Been a very busy past few weeks at work, so I haven’t had the time to blog. Bad Blogger! I found a pretty good summary of Social Security reform options on the AARP website. http://www.aarp.org/work/social-security/info-05-2012/perspectives-options-for-reforming-social-security-AARP-ppi-econ-sec.html The vast majority of options presented would help fill the funding gap discussed in the previous post (a few would increase it). The pro and con commentaries I found to be very predictable and not very nuanced. I am not going to summarize all 12 proposals that were presented (collective sigh of relief). I am going summarize one and provide some general observations.
The biggest observation was that taken together, these proposals would fill the funding gap of Social Security, and then some! If we were to add the estimate of the gap filling measures together, on the conservative side, they would fill 210% of the gap, the more aggressive proposals would fill 313% of the funding gap. What that says to me is that by doing even a portion of several proposals, we could solve the funding gap of Social Security. Hence my declaration earlier that solving the problem that Social Security presents (funding wise) is much more viable than doing the same for Medicare. Now, lets look at an example that shows how something that would seem simple and doable, gets complicated.
I’m using the example of raising the retirement age. If the retirement age were gradually raised to 68, beginning in 2023, it would fill 18% of the funding gap. If it were gradually raised to 70, beginning in 2023, it would fill 44% of the funding gap. With the increases in life expectancy, this would seem to make sense. Here’s the problem, the wealthier you are, the longer, in general, you can expect to live. Already, the top half of earners born in 1941 will live 6 years longer than the bottom half of earners. Lower wage workers will be more aversely affected because they already have fewer years to collect benefits. If the top-half earners’ years to collect benefits goes from 22 to 20, thats about a 9% reduction. If the bottom half earners’ years to collect benefits goes from 16 to 14 years, that represents a 12.5% benefit reduction. That’s the opposite of means testing! Speaking of which, a few of the proposals do involve means testing so that wealthy individuals would receive reduced Social Security benefits. Initially, I liked these ideas, especially if wealthy individuals were advocating for them. However, as a blog commenter pointed out, this would fundamentally change the nature of the program. Although it is true that some pay in more than they will receive and some receive more than they paid in, it is generally a pay in, pay out system. Introducing means testing would create and “Us/Them” “Makers/Takers” dynamic.
So, what’s my idea? I’d go for a combination of raising the cap on the payroll tax to cover 90% of earnings, the way it was intended to do in 1977, I would slightly increase the payroll tax rate, and I would modify the cost of living index to make the benefit increases over time more moderate. That would include one item where the wealthy pay more, one where everybody pays more, and one where everyone sees a small reduction in benefits.