Monday, November 18, 2013

A plan to keep Social Security solvent forever

- by New Deal democrat

My modest goal in this post is to set forth a plan that keeps Social Security able to pay promised benefits forever, that does not require any "compromise" with the  GOP and so can be passed simply with democratic majorities in Congress, and can explicitly be embraced as a campaign promise.

This plan relies upon using the Social Security Trustees' Report projecting the condition of the fund 20 years out, and automatically making small adjustments each year in the direction needed to balance the Fund over that time frame.  In this way it maintains the solvency of the Fund - forever.  How can I make such a bold claim?   Because if small changes are made automatically each year to maintain the program in actuarial balance 20 years out, the changes can run in both directions, alternately increasing or decreasing the Trust Fund balance as necessary, in very small and gradual steps.

The small adjustments each year are made to all four measures that have been suggested to balance the fund over the 30+ years since the retirement of the Baby Boom generation has been proclaimed as entitlement Armageddon, plus a fifth that, frankly, should have been put in place 30 years ago, but better late than never.

I offer this in contrast to the approach by corporatist democrats in Washington, who are back to doing what they seem to do best: pre-compomising with a resolutely intransigent GOP to give away the progressive family jewels of the 20th century in return for (tempoary, until the fist year of the next GOP Administration) tax increases on the wealthy, or maybe even just some transient infrastructure or education spending.  Let me be as clear as a bell. I do not favor any "grand bargain" of any sort with the GOP. It is clear that when the GOP next returns to power,whenever that will be,they will welch on the deal, just as George W. Bush took Clinton's emerging budget surpluses and "gave you back your money" by taking the surpluses in the trust fund accounts and giving them to the top 1% in the form of mammoth income tax cuts. 

So let's start by understanding why we need to address this issue at all:
While revenues from payroll taxes are less than current Social Security benefits, the program also receives interest payments on accumulated trust fund surpluses. Those surpluses now exceed $2.7 trillion and are projected by program trustees to rise to more than $3 trillion by 2021. Under current rules, surpluses would then decline due to rising numbers of baby boomer retirees and growing annual deficits. The trust fund would be depleted in 2033, at which time annual payroll taxes would fund about 75 percent of promised benefits.

Note that this is hardly a looming crisis, and you can find all kinds of quotes from the 1990's and even the 1980's if you try, that by now, i.e., 2013, the program would be broke or exhausted. To deal with the shortfall, it is estimated that expenditures to continue to fund Social Security benefits at current levels must rise from 3% to 4% of GDP.  Meanwhile, tax receipts have decreased from 1980 from about 22% of GDP to 18% of GDP.

In short we have a real, but relatively distant, and relatively small, problem with Social Security, that needs to be addressed, but need not in any way materially change the program. Over the 30 years+ since this problem was first identified, four types of fixes for this shortfall have been proposed:

  • 1. Withholding taxes, currently at 6.2% per employee,and matched by 6.2% from the employer,up to about $113,000, can be increased.
  • 2. The amount of wage revenue captured by the trust fund can be increased. When Social Security started, 90% of all earned income was subject to the tax. Due to ballooning income inequality, the last time I checked only 83% of earned income was subject to the tax.
  • 3. The retirement age, currently slowly rising to age 67, can be further increased.
  • 4. Benefits can be cut, by not keeping up with consumer inflation (for example,by implementing an alternative, lower calculation of inflation).
All of these approaches have drawbacks, especially if implemented singularly.  I want to examine each.  If you want to cut to the chase, skip down to the heading "HOW THE PLAN WORKS."

1.   Increasing withholding taxes

The Northwest Plan, proposed by Bruce Webb and Dan Coberly, makes no cuts at all but relies entirely on increases to withholding taxes:
restoring Social Security to Short and Long Term Actuarial Balance requires tax boosts of 0.02% ( 0.20% per year (once again about a $1 a week for the median income household) for the ten years starting in 2026. Starting in 2036 those increases slow to only needing to change every four to ten years.
While this plan avoids cuts, it is unclear if average workers of Gen X or the Millenial generation would be willing to stomach a 2% increase in taxes from 6.2% to 8.2% in order primarily to fully fund Boomer retirements.

2.  Raising the amount of earned income subject to tax withholding.

What about the remedy touted by 2008 candidate Obama?  According to a report prepared by the Congressional Budget Office [pdf]:
Raising or eliminating the cap on wages that are subject to taxes could reduce the long-range deficit in the Social Security Trust Funds. For example, if the maximum taxable earnings amount had been raised in 2005 from $90,000 to $150,000—roughly the level needed to cover 90% of all earnings—it would have eliminated roughly 40% of the long-range shortfall in Social Security. If all earnings were subject to the payroll tax, but the base was retained for benefit calculations, the Social Security Trust Funds would remain solvent for the next 75 years. However, having different bases for contributions and benefits would weaken the traditional link between the taxes workers pay into the system and the benefits they receive.
As noted in the quote, an over reliance on this alternative makes Social Security look more like a welfare program, transferring money from the affluent to the working poor, and once Social Security is viewed as a welfare program it is politically doomed.

3.   Raising the retirement age.

One type of cut sometimes touted is to the age at which Social Security benefits can be collected.  The Social Security Trustees reported:
[If] the increases in the retirement ages occur over a very long period[, a] mid-career worker born in 1972 and turning age 62 in 2034 would have a FRA of 67 and 6 months under all three options, with an EEA ranging from age 62 under the growing-gap option to 63 and 6 months under the gap-4 option ..... The growing-gap option would produce the maximum number of early retirement months (that is, 66 months) for this worker, resulting in a benefit reduction of about 32 percent (see the previous tabulation). The effects on benefits for a midcareer worker would not be significantly different from scheduled benefits; however, the effects on benefits would be larger further in the future. An individual born today and turning age 62 in 2074 would have a FRA of 69 and 2 months under each of the options, with an EEA ranging from age 62 under the growing-gap option to 65 and 2 months under the gap-4 option. The growing-gap option would produce the maximum number of early retirement months (that is, 86 months) for this worker, resulting in a benefit reduction of about 40 percent.
As is obvious from the above quote, raising the retirement age for workers can result in a drastic cut in benefits, ultimately gutting the program.

4. Implementing a lower measure of inflation

During his 2008 presidential campaign, Obama repeatedly said that he favored raising the amount of earned income subject to withholding taxes to fix the problem.  He has not said a peep in favor of this solution since he won that election.  Instead, he has most recently explicitly embraced cutting benefits over time by indexing them to chained CPI , which tends to rise about 0.3% less per year than the usual CPI measure of inflation.

How would that change impact retirees?  The AARP reports that
If the chained CPI-U were implemented in 2014, a single person claiming the SSI federal benefit standard in 2030 would receive $32 less (-4.6%) per month in real terms, and a person claiming SSI benefits in 2050 would receive $71 less (-10%) per month in real terms, than if the CPI-W continued to be used to determine the SSI benefit standard. In addition, a Social Security COLA based on the CPI-W is applied to SSI benefits after receipt has started. After 10 years of SSI benefit receipt, the SSI benefits of a person who first claimed in 2030 would, by 2040, be $52 less (-7.3%) per month in real terms, and the benefits of a person claiming in 2050 would, by 2060, be $89 less (-12.6%) per month in real terms, than if the CPI-W had been used to determine the benefit standard and the COLA.
If chained CPI were used to calculate benefits continuously over the next few decades, ultimately Social Security would dwindle into a cipher.  In short, over the lifespan of today's teenagers, Social Security would essentially cease to exist.

Obama's current pre-comprosmise of moving to a chained CPI, with increased benefits to lower earners, will effectively kill the program over about a 50 year span, partly by turning it into an unpopular welfare program, transferring withheld wages from affluent middle class earnersand giving them to working class and poor workers, and partly because the chained CPI continues to cut into benefits forever, eventually rendering Social Security a cypher of its present self.  In fact I am on record that any "democrat" who votes for such a cut will never under any circumstances have my support or my vote, and if that causes a new progressive political party to rise, I will join that party.

5. Claw back excess benefits paid after the beneficiary has passed away

 One other option that I've never seen discussed, but in my opinion should have been implemented long (as in, maybe 30 years) ago, but better late than never,  is a clawback of excess benefits due from estate  tax.  Since the automatic COLA was added in the early 1970's, there were many recipients of Social Security who received far more in "real" benefits than they ever paid in.  At some level,  these excess benefits should be clawed back on a progressive basis.  In other words, if a worker received much more in Social Security benefits than s/he paid in, adjusted for inflation, then the excess should be remitted back to the Fund on the recipient's death, for example, $1 clawed back for every $3 that the estate exceeds $500,000.


My plan is actually pretty simple.  How to ensure that there is no shortfall in 20 years or so? Very gradually, on an annual basis, make small changes - in baby steps so that no impact is large - to all four of the above items (only applied to those not already receiving the benefits), until the program is in long term balance, plus implementing the clawback provision.

Here's my specific proposal:  in addition to a clawback provision, in every year where the Trustees report that the Fund will be underfunded by at least 5% 20 years out, the following measures (none of which would apply to current recipients) are taken:

  • 1. The percent of total earned income collected by the fund increases by 1%, and continues to rise by 1% a year until it reaches 90% of all earned income! the percentage it was in the early decades of the program.
  • 2. Withholding taxes increase by 0.1%.  For example, in the first such year withholding taxes increase from 6.2% to 6.3%.
  • 3. The age at which persons qualify for benefits, and to qualify for full benefits, increases by one month.
  • 4. The annual cost of living increase is reduced by 0.1% a year for 10 years (meaning a 1% cut in benefits 10 years out.
The process would get repeated every year until the Trustees report that the Fund is not projected to have any shortfall 20 years out. 

In addition to the clawback, the only embellishment to this method is that raising the amount of income captured to 90% of all income in 1% annual steps should be done regardless of the status of the other steps, since that is the level of income that in earlier times was subject to withholding.

The result is that, under this scenario, about 40% of any such shortfall is made up by raising the amount of income subject to the withholding tax. The remaining 60% would be made up at about 20% apiece by each of the other measures. (plus an unknown amount due to the clawback provision). At current projections, it would probably require 4 or 5 years of such measures in order to fully fund Boomer retirements.  If 5 years were required, then withholding taxes would rise to 6.7%, the age for full retirement would rise to 66 years and 5 months, and benefits 15 years out would be 5% less than at present.  To repeat, once this is done then the Trust Fund is fully funded for all future retirees.

Aside from the fact that the current projected shortfall is addressed in baby steps, the virtue of this plan is that its automatic adjustment process is permanent.  Should the Fund ever be overfunded by 5%, then each of the 4 measures can be reversed in the same baby steps.  Benefits can gradually be increased and retirement ages and withholding taxes lowered until the Fund is reduced to show balance in 20 years.

This plan does include minor, and limited, cuts.  A 5% decrease in the average annual benefit of roughly $1225.45 a month, or $14,305.40 a year, is $715.20 a year (15 years from now, only as to new beneficiaries).  Over a 20 year life expectancy from age 65, this would total about $14,300, so the average wage-earner would have to save this amount over their work lifetime to make up for this cut.   At some point at the low end of the scale, asking a member of the working poor to save even another $4,000 or $6,000 over a 40 year work-life still may involve hardship.  If so. this should be addressed outside of the Social Security system, since anything that turns Social Security more into welfare will severely undercut its broad public support.

Similarly, some progressives, such as Duncan Black a/k/a Atrios, are calling for Social Security benefits to actually be increased.  This plan does not address that issue.  My point is that, first, we have to balance the current system.  Once we do that, if we decide funding must be increased, then we can discuss raising withholding taxes or the percent of earned income captured even further.   Any giveaway that detracts from the public seeing that the Trust Fund is solvent in the long term, undercuts the long-term political viability of the system.

To put it bluntly, once this plan is implemented then Social Security is, or should be, "off the table" forever, even unto the grandchildren of today's teenagers and beyond.   Since it is a budget item, it could be passed with 51 votes in the Senate. I offer it as proposed legislation to be pledged and passed by the Democratic Party, with no participation or compromise with the GOP whatsoever, should the voters give democrats a majority un both Houses of Congress.