Monday, November 30, 2015

A Social Security Reform Plan That Could Pass

Over at National Review, I write about the politics of the flat-benefit Social Security reform plan that I first wrote about for NRO a few weeks ago.

The article provides more details, but here’s the short story: the flat benefit plan is far simpler for reformers to explain; does not renege on the benefits participants already have earned; and would provide benefit increases and payroll tax reductions for current and near-retirees.

Does that guarantee success? NOTHING guarantees success in entitlement reforms. But there’s a better chance of success with this approach than with conventional reforms, which are a very tough sell.


WilliamLarsen said...

"Another advantage of the flat-benefit plan is that it honors the benefits Americans have already earned. It doesn’t renege on benefits that workers accrued through prior work, but it acknowledges that we need to change the terms on which future benefits will be earned."

Why keep the promise to current beneficiaries? Why are they special? While at the same time you change the rules for those who have been working let say 10-30 years assuming the flat benefit affects those currently under age 45.

Your article states a $10 trillion short fall. Do you really believe this or are you using the 75 year solvency period which includes all revenues collected during the 75 years, but excludes 75% of the accrued liabilities that are paid outside the 75 year solvency period?

I proposed a flat benefit to those who met a means tested wealth/income limit in 2002. It would have used the trust fund to fund the benefit for the first ten years and then rely on federal income taxes. The worker would have had access to the 10.6% OASI tax that to save. Over time I projected that the number of seniors who would need assistance at any given time would be about 9%. Far easier to care for 9% than 100% when half do not need it.

I was unable to find what happens to the SS-OASI payroll tax. Does it go away?

"Anyone proposing a magic reform that guarantees full promised benefits without raising taxes is peddling snake oil."

I agree 100% with this statement. The problem is how do you fund current beneficiaries while changing the rules. Does it entail trillions in borrowing to fund the boomers while current workers pay far less in taxes, for a flat benefit while saving more in a 401K. Sorry, from what I read, there is insufficient values, dates and tax rates to determine if this plan is anything but snake oil.

Andrew G. Biggs said...

Why keep the promise to current beneficiaries? Because people object to have benefits they've already earned reneged upon -- something which would be illegal in the private sector -- more than they object to altering the terms on which they earn future benefits. If you can design a plan to pay what they've already earned, that's a plus in terms of getting it passed.

The $10 trillion figure is SSA's 75-year number. Yes, there are different ways to state things, but none is perfect. The SSA 75-year figure is conventional.

A means-tested flat benefit is cheaper, but has moral hazard/disincentive problems. To address those, you'd have to mandate 401(k) participation, which may or may not be legal, and you'd have to monitor people's savings more tightly. Paying everyone a poverty-level benefit is cheap, even if the poverty level is indexed to wage growth, so I saw that as the better choice.

The OASDI payroll tax would be maintained, at least in terms of how I've sketched the plan. But the plan is compatible with tax reforms that would eliminate the payroll tax. And beginning around 2050 or so, the system would start to run payroll tax surpluses.

The plan doesn't have any transition costs and maintains trust fund solvency, so there's no need for borrowing.

WilliamLarsen said...

Andrew, thanks for the comments.

IF I understand you correctly, the current 10.6% payroll tax would be maintained. Where would the additional money come from for workers to invest in 401K's? I take it investing in the 401K would be mandatory. I could easily see where a 708% contribution rate would easily equate to the current scheduled SS-OASI benefit.

The problem I have is if workers actually begin to save an additional 3-6%, that spending will drop. This will put pressure on jobs, wages and the economy.

It is my opinion that we passed the point of no return decades ago in trying to extricate from Social Security. Clearly a flat rate of $950 is a very large cut in benefits for future beneficiaries, far more than the current under current law. Under the plan to pay current beneficiaries their current benefits creates a two tiered SS program with dramatically different benefits.

There is no way that I have found in 40 years of modeling SS that SS can be made fair. The funds were never collected and set aside to pay future benefits, but instead used to pay current beneficiaries. As the ratio of workers to beneficiaries decline the burden grows exponentially.

SS began with no beneficiaries, no trust fund and zero liabilities. Today it has 160 million workers paying into SS with 45 million (Equivalent Full age retirees), $27 Trillion in bonds and unfunded liabilities of ~$34 Trillion (5% return, 2% inflation and 3% wage growth).

Myself with five kids looking at the problem; there is no solution that is not painless.

Do I burden my kids with my expectation of getting my benefits simply because I am old enough or currently receiving benefits? I would say no. I want my children to do better than I have. They certainly did not make the mess.

If Social Security is in such dire straights, why compound the problem and let financially able beneficiaries not participate in the pain while under your plan we penalize those workers who have a standard of living lower than those they support?

I could see where we could eliminate 50% of the cost of SS-OASI by means testing. That saves money today. It also allows the payroll tax to be decreased allowing workers to save more.

The flat rate plan is basically reducing the 41% targeted benefit to about 22% of what it was scheduled, but continuing the same payroll tax. Why is this better than just letting SS stay the current course and pay only what payable benefits under current law? I think we need to leverage the $2.7 Trillion to last longer so that workers can save. Unless this is done, I do not see where is any net gain.

Andrew G. Biggs said...

The whole 12.4% tax remains, except for the elimination at age 62.

Additional 401(k) contributions would come from workers. They wouldn't be required to contribute more, but auto-enrollment and auto-escalation would be made universal, and policies to reduce employer costs for 401(k)s -- such as multiple employer DC plans -- would be used to make 401(k)s cheaper for small employers to establish.

Changes to benefits would be phased in over time to reduce notches. But yes, new retirees would be eligible for the poverty-level minimum benefits; current retirees with benefits below poverty would get higher COLAs to top them up. In the long run (say, post 2050) the plan would be cash-flow solvent and at that point you need to decide what to do regarding taxes or benefit levels.

Means-testing is great, so long as no one reacts to it. But they will react to it, by working and saving less. Given the low cost of giving everyone a poverty level benefit, I chose to go that route rather than means-testing it away. Benefits would still be subject to income taxes as under current law, but other than that there's no explicit means test.

Arne said...


You cannot find a solution because you demand too much of SS. You complain that it pays out too much to people who don't need it while simultaneously complaining that it does not provide an adequate return on investment. You need to consider the possibility that you can't reach a solution because your starting assumptions are wrong. It also appears to me that your solution space is limited because you assign no value to taking care of our elders.

You act like workers have always saved enough for their retirement years. No, workers have always collectively taken care of the continued lives of their parents after they could no longer work. The mechanisms have changed as we moved from hunter-gatherers to farmers to industrial workers. It may seem harder now that people are living longer, but society is rich enough to handle it. As a portion of what we spend on ourselves, what we spend on each retiree is getting smaller.

With adjustments, SS can continue to allow workers to take care of workers forever. What Andrew suggests is new to the US. It works elsewhere, but I worry that by breaking the tie to wage history it will become more susceptible to lobbying by those who have enough money they cannot imagine ever needing help.

WilliamLarsen said...


"No, workers have always collectively taken care of the continued lives of their parents after they could no longer work. "

If no cohort collectively took care of themselves and placed additional burden on the following generation, then what you are describing is an ever downward spiral. In other wards, each generation takes from the following, as the following generation becomes smaller in relationship to their parents, the burden must increase.

I am all for repealing SS right now - cold turkey. I would rather pay a means tested low benefit to those in need than to pay everyone a benefit that requires those with a lower standard of living to support. In other words, if you want my help, you need to carry yourself as far as you can before asking me and my family to support you. But, when I do support you, it is not going to be in a life style that is grandier, but frugal.

What Andrew is proposing is to lock in forever a 10.6% OASI tax to fund a $950 benefit indexed by a higher inflation. This type of benefit requires at most a 3%-4% payroll tax. The reason why the payroll tax stays at 10.6% is because the payroll tax does not work for the worker. Why would a worker support this? Most have mortgages that have interest rates of 3-4%, Student loans of 5-6% and credit card debt.

Past generations like my parents paid life time taxes of about 5-6% for benefits that let us say are full scheduled benefits. The problem is they did not fund their own benefits. Had they, they would have saved a lot less.

Social Security is not fair, it cannot be made fair and to allow an entire generation to escape any payment for the failure called Social Security is wrong. Years ago many predicted a "War between Generations." It was projected that future taxes would get so high that the workers would revolt. This has happened in France, Germany and England. They call them national strikes. The term voting with your pocket/wallet may come back in style. It does not take a rocket scientist to figure out that a benefit of $950 for a 10.6% payroll tax is a non starter. Prohibition was repealed after 15 years and that was an Amendment. The Social Security Act is not an Amendment.

Years ago I thought one way to yank congress's chain on this subject was to have all workers take a day without pay. SS would loose 0.4% of revenues. In some ways we have already seen similar tactic, that is higher benefits in lieu of wages.

Andrew's proposal does not make life better in the future. He says it takes until 2050 to reach its full potential, My plan would over the same time frame free 91% of us from Social Security and at the same cost.