Steuerle and Rennane: Slow growth, don't cut benefits

Over at the Christian Science Monitor's Tax Vox blog, the Urban Institute's Gene Steuerle and Stephanie Rennane argue that Social Security reform doesn't need to cut benefits, only slow the rate at which they grow.

I'm sympathetic to the argument, which has obvious elements of truth: under almost all reform plans, no future retiree would receive lower benefits than a retiree today receives. Say what you will about the "cat food commission" – the left's name for President Obama's fiscal commission – but if you're not eating cat food today then you wouldn't be under a reformed Social Security plan (and in fact, you'd be much less likely to be in the future). Put another way, the percentage of seniors in poverty can be significantly reduced even with a reformed Social Security program that cuts overall costs.

That said, it's also useful to think of the "benefit cuts" claim in comparison to "tax increases." Taxes increase each year even if the tax rate doesn't rise, simply because individuals have higher earnings. But a conservative wouldn't call this a tax increase. But in the same way that Social Security collects revenues through a tax rate, it also pays benefits through a "replacement rate," that is, the percentage of pre-retirement earnings replaced by the program. That percentage would go down under reform, at least for middle and high earners, and so I think they'd be justified in calling this a "benefit cut."

But Steuerle and Rennane point out that life expectancies are rising, meaning that part of a cut in monthly benefits would be recouped by collecting over a longer period. This is a legitimate point, since with longer life expectancies the required replacement rate at retirement would fall. (Why? Your ideal retirement would match the level of consumption you had before retirement; if life expectancies rise then you would need to save more to cover that longer retirement, which would reduce your pre-retirement consumption. A lower replacement rate could then match this pre-retirement consumption level.)

In other words, the issue is more complicated than most folks on either side would really think. Yet another reason why Social Security reform is hard.