Fixing Social Security is progressive
January 20th, 2011
This piece was originally published in Politico.
Last week, 200 progressive organizations launched a public campaign directed toward President Barack Obama that argues against any fix to Social Security that would touch future benefits. This is not only bad for Social Security; it’s not particularly progressive.
According to its trustees, the Social Security Trust Fund is due to be insolvent in 26 years — the blink of an eye on an actuarial table. At that point, benefits will be reduced by nearly one-third for current and future retirees. But these facts haven’t stopped many on the left from denying the problem exists or insisting that it can be solved by significantly raising payroll taxes.
We propose a Social Security solvency plan that takes a different approach, one that fits the program in the context of the entire federal budget and future national priorities.
It’s a savings-led reform plan, relying on $2 in benefits cuts for every $1 in tax increases. That’s the correct formula to ensure that funding retirement for the elderly doesn’t shortchange younger generations. First, we would reduce the spending rate by means-testing the program. With long-term trillion-dollar deficits looming, Derek Jeter should forfeit his monthly government pension check.
We would then amend the Social Security benefits formula to slightly increase retirement payments for those with average lifetime earnings less than $55,000 a year, while slightly decreasing them for those who earned more. To build retirement wealth, there would be a new, deficit-neutral revenue stream to seed retirement accounts for workers younger than 30, so they can begin accumulating private savings early.
We would also gradually increase the retirement age to 68 for today’s 38-year-olds and eventually set it at 70 for today’s 4-year-olds — with necessary hardship exemptions. This age change tracks increases in life expectancy and means recipients would, on average, receive benefits for 17.5 years — as they have since 1980. We would make adjustments in cost-of-living increases identical to those recommended by the president’s fiscal commission.
And finally, on the revenue side, we would extend the payroll tax to those earning up to $190,000 annually — up from $106,800.
This plan is likely to generate opposition from the left, though it strongly defends progressive values for decades to come. It makes Social Security fully solvent through the century, bumps up benefits for lower-income workers, encourages retirement savings and modestly increases federal taxation. Just as important, it leaves room in future federal budgets for crucial investments in education, innovation, infrastructure and research.
Consider that in 1990, 44 cents of every federal dollar was spent on Medicare, Medicaid, Social Security and interest on the national debt. By 2030, according to the Congressional Budget Office, those four programs will eat up 68 cents of every dollar.
That’s the budget of a nation unable to weigh in on behalf of children or economic growth. It is the reason that we must lower the current fiscal trajectory of future Social Security spending — not just extend and finance it.
Without slowing that growth, solvency will have to come exclusively from higher taxes — such as elimination of the payroll tax cap. Assuming the eventual demise of the Bush-era tax cuts, this would set the marginal tax rate at about 46 percent for high-income earners. But all new revenue would have to go to fund retirement, leaving nothing for investments — and raising the question of where we find the money to finance Medicare and Medicaid.
It would be reckless to allow Social Security to take up the entire pool of what is potentially available to deal with the retirement of the baby boom generation.
Social Security is one of the great liberal achievements. But many groups on the left have drawn a line in the sand that could doom it or set the nation on a course to fiscal ruin. Putting the weight of his Nobel Prize in economics behind this anti-reform coalition, New York Times columnist and Princeton professor Paul Krugman calls the Social Security crisis “invented” by “Social Security attackers” using “bad-faith accounting.”
Americans can be thankful that progressives such as Sen. Dick Durbin (D-Ill.) and Robert Greenstein of the Center for Budget and Policy Priorities have weighed in behind other serious approaches that include benefits cuts. Social Security can indeed be fixed in a progressive way — helping low- and middle-income seniors the most and saving budget space for important federal investments.
Jim Kessler is vice president for policy and David Kendall is senior fellow for health and fiscal policy at Third Way, a moderate policy organization.
Tags: benefits, enter for Budget and Policy Priorities, growth, Paul Krugman, President Obama, progressive, retirement, Robert Greenstein, Senator Dick Durbin, social security, solvency, taxes, third way Posted in Economic Program, General Interest