August 19, 2011

How to Fix Social Security

Fixing Social Security is extremely easy.    All they have to do is increase taxes, cut benefits or some of both. 

I'd like to stop there and just have the two sentences above be the end of it but apparently thats not enough talkin for a real blog post.    

Its easy for me to point out that raising taxes and/or cutting benefits will fix Social Security but of course that is far easier to say than to get it done.  Nobody wants to pay more taxes and nobody wants their benefits cut.  We want to eat our cake and we want to keep it too and we don't want to pay the bill.   The hard part is getting people to agree with the fixes or at least finding fixes that people don't hate too much.  You may as well tell people that losing weight is as easy as eating less and exercising more. 

Theres actually a wide variety of ways you can change the Social Security system and improve its long term viability.

CBO report Social Security Policy Options from July 2010.    Wikipedia has a nice graphic showing the different options and how much monetary impact they'd have to the program.  You can read through the whole CBO report or take a quick look at the Wiki graphic to get an idea of how the various proposed changes would incrementally impact SS.    Overall SS is facing a shortfall of 0.6% of GDP over the 75 year timeframe.   The different changes to SS are listed along with the % of GDP that they would save the system.   For example if we were to increase the payroll tax by 1% in 2012 then that would make up 0.3% of GDP in the shortfall.   Or if we raised the full retirement age to 70 then that would make up another 0.3% of the shortfall.  Combined these two changes alone would address the entire 0.6% GDP shortfall.

The table is on the Wikipedia site really interesting to me since it shows you graphically what kind of impact various possible changes  to social security would actually have on its finances.  

For example if you look at the table one option is to raise the tax rate 3% over 60 years.   That will balance out SS for 75 years.  I know that a 3% tax rate sounds like a lot, but they are talking about spreading that over 60 years.   In the past 60 years the rate rose from 1.5% in 1951 to 6.2% today (not counting the temporary 2% cut this year).      That was a 4.7% increase.  Figuring on a 3% increase over the next 60 years seems easier to manage given we raised it 4.7% in the past 60 years.   Let me put it another way.  If they raise taxes about 2/3 as fast as they have been raising taxes so far then social security will be able to persist indefinitely.

Of course maybe we don't all want to end up paying 9% of our wages to social security and would instead prefer that the benefits be cut.   Theres many ways to keep social security alive forever by cutting benefits as well.

Two potential ways to help fix Social Security that I thought were fairly interesting were :

Raise the taxable maximum to 90% of earnings  - 0.2% GDP impact : Right now the taxable maximum is set value that increases based on wage inflation. So in 2011 the maximum is $106,800 and you don't owe tax above that.  The rate may go up in 2011 with inflation.   However peoples wages nationally change more than just inflation.   Back in 1983 SS taxed 91% of total earnings but by 2009 it only taxed 83% of total wages.   If you taxed 90% of earnings today then the limit would be about $156,000.  

Base COLA on chained CPI-U -   - 0.2% GDP impact : Currently the cost of living adjustment (COLA) for social security is based on the CPI-W which is the Consumer Price Index for Urban Wage Earners and Clerical Workers.  If instead they used the chained CPI-U then that would generally result in a little slower rate of inflation a lower COLA.   The chained CPI-U is a broader measure of all urban consumer so it is the measure for everyone and not just the subset of wage earners and clerical workers.  The chained CPI also links together different purchases so that it takes into account items we might substitute for one another, i.e. flank steak versus rib eye.   So it could be argued that chained CPI-U its a little more accurate measure of cost of living than CPI-W.   However you want to rationalize it the net result is slower COLA increases.

But these options still amount to a tax increase and a benefit cut, respectively.   No matter how you stack it up any of these proposed changes to social security boil down to either raising taxes or lowering benefits.  The first option raises taxes on people making over the current limit.   The second option lowers benefits.

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