|
|
A Plan, With Security
The Philadelphia
Inquirer
March 22, 2006
Social Security is a great program with a serious problem. The problem can be fixed, but not without some pain, in the form of benefit cuts and tax increases. The trick is to admit the pain is necessary, then spread it around equitably.
Today, the Editorial Board proposes a five-step plan to do just that. Each idea in it has been vetted by experts on entitlements. Other ideas might also help do the job.
The key point is this: Social Security's projected shortfalls are a problem that can be fixed without scrapping the program or its basic, admirable premise. It is not an individual investment plan. It is an intergenerational compact intended to make sure no American has to spend his or her twilight in poverty.
The Social Security debate has focused lately on the eroding popularity of President Bush's plan to revamp the program by shifting its focus to private accounts invested in the stock market.
Bush's political opponents can barely contain their glee that his effort seems to have stalled.
Even if his ill-advised plan fails, Bush deserves credit for putting Social Security's fiscal challenges front and center. He's right to insist that this non-election year is a good time to address them.
Those challenges won't go away even if the President is thwarted.
This crucial safety net for seniors, the disabled and dependent children faces a significant cash shortage, beginning in less than 20 years and growing worse in the decades to follow. The fault is not the program's. The problem is a blend of unavoidable demographic fact - the size and expected longevity of the baby boom generation - and culpable political choices. In a bipartisan fiscal charade, the White House and Capitol Hill for years have disguised deficit spending by dipping into Social Security surpluses that should have been saved to shore up the program.
But what's done is done, and what's coming demographically can't be avoided. Unless Congress takes steps to balance Social Security's books, the system will place an ever-worsening strain on the federal budget, taxpayers' wallets and the global economy.
The sooner Washington agrees on a solution, the less painful that solution will be for workers and for future retirees.
It's a hopeful sign that Republican lawmakers such as Sens. Charles Grassley of Iowa and Lindsey Graham of South Carolina recently have promoted the idea of fixing Social Security's deficit first. Private accounts by themselves do little to cure that shortfall, projected at $3.7 trillion over 75 years.
The Editorial Board's five-point plan involves some sacrifice from just about everyone. It combines two benefit cuts with two tax hikes. The fifth step brings a new group into the system to bolster its stability.
This plan also suggests two further ideas that might be hard to begin right now, but could offset some of the pain down the road.
Here goes:
1. Increase the wage base taxed by Social Security. Currently, the highest wage subject to the Social Security payroll tax is $90,000, a cap that increases annually by formula. Robert Ball, a former commissioner of Social Security on whose ideas this plan relies heavily, suggests raising that income limit to $140,000 by 2035. The tax is 12.4 percent, typically split evenly between worker and employer.
This option would affect only 6 percent of workers, and would restore the share of total U.S. income that is taxed by Social Security to the same level it was after the last major reform in 1983. Back then, 90 percent of all income in the United States was subject to the payroll tax. But due to the growing gap between high-wage earners and other workers, today that figure is 85 percent.
This option would lower Social Security's projected deficit by 32 percent.
Another way to achieve the same effect would be to create a two-tiered system, where all income above a certain threshold is taxed at a lower rate, possibly around 3 percent.
2. Dedicate a limited estate tax to Social Security. Instead of allowing the estate tax to expire in 2010, as Congress has approved, this tax should be preserved at its 2009 level, with the money going to the Social Security Trust Fund.
In taxing estates of more than $3.5 million ($7 million for couples), this option would affect less than one-half of 1 percent of all estates in the United States; the tax could be structured to avoid whacking family businesses or farms.
Sending this money to the Social Security Trust Fund would cover 26 percent of the program's projected deficit. That gets us up to 58 percent.
3. Switch to a new way of calculating cost-of-living increases.
Some economists argue that the so-called "superlative" cost-of-living index is more accurate, because it takes into account that many consumers substitute cheaper products when prices rise. Switching to this measurement would slow the growth of Social Security benefits by about 0.2 percent per year.
Making this change would reduce Social Security's anticipated deficit by 18 percent. We're 76 percent of the way to solvency.
4. Index benefits to adjust for increasing life expectancy.
Americans are living longer, and are healthier later in life. Given that, raising the retirement ages would be logical. That idea, however, is very unpopular. This elegant alternative would result in slightly reduced benefits, while giving people an incentive to work longer. The Social Security Administration would calculate increases in longevity annually and reduce benefits accordingly. The change would lower monthly payments slightly to reflect the longer period in which a retiree is expected to collect those benefits.
Under this choice, benefits for the average worker who is 25 years old today would be reduced by about 3 percent over the length of his or her retirement.
Benefit reductions would be smaller for workers over 25; there would be no benefit cuts for anyone 55 or older.
Choosing this option would reduce the projected deficit about 14 percent. Our solution meter is at 90 percent.
Combined with Option 3, the average 25-year old today would face benefit cuts of about 5 percent over the length of his or her retirement.
5. Add new employees in state and local government to the Social Security system.
Currently, about 4 million state and local employees do not participate in Social Security. Instead, they contribute to various pension plans.
If newly hired state and local workers joined the Social Security system and contributed payroll taxes, those revenues would make up the remaining 10 percent of the projected deficit. (The unions for these workers would object, and Democratic knees would wobble, but the step makes sense.)
Done. These five steps cover the program's projected 75-year shortfall. Because the steps phase in differently, Social Security might still experience a temporary shortfall in, say, 2056. But these five points restore long-term stability.
Two ideas could help ease the pain of benefit cuts and tax increases: "add-on" private accounts, and letting Social Security invest in equities.
The President is right that more Americans' ought to save more and tap into the wealth-building power of stocks. Where he's off base is to carve his accounts out of Social Security's core, instead of as a supplement.
Here's why you shouldn't mess with Social Security as baseline insurance. Traditional pension plans are disappearing, and some seniors who thought their pensions were secure have seen their plans go bankrupt, such as Bethlehem Steel. More risk isn't what they need.
Meanwhile, personal savings are way too low. To coax people to save, Congress should create add-on accounts, where people could decide to set aside an additional 1 percent of payroll tax in a 401(k)-style account - stocks for younger workers, bonds for older workers who need less risk. "Opt-out" accounts, where workers must choose not to take part, might be an effective way to induce more people to save. In an ideal world, the government would offer to match lower-income workers' savings up to a point, to encourage more saving.
Right now, the deficit-ridden federal government may lack the ability to handle the lost tax revenue these accounts might entail, let alone to offer the matches.
That's one reason why letting Social Security itself invest a portion of its assets in equities might be a worthwhile experiment. If that strategy boosts revenues, without causing the economic distortion some fear, it could provide the wherewithal to make the "add-on" accounts more attractive.
This plan doesn't address every issue that Congress needs to take up. For example, lawmakers need to ensure that any changes preserve or even enhance the program's progressive design, which allocates proportionately higher benefits to lower wage earners.
But this proposal demonstrates that, when it comes to Social Security, it's well within America's reach to mend it, not end it.
|
|
