An Opportunity to Really Fix Social Security

By :: April 9th, 2013

The White House has put out the word that President Obama’s budget will propose changing the way government adjusts benefits for Social Security and other programs (as well as the income tax).

Liberal Social Security advocates are furious. By shifting to a measure called the chained Consumer Price Index, the retirement system would boost benefits by a bit less each year than under the current formula, a gradual change whose bite would grow over time. These advocates are vowing to kill the idea dead. This is something of a conversation-stopper.

Here’s a better idea: Use this technical change as an opportunity to redesign the retirement program. Most Social Security experts, no matter their political persuasion, know this must be done. Why not do it now?

While there may be broad disagreement on the solutions, there is a fairly strong consensus on the nature of the problem. Social Security has done a remarkable job of reducing poverty among the elderly. But its design is badly outdated, better reflecting the nature of work and family structure in 1935 than in 2013. And it has insufficient resources to pay all promised future benefits.

Here are just four of its design problems:

Benefits are insufficient for long-time low-wage workers, never-married and divorced women, and many widows.

Benefits are insufficient for the very old, who often face significant long-term care needs not covered by Medicare.

Social Security encourages many people to stop working at age 62 when they could--and probably should—work longer.

Social Security Disability is both a policy and administrative catastrophe. It encourages fraud and discourages people who could work from doing so.

Overall, Social Security provides about 37 percent of all income for Americans 65 and older. For those in the bottom 20 percent of incomes, it accounts for nearly 85 percent. Yet the Center for Retirement Research at Boston College estimates that even with Social Security, 61 percent of low-income households were at risk in 2010 of not maintaining their (already low) standard of living once they turned 65. Why not do something about that?

There are literally dozens of ways to fix the problems of financing and benefit adequacy.  Melissa Favreault and her colleagues at Urban Institute’s Retirement Policy Program have described many of these ideas and their consequences:

There are the bumper-sticker solutions such as chained CPI or raising the amount of wages subject to the payroll tax. And there are more complicated ideas such as creating a new minimum benefit for poor seniors or reforming the Supplementary Security Income (SSI) program. They all deserve a good debate and some action.

Bob Greenstein at the Center on Budget and Policy Priorities suggests bundling the chained CPI inflation adjustment with protections for very poor and very old seniors. And the White House hints Obama may do that. But the discussion should not stop there.

The curious thing is that progressives support many of these changes. But they don’t want to engage in a Social Security debate at all. They see Obama’s offer as a one-sided concession on a line-in-the-sand issue.  And, some fear it will open the door to private accounts—an approach many on the left simply hate.

There are even private account solutions many Democrats would embrace, such as add-on savings to supplement traditional benefits. But let’s say Obama and Congress really don’t want to go there. They could still take some big steps to modernize an important program that does not work nearly as well as it should.

Obama has opened the door. Why not walk though?


  1. ND  ::  2:23 pm on April 9th, 2013:

    I would add to this that:

    (a) 2-earner families are overtaxed and underbenefitted. Sole breadwinner families are undertaxed and overbenefitted.

    (b) benefits are progressive and there is no property-capital-earner tax at all so all the burden of the progressivity is borne by (a) high wage earners and (b) debt, more likely in the future as the Baby Boomer bulge move into retirement.

    These issues hit Gen-X (ages 35-48) very hard and are a big reason only 43% of college-educated Gen-X women have had children (and only 33% of college-educated Gen-X men). Social Security in its current form is effectively an anti-family, eugenics policy aimed at them.

  2. AMTbuff  ::  3:37 pm on April 9th, 2013:

    Social Security benefits are way down the list of reasons for lower fertility in the college-educated. The birth control pill is at the top of that list.

    One can argue that the very existence of Social Security reduces fertility by eliminating one incentive to have children: No longer do childless people fear that their old age might be spent in extreme poverty.

    As to Howard’s question, it is difficult to imagine agreement on any fiscal issue in isolation. Given the ideological divide between the parties on the proper size and scope of government, a grand bargain is the only possible kind of bargain. Social Security is not isolated from the overall fiscal gap.

    Nothing can be settled until everything is settled in a deal that both parties believe will be very difficult for the other side to dismantle later.

  3. ND  ::  8:32 pm on April 9th, 2013:

    Excess Social Security taxes (and other taxes) collected on 2-earner families are a big impediment to fertility among educated people.

    I could not be a good mother without earnings and a good dad as a partner, so I am not willing to have a child unless under those circumstances. Because the federal tax and benefits system works against me and makes me subsidize less healthy family structures, especially sole breadwinners and nonearning parents (whether married or not), it makes it even more difficult for me to accomplish the basics of a healthy home into which I would be willing to bring a child.

  4. ND  ::  8:41 pm on April 9th, 2013:

    Also, I would suggest that anyone who has a child for the narcissistic reason of paying for or caring for him/her in old age is not prepared to be a parent yet? This is backwards; the parent pays for the child, not the other way around. It is one thing to ask a child to do some basic care and financial administration of a parent’s affairs in their decline; it is quite another to burden the child with full financial and personal care responsibility for the parent.

    So I am glad we have the birth control pill for such folks to use so they don’t have children before they are mature enough (and financially stable enough) to handle the responsibility as well as take care of themselves.

  5. Michael Bindner  ::  10:27 pm on April 9th, 2013:

    Agree that Obama should engage in this debate. Indeed, the most liberal idea is to change the employer contribution from a payroll tax to a consumption tax and credit each worker the same amount, with a higher floor for individual payroll taxes and a lower ceiling (to avoid paying EITC and the worries of high income seniors getting Social Security). The most Socialist idea is to have these employer contributions hold insured employer voting stock (with a third of that stock being held in a common fund to make retirees whole if the business fails, or intervene if a quarter of stockholder shares suspect something is amiss). The employer payroll tax must go up if there is no such reform, as benefits must rise in order to cover higher premium costs in Medicare Parts B and D.

  6. Michael  ::  12:51 am on April 10th, 2013:

    I thought that under the Social Security reform of 1983, Regan & Greenspan agreed that 90% of national earned income is suppose to be subject to the Social Security payroll tax. Because income has been largely stagnant for the masses, with generous increases for the 1 percenters, currently, only 80% of national earned income is subject to the Social Security payroll tax. This is the first correction that should be made. Personally, I would accept chained CPI if all earned income were to be subject to the Social Security payroll tax. It’s a travesty that elected officials, who are mostly rich, are playing politics with Social Security, with citizens overwhelmingly poor enough needing to depend on it.

  7. Tax Roundup, 4/10/13: Return-free filing? Mistakes not to sweat. And: W-2 Donuts? « Roth & Company, P.C  ::  8:33 am on April 10th, 2013:

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  8. AMTbuff  ::  12:16 pm on April 10th, 2013:

    The graduated (aka progressive) income tax is a bigger culprit than SS taxes. If one earner has a high income the low earner pays income tax at a high rate.

    That said, a single-earner couple is optimal for the children. Parenting really is a full-time job. If the tax system is going to encourage choices which benefit children, encouraging parents to scale back consumption and live one income is more sensible than a lot of other things the tax system does.

  9. Kathy Ruffing  ::  10:00 am on April 11th, 2013:

    The statement that “Social Security Disability is both a policy and administrative catastrophe” is breezy, catchy…and unfounded. The SSA actuaries and others have amply documented that most of the growth in the program stems from demographic factors: the aging of the baby boom, the rise in women’s labor force participation, and the increase in Social Security’s full retirement age from 65 to 66 (and eventually to 67). Sure, there’s some extra growth whose causes we can’t fully quantify. We know intuitively (though it’s tricky to show statistically) that a sour economy boosts applications and, to a lesser extent, awards. But it’s tough to get DI. Most people who get onto the program never work again, even though the program’s work incentives explicitly allow and encourage them to do so to supplement their average benefit of a measly $1,100 a month. In fact, even most people who are rejected don’t return to work at substantial earnings.

    Outright fraud makes for great “gotcha!” videos but is really rare. A transcript isn’t available yet, but at the March 20 hearing of the Ways and Means subcommittee on Social Security, I think the Inspector General replied (in answer to a question) that his office referred 32 cases for prosecution in 2012 out of about 32,000 investigations picked from about 3 million applications. The real shame is that Congress consistently underfunds program-integrity activities (chiefly “continuing disability reviews”) that are documented to pay for themselves by up to $9-to-$1.

    Howard, there’s a lot of distorted and sloppy media coverage of the disability programs. Let’s try to raise that standard.

  10. Bart Zehren  ::  4:24 pm on April 24th, 2013:

    How about expanding Social security by admitting teachers and other other types of public sector employees into the program?

  11. Michael  ::  7:08 pm on April 24th, 2013:

    I know 2 retired teachers, who were never part of the Social Security system. Though their monthly pensions are in the $4000’s, their retirement system pays only $100 a month, towards their health insurance, so the retired teachers have to pay $700 a month, out of their own pockets.

  12. Bart Zehren  ::  7:57 pm on April 24th, 2013:

    Michael: I appreciate your comment. Are you agreeing with me about teachers and Social Security? It’s not clear.

  13. Michael Bindner  ::  7:31 pm on June 26th, 2013:

    Personal Accounts are only a good idea if they are both insured and lead to concentrated investment in the employing company, thus restoring something close to the old system of pensions as well as creating more workplace democracy. If they are merely a transfer to Wall Street, they are a non-starter which will hurt workers in the short and long term, increasing the unaccountability of management to capital that is already killing capitalism.

    As far as chained CPI, I will give it an unqualified maybe. What is more important is both raising the basic benefit, even after increasing the premiums for Medicare Parts B and D so that they fund more of the program. An uncomplicated way to do that is to credit employer contributions equally for all workers, rather than as a match to the employee contribution, taking off the cap on the employer side and setting the tax rate so that it is adequate to support future benefits for whatever future period is analyzed. This might be done through shifting to a Value Added Tax, although a Net Business Receipts Tax (like a VAT but with set asides) would be necessary to create private accounts.

    Liberals may be afraid of personal accounts, however Socialists are not necessarily opposed, especially if well briefed.

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