Reforming Social Security Benefits

Excerpt from “Reforming Social Security Benefits,” Testimony Before the House Ways and Means Subcommittee on Social Security.

In this testimony, I would like to focus on the need for Social Security benefit reform regardless of the current imbalances in the system or the taxes raised to support the system.

Why? Despite Social Security’s great success, its growth in lifetime benefits over time has been decreasingly targeted at its major goals. Even while programs for children and working families are being cut, combined lifetime benefits for couples turning 65 rise by an average of about $20,000 every year, so that couples in their mid-40s today are scheduled to get about $1.4 million in lifetime benefits, of which $700,000 is in Social Security.

Social Security has morphed into a middle-age retirement system. Typical couples are receiving close to three decades of benefits. Smaller and smaller shares of Social Security benefits are being devoted to people in their last years of life.

If people were to retire for the same number of years as they did when benefits were first paid in 1940, a person would on average retire at age 76 today rather than 64. Soon close to a third of adults will be on Social Security, retiring on average for a third of their adult lives.

While Social Security did a good job reducing poverty in its early years, it has made only modest progress recently, despite spending hundreds of billions of dollars more. The program discourages work among older Americans at the very time they have become a highly underused source of human capital in the economy.

The failure to provide equal justice permeates the system. It discriminates against single heads of household, spouses with relatively equal earnings, those who bear their children before age 40, long-term workers, and many others. At the same time, private retirement policy leaves most elderly households quite vulnerable.

Unfortunately, the Social Security debate has largely proceeded on the basis of being “for the box” or “against the box.” The contents themselves deserve scrutiny.

How might one break through the stalemate and find areas of mutual agreement? While I applaud the efforts of the Simpson/Bowles Commission and the Bipartisan Policy Commission I believe we can go much further to address the problems I just raised.  How?  We should start with a basic set of principles and see where they lead us.

Consider.  Inevitably balance will be paid for mainly through benefit cuts or tax increases on higher income individuals who have most of the resources.  That debate need not derail other needed reforms.  I suggest proceeding in the following order:

First, consider reforms aimed at meeting Social Security’s primary purposes:

  • providing greater protections for those truly old or with limited resources;
  • supporting the work and saving base that undergird the system; and
  • providing more equal justice for those suffering needless discrimination in the system, like single heads of household and longer-term workers.

Some of those fixes cost money, and some raise money; we don’t have to address trust fund and distributional consequences in each and every change.

Second, further adjust minimum benefits and the rate schedule and indexing of that schedule over time to achieve final cost and distributional goals. The extent of these adjustments will also depend upon the tax rate and base structure agreed upon.

My testimony provides a fairly detailed way to engage this type of reform process.  It largely follows the logic I applied to taxation when serving as the economic coordinator of the Treasury effort that led to the bipartisan-supported Tax Reform Act of 1986, and in my testimony before the Simpson/Bowles Commission.

18 Comments on “Reforming Social Security Benefits”

  1. Janine Lesser says:

    I am 61, my husband is 63. We planned on working for another 3-5 years. He was laid off in a private equity firm buy out in January, and has been dilignetly searching for a job in the New England region without success. He has had many interviews, but we believe his age keeps him from getting hired. I am closest to the oldest in my workplace, and fear for my job. I have heard the exact same story from MANY of our contemporaries, including a person I work with, neighbors, my father (20 years ago), my sister, my brother. These are all, with the exception of my father, people with college degrees and graduate degrees and extensive professional work histories. From my perspective, the problem is not our choice about workingover 64, but dealing with a work force that keeps trying to displace us.

  2. “If people were to retire for the same number of years as they did when benefits were first paid in 1940, a person would on average retire at age 76 today rather than 64.”

    Life expectancy of a baby has risen, but the life expectancy of people who are eligible for Social Security is up about 10%. Mind you the cost has increased as much as 1000% in real terms.

  3. “While Social Security did a good job reducing poverty in its early years, ”

    Social Security is old-age insurance. It does not pay any benefit based on need. Whether it alleviates poverty is a bi-product.

  4. What you are writing says that you would like to change the intent of Social Security. It was suppose to be old-age insurance, not a welfare program.

    The problem is that there is one place to buy old-age insurance for the vast majority of Americans. There are many welfare programs. You want to change what people can’t otherwise get into something that we already have.

  5. cda says:

    Yeah, the work until you drop dead plan. I’m sure the younger set are going to love to know that the progressives hope to make them slaves to the state until the day they drop dead.

  6. rhhardin says:

    SS is insurance against outliving your savings.

    Few can save for the longest possible retirement, but most can save for an average retirement. This they do with their contributions to SS while working.

    If the system is paying out more than it’s taking in, it means that the retirement age is set too low. Just raise it until the number of retirees falls enough, and the number of workers rises enough, to balance the system.

    If workers want to retire earlier than the new benefits age, they can bridge the gap on their own dime, in effect saving more than the SS contribution amount.

    No need to raise contributions or reduce benefits otherwise than this single move: raise the retirement age for benefits

    • While the life expectancy of a baby has risen, the life expectancy of people who are eligible for Social Security is up about 10%. Mind you the cost has increased as much as 1000% in real terms.

      These rising costs have created a sitution for younger Americans where SS is like spending a quarter to buy a dime – and your solution is that we should get our kids to spend a quarter to buy a nickel. There will come a time when mugging your children isn’t the answer.

      • rhhardin says:

        No, you set the retirement age so that it balances. What you put in is what you get, on the average.

        It’s insurance against living too long, paid for not by youth but by people who don’t live that long.

        Just as fire insurance has people whose houses don’t burn down paying people whose houses do burn down.

        The thing to watch isn’t who gets or doesn’t get money, but that the risk has disappeared.

        The disappearence of risk is the point of SS. You won’t outlive your savings.

        • The economic returns of Social Security are well documented, not only by the SSA but the Urban Institute as well.

          What Mr. Steuerle does not tell you is that the average couple in their mid-40s expects to retire after the trust fund is exhausted. They will not collect anything close to $700,000. If they did, it would be subject to means testing another fact that his figures do not incorporate.

          It is insurance, but it is financed. Unlike your fire insurance, all of the insurance benefits in SS are paid with borrowed money. Every dollar of payroll taxes generates a promise of future payments. We borrow money in exchange for the promise. Social Security is insurance, and the provider is insolvent by any measure of the insurance industy.

          Simply making it a worse and worse deal is not going to work forever.

          • rhhardin says:

            There isn’t and can’t be a trust fund. All money paid in to the government must instantly be returned to the economy, lest the money supply fall. This can be either by redeeming federal debt, or by federal spending. It can’t be set aside as savings, so the failure to do so is idle.

            All current SS benefits are (as you say) paid by current workers but in return for the same insurance when they retire. Their payments reduce their need to save, in particular for the impossible longest possible life. If things work right, they have to save for an average life.

            The system can be out of balance, namely the retirement age can be too low as it is today. That’s what you have to fix.

            Today’s workers in turn will be paid by tomorrow’s workers. It can’t be otherwise.

            You can’t save future goods and services.

          • “but in return for the same insurance when they retire.”

            That is factually inaccurate. It isn’t the same or even close to it. This thread started when you suggested increasing the age of retirement. Same is simply the wrong word.

            The insurance provided by SS has fallen virtually every year since inception. In 1960 a couple could expect $7 of benefits for every $1 contributed. Today it is a negative number. So it isn’t the same insurance. It is woefully inferior – mind you not guaranteed, not funded insurance.

            “lest the money supply fall” … And… When SS was founded, FDR insisted that it be self-funded. So he didn’t get the money supply problem either. We abandoned that idea in the 40s and 50s.

            The quote is like saying that a squirrel can’t hide an acorn lest the acorn supply fall. If the system isn’t about saving, you aren’t insuring your old age. You are insuring that your parents don’t have to live with you.

          • rhhardin says:

            Joe the Economist said “That is factually inaccurate. It isn’t the same or even close to it.”

            (indentation reset owing to no current reply button, going two back; maybe indentation is limited?)

            It’s the same insurance. You don’t have to save for the longest possible life, just the average life. The risk of living a long life disappears and it’s possible to plan again.

            That different generations get different amounts seems to be your complaint? This happens across generations all the time for all sorts of reasons, one being technological progress and standard of living changes.

            One side effect of demographic choice changes is that SS needs a retirement age change from time to time. That’s not a big fairness issue, just the statistics to keep the annuity that SS is self-funding.

            As to borrowed money, that’s just an effect of a choice between taxing and borrowing. Either way, the money is taken out of circulation and put back in by way of payments to retirees.

            If you pay retirees, you have to take that money out of circulation first. There are only two choices for how.

            Even if you don’t want to do that, you wind up doing it anyway, because the Fed limits inflation through open market operations and will soak up what you fail to soak up of those double dollars, in order to check inflation.

            (Not discussing what the Fed is doing now, which is mysterious and it is hoped, temporary)

          • My concern is that the ever rising-cost of Social Security makes it virtually impossible to save for retirement outside of the system. Rising costs lead to increase dependency. Rising dependency leads to higher costs. At some point it breaks, leaving millions of people screwed.

            The largest economic investment that most people make in retirement today is SS. It has a negative economic return. You would be better off putting your money under a mattress.

            The debate about Social Security uses a lot of loose words. The word same doesn’t have the same meaning as that in the dictionary. So you can use ‘same’ in the same sentence that you want to change the retirement age.

            “SS is self-funding.” Social Security isn’t self-funding. It isn’t even funded. It is borrowed money. For Social Security to be ‘self-funded’, as FDR wanted, it would have to have assets sufficient to pay its bills. If the system were ‘self-funding’, we would not be in a discussion about what happens when the system can’t pay its bills.

            The core difference between us is that I see Social Security overtime where it needs to serve seniors of 2033 as it serves them today. That means the same retirement age.

            Insurance is not a momentary event. People who are 64 and younger today expect to outlive full benefits. SS does not serve these people as insurance.

          • rhhardin says:

            There’s no question about the trust fund at all. It doesn’t exist, it never existed, and it can’t exist, a priori.

            No matter what you do, any “trust fund” will wind up holding IOUs, if you insist on the fiction of a trust fund.

            The government can’t save money owing to the fact that it also regulates the money supply through open market operations. That always causes a IOUs to displace any dollars the government holds because those dollars have to go back out into the economy.

            The ever-rising cost of SS is fixed by raising the retirement age. At the moment it’s hostage to a longer life expectancy.

            Think of it as a promise to finance a vacation for the last eight years of your life rather than as a promise to finance a vacation starting at age 65, and it comes out looking more fair.

            Then the politics of it favor changing the retirement age upwards a little more easily.

            Incidentally the rising retirement age will happen even if you privatize it all. Everybody can’t save at once. That will come out as too many people selling stocks at once and too few buying, lowering the rate of return and forcing people to delay retirement until there are fewer selling and more (delayed retirement) workers buying.

            The logical hangup is that the workers have to be willing to support the retirees. You reduce the number of retirees and increase the number of workers until that happens, whether public or private savings are used.

          • Without the Trust Fund SS would not pay full benefits today – so it does exist. It simply isn’t big enough to be ‘self-funded’.

            What you call IOUs, investment professionals call cash equivalents.

            “At the moment it’s hostage to a longer life expectancy.”

            As I have pointed out, the rise in life expectancy is fractional compared to the rise in cost. People blame life expectancy because they don’t want anyone asking questions about the system itself. The first 50 years of retirees took out oversized benefits.

            “Then the politics of it favor changing the retirement age upwards a little more easily.”

            Ignoring the deteriorating returns is an invitation to implosion. Today 50% of voting aged Americans expect to retire after the Trust Fund is gone. Nothing will be easy once politicians start to serve this audience.

            “Incidentally the rising retirement age will happen even if you privatize it all”

            You can’t privatize a negative number. The GOP isn’t talking about privatization – they are talking about rewriting the system from insurance to savings. These aren’t the same thing, and I imagine that you would agree. One manages risk. The other accumulates wealth.

            “The logical hangup is that the workers have to be willing to support the retirees. ”

            We see a very different future. As the system goes into crisis, workers will be even less willing to contribute. They will vote for politicians who will re-write the system on very different terms.

          • rhhardin says:

            There is no trust fund. SS pays out of general funds, and SS contributions go into the general fund. FICA is a tax (a good one, in that it tends to flatten the general tax rates, and a flatter tax is good). Worrying about the trust fund running out is idle. There’s no trust fund to run out.

            The question is how much tax people want to pay to support retirees.

            The retirement age has to be raised to match that. The balance is that today’s workers also get that SS support at that age, so it’s not as if they’re wanting to cut off the seniors.

            It’s savings in that you get a future benefit for today’s contribution, and it’s not economically distorting any more than plain old vanilla savings would be, except it manages risk for you. It’s like buying an annuity for future annual payments, from your point of view, except you don’t have to worry about the annuity company disappearing on you in 40 years, and it’s inflation protected.

            Of course it’s a democracy and we could vote to disavow the promise, but that’s not likely to get support.

            We do care that it balances sustainably, which is achieved by fudging the retirement age.

        • If what you said about the Trust Fund were true, there would be no automatic cuts to benefits.

          Given that you have no certainty about your benefits, it cannot manage risk. In fact, it creates uncertainty rather than eliminates it.

          You write a lot of theory that runs against facts. Flemming V Nestor means that while you don’t have to worry about “annuity company disappearing”, but you do have to worry about “how much tax people want to pay to support retirees.”

  7. I wish I had heard about this hearing, however I was on medical leave and could not submit comments for the record.

    Improving the equity of the system is paramount, which I would do by crediting the employer contribution equally regardless of income and funding it with a consumption tax – with an automatic tax increase to guarantee benefit levels. I would also set these levels higher, even after increasing premiums for Medicare Parts B and D. The tax would also fund Medicaid, which would be federalized for the aged, although it could have offsets for firms who fund these costs for their retirees – either through insurance or direct service. A unionized Ford-UAW nursing home would likely be both cheaper and better than for profit non-union alternatives.

    If work is to be encouraged, personal accounts holding employer voting stock would certainly do that, provided that worker democracy is an element and that this stock is insured with a pool of similarly owned companies. Of course, this type of arrangement may also lead to earlier retirement rather than later if people have enough savings. I see nothing valuable about making working longer a fetish if you don’t have to, although I would include a proviso that if half the retirement stock not invested in the insurance fund (and a third would be) is spent down, the remainder is converted to insurance fund assets for annuities for both spouses.

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