aunt typically sings.)
To dive a little deeper, part of the solution surrounds increasing the maximum taxable income (Maximum taxable amount is 110,000). A report from Peter Orszag, former director of the Office of Management and Budget and Nobel prize winning economist Peter Diamond identifies that this is an important adjustment to preserve a progressive structure to Social Security.
Orszag and Diamond state:
“Furthermore, people with higher earnings and more education are increasingly tending to live longer than less-educated, lower-earning workers. This hurts Social Security finances and reduces progressiveness on a lifetime basis, since the highest earners receive payments over an increasingly longer period compared to everyone else. To offset this trend, our plan would gradually reduce the highest tier of the benefit formula, affecting the 15 percent of workers with the highest lifetime earnings.”
Two plans that have come out in the past few years to address our national debt crisis, also identify potential reforms to Social Security (the Simpson-Bowles and Domenici-Rivlin plans). CBPP states that both plans have differences how they approach social security, but also have some similarities, Center on Budget Policies and Priorities states both plans:
- Gradually hike the maximum amount of earnings on which workers and their employers pay Social Security taxes (currently $110,000) until it covers 90 percent of all earnings;
- Use the so-called chained Consumer Price Index (rather than the Consumer Price Index for Urban Wage and Clerical Workers) for future cost-of-living adjustments in Social Security and other programs, as well as for indexing income-tax brackets;
- Trim benefits to reflect rising life expectancy;
- Enhance benefits for workers who received low wages through much or all of their long career; and
- Adjust benefits upward for recipients who have been on the rolls for a long time, such as 20 years.
Social Security’s website offers memorandums for many of the plans to reform social security. There are some pretty in-depth analysis of reform plans, including the Ryan plan proposed in 2010.
Some policy analysts have suggested scrapping Social Security altogether and moving to personal accounts. These accounts present numerous challenges, which Orszag and Diamond happily list out in their report — inherent risks, cash flow challenges, concerns regarding pre-retirement access to earnings, investment decisions and administrative costs, just to name a few. If you would like to see a counter viewpoint, check out the Cato Institute defense of personal accounts. Cato also states in a blog post (also a video overview describing how personal accounts would work):
Other nations have figured out the right approach. Australia began to implement personal accounts back in the mid-1980s, and the results have been remarkable. The government’s finances are stronger. National saving has increased. But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed the Chilean system, is a great summary of why personal accounts are necessary. All told, about 30 nations around the world have set up some form of personal accounts. Even Sweden, which the left usually wants to mimic, has partially privatized its Social Security system.
Where do the candidates stand?
Romney/Ryan and Obama have been somewhat quiet on the issue. However, from what they have said, the candidates offer very different perspectives on how to reform Social Security. The Las Vegas Sun has a great overview of where the candidates stand, and is worth a read. Mitt Romney has proposed raising the retirement age, and that no tax increases are on the table. The article states:
“Mitt Romney and Paul support gradual reforms to Social Security that protect current beneficiaries from any benefit disruptions while strengthening the program to ensure that it doesn’t go bankrupt,” Romney campaign spokesman Ryan Williams said. Mitt Romney has not publicly supported personal accounts, and Paul Ryan supported President Bush’s plan for reform in 2005, and supports the use of personal accounts.
The article continues to provide some further insights on Obama:
During the 2008 campaign, Obama said he wanted to improve Social Security’s finances by applying the payroll tax to annual wages above $250,000. It is now limited to wages below $110,100, a level that increases with inflation. Obama also pledged to oppose raising the retirement age or reducing annual cost-of-living adjustments, or COLAs. “Let me be clear, I will not do either,” Obama said at the time.
Last year, however, Obama put on the table a proposal to reduce annual COLAs during deficit-reduction talks with House Speaker John Boehner, R-Ohio. The talks ultimately failed and nothing came of the proposal, but it raised questions about whether Obama would honor his 2008 pledge.
Obama has offered some further insights, as the Las Vegas Sun quotes the President from his 2011 State of the Union Speech: “We must do it without putting at risk current retirees, the most vulnerable or people with disabilities, without slashing benefits for future generations and without subjecting Americans’ guaranteed retirement income to the whims of the stock market.”
So there we have it, a brief overview of social security, vaguely where the candidates stand and how to close long-term budget shortfalls. Good news is that it looks like social security is going to be around for quite awhile. Bad news is, there seems to be very little political will to fix the program. We got until 2037 though, so maybe by then, we’ll have it all figured out.