We Can Shore Up Social Security Without Harming Seniors

June 18, 2012

Every year for quite awhile now, the annual Social Security Trustees’ report evokes alarmist headlines.

“Social Security Still Going Broke (Again),” trumpets the National Taxpayers Union. Politico columnist John Goodman chimes in with “Social Security trustees: We’re going broke.”

And every year experts — and responsible news media too — explain that the Trust Fund isn’t going broke at all.

What with payroll taxes coming in, plus interest on the reserves invested in Treasury bonds, the Fund is now expected to have enough to pay full retirement benefits until 2033.

After that, it will still have enough to pay three-quarters of what retirees should get under current law until 2086.

This year’s report nevertheless projects a shortfall three years sooner than last year’s. Trustees blame the economy — specifically, lower real earnings due to the energy price spike and sluggish growth in average hours worked.

Republicans don’t fret such nuances. They blame the President for not reforming entitlement programs — as if this is something he could do without their votes in Congress.

Well, there are apparently proposals they’d be willing to support — unless they came from the White House, of course.

Back in 2010, House Majority Leader John Boehner teed up the idea of raising the retirement age again. Several leading House Democrats seemed willing to consider this, though it’s doubtful they’d stick their necks out now.

Three Republican Senators introduced an additional wrinkle last year. Once the retirement age gets to 70, index it to life expectancy — presumably in expectation that the average life span will continue to increase.

Average life span, note, not the life expectancy for low-income people. Overall life expectancy gains have masked significant — and growing — differences between richer and poorer Americans.*

The Senators also proposed changing the benefits formula so that “high earners” — those with average annual earnings of a mere $43,000 a year — would get less than they would under current law.

Presidential hopeful Mitt Romney apparently has something similar in mind — for both the age increase and the curbed benefits growth for those “with higher incomes.” Needless to say, no details here.

The modified means test is one of several schemes for reducing Social Security pay-outs.

One that’s gotten more play across the political spectrum would adopt a different cost-of-living adjustment index.

The COLA is now linked to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) — a measure based on the costs of a standardized market basket of goods and services typically purchased by households in the groups named.

Economists of diverse political leanings have suggested switching to the so-called chained (or chain-weighted) Consumer Price Index.

The co-chairs of the President’s deficit reduction commission liked this idea. So did both the concurrent Bipartisan Policy Center Task Force and the Gang of Six Congress members who later thrashed out an abortive plan to end the debt ceiling standoff.

The chained CPI attempts to reflect consumers’ behavior in response to prices as well as prices themselves — specifically the fact that people change their buying habits when prices rise. When beef prices increase, they buy less steak and more chicken, etc.

A switch to this CPI would thus slow benefits growth. But would it accurately reflect retirees’ living costs? Apparently not.

The Bureau of Labor Statistics has been maintaining an experimental CPI for elderly Americans for about 30 years now. It’s found that the index rises somewhat faster than the CPI-W, mainly because seniors spend a greater share of their budgets on health care, housing and, to a lesser extent, heating oil.

The average gap between the indexes isn’t great for any one year, but it mounts up over time. Switch to an index that rises more slowly than the CPI-W and the gap between living costs and benefits increases.

So we’ve got objections to this, objections to that. Yet everyone agrees that Social Security needs some sort of fix. And the sooner it’s made, the less drastic it will have to be.

There’s another obvious fix. Scrap the cap, as it’s commonly referred to. In other words, subject all earnings to the payroll tax rather than give a free pass to everything over a fixed amount.

The cap is adjusted annually, using yet another CPI, but nothing’s been done since 1983 to capture the increasing amount of income flowing to a relatively small number of high-earners.

As a result, the tax has become more regressive. And the Trust Fund is losing revenues that could help it stay solvent — perhaps for 75 years, the Strengthen Social Security coalition says.

Scrapping the cap alone won’t solve the problem, however.

If that’s all that’s done, then the extra revenues gained would ultimately get paid out in higher benefits because, at this point, benefits are based partly on lifetime income subject to the payroll tax.

But one could adjust the formula so that contributions above the current cap didn’t count toward benefits — or did, but only partially, as Congressman Ted Deutsch (D-FL) has proposed.

Seems to me a whole lot fairer to lift the cap than to force people in their late 60s to continue working — or fall into poverty because they can’t get work if they lose their jobs.

Also fairer than reducing benefits across-the-board when we know — or ought to — that a large majority of seniors would be hard put to pay for basic living costs, as about one in six are even now.

* A recent brief by the Economic Policy Institute addresses in detail other arguments against raising the retirement age. Heavily sourced for those who want to plunge in even further.

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Social Security “Fix” Would Leave Low-Wage Workers Broke

September 6, 2010

Social Security celebrated its 25th birthday last month. The milestone probably got more attention than it would have otherwise because the system is reportedly in the bulls-eye of the President’s fiscal commission.

Why it should even be on the table isn’t altogether clear. By law, benefits must be self-sustaining, i.e., funded by payroll taxes, plus the interest on Treasury bonds in which excess revenues are invested.

Perhaps the answer is that benefits owed are projected to consistently exceed annual payroll revenues, beginning long about 2015. So the federal government will lose funds it’s been using for other purposes. Thus, as New York Times columnist Paul Krugman says, the system’s costs “could prove unsupportable for the federal budget as a whole.”

This year is a foretaste of what could happen because for recession-related and accounting reasons the system is short on current tax revenues. The trustees project a $41 billion deficit, excluding interest income. Alarm bells from the far right notwithstanding, this doesn’t mean the system is broke.

The trustees project a reversal in 2012. But they say the trust fund, i.e., the bonds and accumulated interest, will be exhausted in 2037. At that point, payroll taxes will still cover about 78% of benefits, plus administrative costs (now less than 1% of the total). But what about the missing 22%?

Virtually all the experts agree that the federal government shouldn’t wait till the system gets to this point. People who’ve retired and those near retirement age will have counted on Social Security for a good part, if not all of their income for the rest of their lives. It will be too late for them to prepare for a drastic drop in benefits — assuming they could have if they’d known in advance.

Hence the many views we’re seeing now on what should be done to keep the system solvent. One that’s getting a lot of play is to prospectively raise the eligibility age for Social Security retirement benefits.

The government already did this to prepare for the bulge in claims by aging baby boomers. If you were born after 1942, you’ve got to be at least 66 to retire with full benefits. The age continues to rise until to reaches 67.

House Minority Leader John Boehner recently got a good bit of heat for suggesting the age be raised to 70. House Majority Leader Steny Hoyer has also spoken of some mix of reforms that could include a higher retirement age or “one pegged to lifespan,” which probably means a retirement age indexed to life expectancy.

I’m with those who think this is the wrong way to go. A couple of major reasons.

First, low-income workers have jobs that are physically demanding, e.g., construction, waiting tables, home health care. They may not be able to keep up with these demands in their mid-60’s or later.

Second, both they and other older workers who lose or have to quit their jobs will have a hard time finding alternative employment. We’re already seeing this in the experience of older workers laid off because of the recession.

In fact, one of the reasons Social Security is technically in the red this year is that far more older workers are claiming benefits before they reach full retirement age. This means their monthly benefits will be permanently reduced.

By how much depends on how far short of 66 they are. The cut could be as much as 25%. The National Committee to Preserve Social Security and Medicare says that workers who retire at 62 when the full retirement age reaches 67 will lose 30%.

Now, this may not matter a whole lot for older workers who’d held high-paying jobs. They’re likely to have 401(k) accounts and possibly other investments that will have regained their value by the time the proposed age increase went into effect.

But it’s going to cut the rug out from under low-income workers. The Center on Budget and Policy Priorities recently issued a Social Security fact sheet that gives us some indicators.

Today, more than a quarter of post-retirement beneficiaries rely on Social Security for more than 90% of their income. Surely the vast majority of them were low-wage workers. Obviously any benefits reduction would have a major impact on their financial situation.

Looking toward the future, the amount of pre-retirement income Social Security replaces will fall because more will be deducted for Medicare premiums — unless health care costs miraculously level off to the overall inflation rate. By the time the retirement age reaches 67, it will probably be, on average, about 31%.

It will, of course, be less for workers constrained to retire earlier. There will be more of them in this group if the full retirement age is raised. And if their earnings were low during their work years, they’ll be in dire straits.

Some have suggested that the higher eligibility age could include a carve-out for low-wage workers. Or maybe the Supplemental Social Insurance rules could be changed so that benefits would be available to those with less than debilitating conditions.

This, however, would still leave a very large number of older workers between the rock and the hard place unless they could continue working full time until well into what are supposed to be our golden years. Much more likely for professors, lawyers, financial managers, etc. than for factory workers.

Seems to me there ought to be a better way to shore up Social Security — and I don’t mean Congressman Paul Ryan’s new/old plan to privatize it.