Comments on Social Security Reform

By :: August 27th, 2010

We’ve gotten some interesting comments on our recent post about Social Security reform. In the post, we note that many reform options would slow the growth of benefits from one age cohort to the next, but not cut lifetime benefits relative to what people receive today. We didn’t focus on the specific issue of raising the retirement age, but used that option as an example of how benefits could continue to grow over time, but at a slower rate than what is currently being promised.

Regardless of the reform option in question, we certainly agree with those commenters who urged that we consider how reform might affect different groups in the population. We have long advocated proposals such as a minimum benefit level to maintain and increase progressivity—and offset the impact of other changes such as any increase in retirement age.

As a technical matter, however, it should be noted that adjusting the retirement age for life expectancy does not disproportionately affect lower-income groups, mainly because it does not affect disability insurance, and the disabled come disproportionately from lower-income groups. However, one should be debating the effects of the package as a whole on different groups—not one aspect of reform at a time.

The bottom line, though is that benefit reforms--whether increasing the retirement age, indexing benefit growth differently, or a variety of other schemes-- can be designed so that on average lifetime benefits continue to increase over time, though at a slower rate. That still leaves open the issue of how to distribute any particular level of benefits.

21Comments

  1. Anonymous  ::  1:24 am on August 28th, 2010:

    They should increase over time at whatever rate the economy is expected to, both in terms of annual purchasing power and lifetime earnings.
    How do you do that? First, you must increase the cap to not just inflationary levels, but also to capture the same percentage of workers. Second, you must increase tax benefits for children enough to keep population growth fast enough to offset the increase in life expectancy.
    The problems are both financial and demographic and both must be solved.

  2. Anonymous  ::  3:55 pm on August 29th, 2010:

    I just hope people remember that being on disability is difficult. the thought that anyone thinks the COLA 'increase' should be cut is very scary.

  3. Anonymous  ::  4:21 pm on August 30th, 2010:

    The basic problem with Social Security in all developed countries, OECD, are:
    1. The ration between active payers to the PAYGO system and the recipients of payments. It was calculated on a 4:1 ration which now is 2:1 or lower
    2. Most systems were designed to pay out less than 3 years and in the US it was on average never designed to pay out since the average life expectancy was 63.
    3. In the actuarial calculation for benefits it was estimated an annual GDP growth of plus 4 %. In OECD the growth is now going down to 2-2.5 %, the US is if they take the wrong decision on its way of mimicking old EU, lower than 2 % growth.
    Possible solutions:
    1. Raise retirement age
    2. Base calculations on a lower GDP growth of 2 % and lower payor per recipient i.e. benefits have to be cut and FICA tax will have to go up
    4. Make the system fully funded i.e. go from a PAYGO system to a fully actuarial system.
    5. Transfer some of the risk from the tax payer to the retiree
    In the late 90s Sweden did all of the above. Sweden is as a consequence the only OECD country that has a fully funded and fully stable Social Security system that has no impact on either tax payers or the economy.

  4. Anonymous  ::  4:26 pm on August 30th, 2010:

    For further reading on how Sweden did it and the Social Engineering 7th wonder of the world the “Automatic Balance Mechanism”
    AUTOMATIC BALANCE MECHANISMS IN PAY-AS-YOU-GO PENSION SYSTEMS*
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1132686
    Carlos Vidal-Meliá♠, María del Carmen Boado-Penas† and Ole Settergren‡
    ABSTRACT (13/02/2009)
    The aim of this paper is twofold: to show the usefulness of the automatic balance mechanisms
    (ABMs), and to explore the issue of introducing an ABM into the Spanish public contributory
    retirement pension system. With this aims in mind, we define the concept of the automatic
    balance mechanism and carry out an analysis of those existing in Sweden, Canada, Germany,
    Japan and Finland.
    We also present an indicator of the Spanish system's solvency which emerges
    from the actuarial balance sheet, and simulate the effect that certain changes in the parameters of
    the present system would have on solvency, showing the direction that could be taken if the
    mechanism were to be introduced in Spain.
    A comparison between the official balance sheet for
    the Swedish notional account system and our balance sheet for the Spanish contributory pension
    system is too provided. The main conclusion reached is that, given the system's situation of
    (in)solvency, the introduction of an automatic mechanism is highly recommended in order to
    guide the system onto the road to long-term financial stability, automate the measures to be
    adopted – taking them out of the political arena, avoiding their delay and a lack of time
    perspective – ensure the periodic monitoring of sources of pressure on pensions and build public
    confidence. (JEL: H55, J26, M49).

  5. Anonymous  ::  9:23 pm on August 30th, 2010:

    In 1983 Ronald Reagan's committee on Social Security determined that we need to tax the lower 90% of income for Social Security to survive. We did not do that. We now collect SS tax on the lower 83%. Lets look at recapturing that unpaid tax before we lower benefits. It's just not fair to us middle class workers to sacrifice when the top 10% get so much in the way of benefits.

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  7. Anonymous  ::  5:47 am on August 31st, 2010:

    Do you think Social Security benefits are too generous today?
    If not then we shouldn't be cutting benefits at all, since the same formula will be used in the future as is used to calculate todays meager benefits.
    The cost of paying full benefits to everyone is less than 1.5% of GDP. We are a rich enough nation to raise revenues to cover this cost.
    We have spent alot more money on projects much less worthy of support.

  8. Anonymous  ::  12:14 pm on August 31st, 2010:

    But does this at all include the current SS fund?

  9. Anonymous  ::  4:50 am on September 9th, 2010:

    I think Social Security is not generous enough on the benefits and yet why do they have to cut down on the average lifetime benefits rate? If you haven’t heard about the social security do-over, you are likely far too late. The Social Security payback option, or Social Security double-dip, lets people get early social security benefits to pay back later. This allows them to resume collecting bigger Social Security checks by starting over when they're older. When utilizing the Social Security benefits do-over, more cash is made than if you were to put that money into an annuity from an insurance business. This is becoming something everyone wants to do. The Social Security Administration hopes to be able to end this.

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