Saturday, March 12, 2011

Eight Ways to Fix Social Security

In my previous post, I explained why Social Security needs to be fixed. I said that I would offer seven ways to accomplish this in today's post. I've actually done one better than that. Here are eight ways to fix Social Security.

Raise the retirement age.

When Social Security was first implemented, there were not many Americans who lived to age 65 (now 67). Today, due to advances in health care, more of us reach retirement age and live long past retirement age. This means that Social Security will pay benefits to more people for a longer period of time. Raising the retirement age would mean Americans would work longer, thus paying into the system for a longer period, and take benefits for a shorter period.

Index benefits to inflation instead of wages.

Social Security benefits increase each year based upon an index tied to wage increases. As wages rise, so do Social Security benefits. Over time, however, wages rise faster than the cost-of-living. Tying Social Security benefit increases to cost-of-living, rather than wages would, therefore, slow the growth of the program. For an excellent discussion of this proposal, watch this video from Paul Solmon on The Newshour.

Raise the limit on the amount that is taxed.

Social Security is funded through a payroll tax on workers and employers. There is, though, a cap (currently $106,800) on the wages that are taxed. You do not pay any tax on the amount you make above that amount. The cap was put in place to gain support for the program from upper-class voters. If there were no cap, wealthy workers would end up putting a lot more into Social Security than they would take out when they retire. One way to pay for Social Security deficits, therefore, would be to increase, or eliminate, the cap. Wealthier workers would pay more into the system and help pay for its deficits.

Means test benefits.

Social Security is not a welfare program. It is for everyone. This means that wealthy individuals can receive benefits along with our most needy seniors. One way to reduce the cost of the program is to add a means test. It would only be for those who most need it. The wealthy would get nothing, the middle class would get less, and most of the benefits would go to poor seniors.

One important consideration when looking at this solution, and the previous one, is that Social Security would become a welfare type program. Its main purpose would be to transfer wealth from the upper class to the lower class. Social Security already transfers some wealth from the most well off to the least well off. These two proposals would dramatically increase that tendency. While this would help balance its budget shortfalls, it may also reduce support for the program.

Increase immigration.

Due to the Baby Boom generation reaching retirement age, fewer workers are paying into Social Security for an increasing number of retirees. One way to deal with Social Security's budget shortfalls, therefore, would be to increase the number of young workers. Since most immigrants are young, and eager to work, increasing the number immigrants would accomplish this goal.

We have many restrictions on immigration in the US. Many of these restrictions are on high wage jobs, such as doctors and computer programmers, which pay more in FICA taxes than low skilled jobs. So, lifting these restrictions would be particularly beneficial.

Undocumented workers are also particularly good at helping us pay for Social Security because they pay into the system without taking out. But, for reasons I won't go into here, I would advise against policies aimed at increasing the number of undocumented workers.

Make more babies.

Another way to increase the number of young workers is procreation. Government policies aimed at encouraging citizens to make more babies have a poor track record, however. (For more, read this guest post by Brian Hollar.)

Personal accounts.

All of the above solutions deal with Social Security's fiscal problem—revenue increases are not keeping pace with the cost of the program. None of them, however, deal with the structural problem—it is a “pay-as-you-go” system. When Social Security was first passed, in 1935, Congress and President Roosevelt wanted a program that could go into effect right away. To do this, they created a program in which current workers would pay for current retirees.

When you pay into Social Security, that money is not saved for you until your retirement. Instead, you pay for those who are already retired, and when you retire, those that are working will be paying into the system to pay for your retirement benefits. This, however, is the root cause of Social Security's current deficits. We have made promises that we could not keep because we did not plan for a situation where we would have fewer workers paying into the system for an abundance of retirees.

One way to deal with this structural problem would be to wean ourselves off of a pay-as-you-go system for future generations. We could let young workers today put some of their FICA taxes into a personal account. In exchange, they would agree to reduced or no Social Security benefits when they retire.

One of the difficulties of this proposal, however, is that while it helps with the structural problem, it would make the fiscal problem worse in the short term, because, less revenue would be generated for current retirees. This solution, therefore, should not be attempted without first addressing the fiscal problem.

Friday, March 11, 2011

Does Social Security Really Need Fixing?

In a recent Op-ed for USA Today, Office of Management and Budget Director Jacob Lew argued that “Social Security isn't the problem.” Social Security isn't running a deficit, according to Lew because the Social Security “trust fund” will make up the difference between the revenue generated by Social Security taxes (FICA) and the amount Social Security pays in benefits for the next 26 years.

Other Democrats have also made similar claims. Harry Reid, Chuck Schumer, and Richard Durbin have all recently claimed that Social Security does not add to the deficit (see FactCheck.org). Also, former Clinton Labor Secretary Robert Reich recently wrote, “Now that Social Security has started to pay out more than it takes in, Social Security can simply collect what the rest of the government owes it. This will keep it fully solvent for the next 26 years.”

Until last year, Social Security had been running surpluses. The revenue generated by the FICA tax was more than enough to pay out to Social Security beneficiaries. The Social Security trust fund used this additional money to buy treasury bonds, or borrow money from the federal government. These Democrats are arguing, therefore, that since Social Security is now running deficits, it only has to cash in those bonds to pay the difference, and it has enough bonds on hand to pay the difference for another 26 years.

There is a major flaw, however, in this logic. Social Security is a federal government program. So, when one part of the federal government borrows money from another part of the federal government, it amounts to nothing more than paper shuffling. (There are actual papers that are “shuffled” in filing cabinets at the Social Security Administration office in Parkersburg, WV.)

When Social Security cashes in those bonds, the revenue has to come from the federal government. That means that, if the federal government is running deficits as it is now, it must borrow more money by selling more debt to someone besides itself to pay for it.

As the Concord Coalition points out, the Congressional Budget Office has made the same point when it wrote:
Trust funds have no particular economic significance. They do not hold separate cash balances; instead they function primarily as accounting mechanisms to track receipts and spending for programs that have specific taxes or other revenues earmarked for their use.
Social Security deficits, therefore, are contributing to our federal government deficits. The Social Security “trust fund” is a mirage. It is simply an “accounting mechanism” and contains nothing of real value.

Social Security is the single largest federal program and is a major contributor to our federal government deficits today and in the future. Unlike the deficits in Medicare and Medicaid, however, fixing Social Security's problems are easy and well known. In tomorrow's post, I'll describe seven ways to fix Social Security. Can you guess all seven before then? Let me know in the comment section below.

Thursday, March 10, 2011

RIP: David Broder

The media suffered the loss of one of its best journalists yesterday. David Broder wrote opinion editorials for the Washington Post, was a frequent guest on political news programs such as Meet the Press, and won a Pulitzer Prize for his editorials during the Watergate Scandal.

Broder's writing was known for its clarity, and his ability to engage questions larger than the hot topic of the day. He was a consumer of political science research and brought some of what he gleaned from these studies to his writing.

Even though a liberal Democrat, Broder did not shy away from criticizing democratic leaders. For instance, in 2007 he criticized Senate Majority Leader Harry Reid for killing an effort to withdraw troops from Iraq because, by Reid's estimation, it would benefit Democrats in the next election to do so. And more recently, he criticized President Obama for missing an opportunity in his recent State of the Union Address to tackle tax reform.

Rest in peace, Mr. Broder. You will be missed.