Wednesday, May 6, 2015

Where Lindsay Graham is Wrong on Entitlements (and I used to be)

Sen. Lindsay Graham is an entitlement reform hero – a guy who’s been willing to get out there on crucially important but politically unpopular issues. But in a discussion of his potential presidential campaign (probability 0.925, he says) he makes what I now consider to be a mistake on entitlement reform: fixing Social Security, he says, “so simple you could do it on the back of a napkin.”

I used to think that. You can go to a list of reform options – raising the retirement age, cutting COLAs, whatever you like – and patch them together until the savings are enough to erase the long-term deficit. And you’re done.

Here’s the problem: that approach assumes that Social Security is working perfectly, with the exception of being underfunded. In other words, Social Security policy effectively has one lever, with one end labeled ‘More Taxes’ and the other ‘Less Benefits.’

But if Social Security isn’t working perfectly then the Chinese-menu approach will cement in place problems that could be fixed. And, by being fixed, make Social Security work better even while we’re lowering costs.

For instance, Social Security leaves almost 1-in-10 retirees in poverty, despite spending $900 billion per year. We could give every retiree a poverty-level benefit and take the elderly poverty rate to zero for about half that amount. That’s pretty much what I’ve proposed.

Likewise, Social Security penalizes people who choose to delay retirement. If you continue to work, you’ll continue to pay taxes. But, on average, you’ll receive only 3 cents in extra benefits for each dollar of taxes you pay. So why not cut the payroll tax on older workers?

Similarly, the Social Security disability program could be reformed to encourage rehabilitation and re-employment rather than disability and dependency. But those reforms have nothing to do with tax rates or benefit formulas.

In other words, Social Security is an underfunded government program. Meaning, it’s underfunded and it’s a government program. We can make improvements on both ends of that equation.


JoeTheEconomist said...

Andrew, I have a piece at a publisher which takes your idea of reform and asks....

If we are going to make it a welfare program, let's just end it and transfer the surplus to a real welfare program. Social Security has no idea what a person's needs are. Why will Social Security be a better version of welfare?

WilliamLarsen said...

After years of writing nearly every elected US rep since 1984 to about 1996, I learned that they did not want to address the problem of Social Security due to "the third rail." I ran in Indiana for congress from 2002 to 2008 with stating we need to tear out the third rail, smelt it down and make a better safety net. Based on the trust fund in 2002 my plan was to means test all current and future beneficiaries because SS was not fair, count not be made fair by taxing and cutting benefits because someone was always going to get hurt. 38 million beneficiaries v 160 million workers and countless future workers; who pays the price?

The idea was to use the Trust fund to pay a means tested benefit to people over age 65. Everyone would be required to consume/spend down their assets before being eligible for benefits - similar to Medicaid. I estimated that the trust fund would last no more than ten years. However, at the end of this ten years, workers would have been able to save their 10.6% OASI tax and actually accumulate wealth for their retirement. However, it would take another 30 to 35 years for this transition to reach equilibrium. when about 9% of those over age 65 would need assistance. In essence cost would be cut by 90%.

The idea of only workers being required to take care of seniors in poverty is wrong. If we are going to take care of seniors in poverty, then all should help in the concept. This means General Revenues should be used.

The problem is we have lost 13 years. the SS-OASI trust fund though larger in total dollars is worth far less in buying power relative to the number of seniors and cost of living. Congress and the president have squandered 13 precious years. In fact they have squandered 78 years and have absolutely nothing to address the root cause.

I with JoeTheEconomist "f we are going to make it a welfare program, let's just end it and transfer the surplus to a real welfare program." I assume the the surplus refers to the SS-OASI trust fund.