Wednesday, June 17, 2009

David Walker on the Future of Social Security

U.S. News & World Report's Kimberly Palmer interviewed David Walker regarding the future of the Social Security program. Walker, formerly head of the U.S. Government Accountability Office and currently president of the Peter G. Peterson Foundation, had this to say:

There's broad-based agreement as to the major elements of what's needed for Social Security reform: to strengthen the benefit for people near the poverty level; to provide less replacement income for middle- and upper-income workers; to gradually increase the retirement eligibility ages in installments over time to encourage people to work longer and to index those ages to increases in life expectancy; to increase the taxable wage base cap. The Social Security tax is the most regressive tax that we have. Other changes include to possibly consider a very modest modification to the post-retirement cost-of-living increase and to consider an add-on supplemental savings account. If you did all of those things, you could provide for a solvent, sustainable, more savings-oriented Social Security system indefinitely.

Click here to read the whole interview.


WilliamLarsen said...

It is obvious Walker does not understand SS-OASI. Low income replacement rates are 90%. How much more are you going to replace? There are two bend points with three replacement rates; 90%, 34% and 15% . The more you make, the lower your overall replacement rate. We know under current conditions, that SS-OASI can pay at most 73% of promised benefits under current law. Under current law, COLA disappears as soon as the trust fund falls below 20% of projected expenses for any given year.

This means that modes changes to cost-of-living increase will do nothing because COLA is already projected to be zero each year after 2035.

Life expectancy is increasing more slowly each passing year. A baby born in 2009 can expect to live 17 days longer than a baby born in 2008 at age 67, which is full retirement age. With a life expectancy of 20 years, how much does increased life expectancy actually cost? 17 days divided by 7300 days is 0.23% per cohort. Inflation for the past decade has averaged over 3% a year.
The taxable wage base is already indexed.

In summary COLA is 0%, increased life expectancy adds 0.23% a year per cohort, taxable wage base is already indexed by the change in the US average wage and Walker thinks making changes to these variables will close a 40% revenue gap? The guy is nuts.

Andrew G. Biggs said...

While in a stylized situation replacement rates can't go below 90% for very low earners, in many cases in practice they do. There's a figure in my Senate Aging testimony from yesterday that shows how that can happen, and I have a longer paper (see that's wholly dedicated to this question.