Thursday, April 2, 2009

GOP Budget proposal for Social Security: How much of the deficit would it fix?

Rep. Paul Ryan (R-WI) introduced the House Republican budget proposal, which includes provisions to help reduce future Social Security deficits by reducing benefits for high earners. The full description is available here, but the key is to reduce the 15 percent replacement factor in the Social Security benefit formula by 0.25 percentage points per year beginning five years prior to the projected insolvency of the program. Since the trust fund is currently projected to be depleted in 2041, this implies benefit reductions beginning in 2036.

Some background: Social Security has three "replacement factors" by which benefits are calculated. For a new retiree in 2009, Social Security replaces 90 percent of the first $744 in monthly earnings, 32 percent of earnings between $745 and $4,483, and 15 percent of earnings above that level. Reducing the 15 percent replacement factor wouldn't affect most retirees because their earnings during their working years weren't high enough to enter into it.

I've estimated the effects of this provision on Social Security solvency using the Policy Simulation Group's GEMINI microsimulation model. The parameters imply that the 15 percent replacement factor would go to zero after 60 years, so I have assumed the policy continues from 2036 onwards. Under these assumptions, the policy in the House Republican budget would reduce the 75-year Social Security actuarial deficit by around 5 percent, from 1.70 percent of taxable payroll to 1.61 percent. The key reason for the small effects is the delay: were the proposal started sooner it could do go much further toward addressing the problem, and without impacting low earners who rely on Social Security the most.

The House GOP proposal solves less of the long-term deficit than President Obama's tax plan – which addresses around 15 percent of the shortfall – but they target some of the same people, albeit at different times of their lives. Obama's plan to impose a surtax on individuals earning over $250,000 would hit high earners during their working years; the House GOP's plan would hit high earners during their retirement years.

It's great that the House GOP has put some ideas on the table, just as it was great when then-Sen. Obama did. The key is for both to do more, do it sooner, and – hopefully – do it together.

1 comment:

WilliamLarsen said...

The 1977 change to the benefit formula was done to remove congress from determining the SS-OASI benefit.

It is amazing that they are still trying to fix the problem. You have pointed out most of the problems with tweaking the 15% replacement factor. You numbers agree with what I did over a decade ago. The problem it is too little and too late. At most it adds a year maybe two. But in the scheme of Social Security, is it not the concept to last the life of the U.S.? Is not anything less just putting a very expensive patch on a horrible program?

There is no painless solution and the longer we wait to admit it, the worse it will get.