More Social Security By Cassandra

10 Jan, 2005 by John Hawkins

Print this article Font size -16+

Never have so many opined at such great length to so little effect… Reading about Social Security reform this weekend, my tortured brain finally exploded. Depending on who is blathering at the moment:

1. There is no Social Security crisis.
2. The End Is Near: bend over and kiss your tuckus goodbye.
3. Social Security reform is no fit task for a Presidential legacy. Instead, Bush should blow up something really big, or hurl enormous and potentially costly objects into space.
4. The Shrub is on the right track with SS reform, but is going about it all wrong… see paragraphs 2-159….yada, yada, yada…

After two days of intense, alcohol-mediated, throbbing pain, I came to appreciate the value of brevity. Of everything I read, my favorite was this response to Paul Krugman’s aptly-named “Confusions on Social Security”:

This is so tortured it is hardly worth reading or answering.
Paul: baby boomers retiring means too many recipients getting benefits, too few workers paying into system. Which word don’t you understand?

Of course when folks like Charles Rangel (D, Hyperbole) insist on just randomly making stuff up as they go along, you take your laughs where you can find them. Because he so rarely makes sense, I have taken the liberty of translating Rep. Rangel’s remarks for you below:

“But the facts prove that there is no imminent crisis with Social Security. The nonpartisan Congressional Budget Office says Social Security can pay full benefits for nearly 50 years. So, there is no crisis.”

TRANSLATION: Current estimates show payroll tax receipts falling short of outgoing benefits as early as 2018. Social Security can pay full benefits for nearly 50 years: if we raise taxes to replace the depleted Social Security trust funds lent out to cover current spending.

But there is a challenge, because people are living longer.

TRANSLATION: If people live longer, but the retirement age at which Social Security kicks in remains at 65, they collect benefits for a longer period of time while fewer younger people pay into the system. BUT THERE IS NO CRISIS. We’ll just raise taxes.

“Unfortunately, the President’s proposal for privatized accounts makes Social Security weaker, not stronger. It drains $2 trillion from the trust fund, leading to drastic cuts in benefits of more than 40 percent.”

TRANSLATION: This worked like a charm during Kerry’s campaign. No point in mentioning that unless we raise taxes, there won’t be enough money to pay out benefits anyway. It’s one or the other: you can’t make something out of nothing.

Fortunately for my sanity, some commentators actually had serious things to say about Social Security reform. The WaPo, for once resisting the temptation to be snarky, did a credible job of explaining the Bush cost-cutting plan. Currently, increases in Social Security benefits are indexed to national wage growth. The new plan would index benefits to inflation. The benefit of this system is that if wages increase faster than inflation (which they will as long as productivity continues to rise), money flows into the trust fund faster than it is paid out:

If the commission’s plan were implemented, the average earner who works until the age of 65 would get a tenth less than under the current system if he or she retired in 2022. By 2042, it would be a quarter less; by 2075, just over half of what’s promised by the current system.
If these cuts sound harsh, that’s partly because the current system makes promises that aren’t affordable. The practice of wage indexing that the administration appears keen to scrap is one source of this excessive generosity. The indexing works by taking the 35 highest-paid years of a person’s career, then upping the numbers by the rate of national wage growth in the intervening period. Suppose, for example, you earned $40,000 in 1988. Wages have increased by about 80 percent since then, so your 1988 earnings are upped to around $72,000 for the purposes of calculating your pension entitlement. Because of this system, benefits are on an expensive growth path. The average earner who retires this year at 65 gets an annual benefit of about $14,000, whereas an average earner who retires in 2050 is projected to get over $20,000 in today’s dollars.

The Post argues the cuts are too drastic. But like the vast majority who write about Social Security reform, they mistakenly treat it as a retirement system rather than a safety net. Benefits should be indexed to the cost of living, as they are with most retirement plans. The beneficiary of a safety net has no reason to demand a rising standard of living at the government’s expense. As the Post points out, beneficiaries can postpone retirement or supplement their Social Security benefits with a private savings or a retirement plan.

One of the more interesting proposals I read was another WaPo article that proposed solving the shortage of younger workers by using the payroll tax to incent couples to have more children:

There are many reasons birthrates are falling, but Social Security itself is likely a major cause because of the raw deal it creates for parents and the enormous subsidies it provides to non-parents. By raising and educating their children, parents provide the system with essential human capital. The cost of this contribution, in both direct expenses and forgone wages, is often measured in the millions.

Yet parents get no compensation from Social Security, nor from the wider economy, for the investments they make in their children. Instead, Social Security pays the same benefits, and often more, to people who avoid the burdens of parenthood. So long as Social Security effectively penalizes people for having the very children the system requires, it contributes to a downward spiral of falling birthrates leading to higher and higher tax rates.

Here’s a possible solution. Instead of slashing benefits across the board and borrowing trillions to create a risky system of personal accounts, use the same money to offer substantial tax relief, and extra benefits, to married parents who successfully raise their children. For example, have one child, and the payroll tax you pay (and that your employer nominally pays) drops by one-third. A second child would be worth a two-thirds reduction in payroll taxes. Have three or more children and you wouldn’t have any payroll taxes again until your youngest child turned 18.

When it came time to retire, your Social Security benefit (and your spouse’s) would be calculated just as if you had both been contributing the maximum Social Security tax during the period in which you were raising children, provided that all your children graduate from high school.

Can’t you just hear the Blue state shrieking now?

David Brooks had some observations on the politics of getting SS reform through Congress. Overall, good advice – he thinks Bush needs to sell reform to voters in a general way and leave the rest up to Congress, endorsing the following values:

First, Social Security reform should liberate our kids, not shackle them. It should eliminate the fiscal overhang so they have the money to tackle the problems that will arise in their own day.
Second, the reform should be transparent, so that people can see what kind of return they are getting on the money they put into the system. People should have information about their own lives.

Third, it should enhance people’s control over their own retirement. In a self-governing democracy, citizens should do for themselves what they can do for themselves.

Fourth, people should be encouraged to work longer. In an age in which many live into their 90’s, we should be making better use of people in their 70’s and 80’s.

Fifth, we need a savings revolution. The plan should encourage the nation to save more, to create more capital for America’s future greatness.

This is a time to trust the legislative process. Social Security has a better chance of passage if Congress leads. It’s also time to think big. Social Security reform plus tax reform go a long way toward getting you to an ownership society.

Finally, in the Weekly Standard, Irwin Seltzer has a very detailed treatment of SS reform that’s too involved to excerpt here. A few points:

1. “…we should be careful before spending a great deal of energy worrying about the financial condition of retiring baby boomers”. I wasn’t aware that this was the point of Social Security. Again, it’s a safety net, not a retirement system. Not all beneficiaries will be affluent DINC’s, but the projected shortfall affects the ability to pay out benefits to all beneficiaries.

2. While I agree entirely with his point about changing the escalator to a cost-of-living index, this is not precisely a ‘cut in benefits’, but a “cut in the rate of increase in benefits”. Semantics, but important when you’re living in a world of Charles (40% cut in benefits!!!!) Rangels. This is the oldest game in the world, and it matters.

3. When retirement plans are generally cost-of-living based, why on earth shouldn’t SS be?

4. I agreed (as did the Unit) with his points on the government as an insurer of risk on private retirement accounts.

5. Yes, yes, yes:

Where the president and his team might benefit most from further reflection is in the financing of Social Security. The current system of levying a 12.4 percent payroll tax gives us the worst of all possible worlds. First, it is a tax on jobs–payroll taxes make it more costly for employers to hire, and less attractive for workers to work. These taxes raise employers’ cost of hiring by 6.2 percent, and reduce the employees’ incentive to work by cutting their take-home pay.

Worse still, the system is regressive. Only salaries up to $87,900 (in 2004) are taxed, meaning that Wall Street mega-earners pay no more than their secretaries. This regressivity is ameliorated by the fact that most high earners continue working after the date at which they receive retirement benefits, and those benefits are taxed at the high rates that apply to all of the income earned by these older but unretired workers. Still, not the fairest of systems.

No, no, no:

…why tax a good thing, like jobs, rather than the many bad things that currently go untaxed? Two leap to mind: pollution and imported oil.

As the Unit pointed out, are these sustainable revenue sources? At any rate, they both amount to a tax on business – if you don’t like taxing jobs, it’s hard to see why either of these is better.

Anyway, interesting article. Assorted villainous snark aside, I can’t imagine a finer legacy than combining tax and Social Security reform.

Content used with permission of Cassandra from Villainous Company. You can read more of her work by clicking here.