Thursday, May 20, 2010

The right way to fix Social Security (according to the Seattle Times)

The Seattle Times
editorializes today regarding Social Security reform. I don't agree with them regarding the retirement age – Americans worked longer in the past, when more jobs were physically taxing, than they do today. But it seems like a good-faith effort to listen to all sides.

"Social Security needs to be fixed. This has been common knowledge for 15 years, and nothing has been done about it, even though the longer the delay the bigger the fix has to be. The time for delay is over. Congress needs to reach a bipartisan agreement, and do it.

"Much time was wasted a decade ago on the Republican proposals for private accounts. This page never supported those proposals. They would work very neatly for some people, but they pushed too much risk on individual workers — and the purpose of Social Security is to insure against risk.

"With the Democrats in charge, more attention has been paid to remove the $106,800 cap on taxable income and subject all wages to the employee-employer 12.4 percent flat tax. The trouble is that there is a reason for the cap. Taxable income is capped because the benefit is capped. Social Security is insurance — a way for workers to provide for themselves — and removing the cap makes it too much like welfare.

"These two approaches are partisan. They wrench Social Security rightward or leftward. There is no need to do this, nor do most Americans want it.

"Congress should split the difference between paying out less and paying in more. First, let the cap on taxable income rise faster, without removing it. Second, increase benefits slower over time. Neither of these changes need be hugely noticeable if done now.

"The 12.4 percent combined rate on wages should not be raised. This is already a heavy tax on the creation of jobs. And the retirement age, now 66 and creeping up to 67 for full benefits, should not be raised any higher. Sixty-seven is already too high for ironworkers, carpenters, miners, loggers, fishermen and countless other careers that call on bodies and hands.

"Splitting the difference on the tax cap and benefit increases saves Social Security without turning it into anything more than it already is, which is social insurance to provide a partial income in retirement. For a full income, Americans need to save and invest for themselves."


Bruce Webb said...

Well I would just add the caveat that 15 years of inactivity on the Social Security front has not in fact made the cost of the fix get larger. Instead despite the loss in current year income implied by a failure to implement a fix at the rate projected to be needed by each years 75 year projection and the upward bias via the roughly 0.6% change in actuarial gap due to change in valuation period the 1997 projected gap of 2.23% was in 2009 projected to be 2.01%, which is to say 10% smaller than projected 12 years ago.

It seems to me incumbant on advocates of Infinite Futire projections as a guide to policy to explain away that short term volatility, particularly as the gap was as low as 1.86% in the interim.

In any case the simplistic "the longer we wait, the higher the cost of the fix" doesn't match up well to first order numbers from the Reports. Somehow we are managing to survive the combined cost of current year non-collection of the projected gap and the increase attributable to change in valuation period where old year 76 becomes new year 75.

Bruce Webb said...

Oops. The change due to change in valuation period would be about 0.06% and not 0.6%. My bad.

Andrew G. Biggs said...


I understand your point, but the problem is that there isn't a causal relationship between our inactivity on reform and the size of the deficit. In other words, the projected deficit may have shrunk, but given that shrunken size (or whatever size you think it actually will be) we'd be better off solving it sooner rather than later because the costs are spread over a greater number of people. So even if your numbers are correct it doesn't really make a strong case for waiting, in my view.