Chestnut Hill, Mass.
WHILE Washington wrangles over how much can be cut from a sliver of the federal budget — the 12 percent that makes up nondefense discretionary spending — responsible politicians from both sides of the aisle know that the real issue is entitlement programs like Social Security.
Solving Social Security’s problems would not only reduce the long-term deficit, but also improve the future security of retirees.
That view might surprise analysts who point out that Social Security has not contributed to the deficit in the past, because it’s been financed by payroll taxes, and technically cannot in the future because, by law, it cannot spend money it doesn’t have.
But in reality, scheduled Social Security benefits and current payroll taxes are included in long-term deficit projections by the Congressional Budget Office, the Office of Management and Budget and the Government Accountability Office. These projections matter: policymakers, investors and the bond markets use them to gauge the nation’s fiscal health. Since a shortfall in Social Security is embedded in these projections, eliminating that shortfall would substantially improve the long-term budget outlook and the nation’s creditworthiness.
Restoring balance to Social Security would also make Americans feel more secure about their retirement. Surveys have repeatedly shown that many Americans do not believe that Social Security will be there for them. While such an assessment is wrong — even without any changes, Social Security payroll taxes could pay 100 percent of benefits for the next 25 years, and 75 percent to 80 percent of benefits for decades thereafter — anxiety about the program’s future leads people to grab benefits as soon as they can. The problem is that benefits claimed at the early retirement age, 62, are 25 percent smaller than at the full retirement age (currently 66) and are likely to be inadequate when retirees have exhausted their other sources of income later in life. Eliminating the Social Security shortfall will, therefore, reduce the misplaced fear that causes Americans to claim benefits early.
The key question is how much of Social Security’s financing gap should be closed by cutting benefits versus raising taxes. Some of both will be needed, but slashing benefits is dangerous because retirements are already at risk.
The need for retirement income is increasing as people live longer. Health care costs are soaring and two-thirds of Americans will need some long-term care. At the same time, resources for retirement are diminishing. The gradual rise of Social Security’s full retirement age to 67 serves as an across-the-board benefit cut. And employer-sponsored retirement plans, for those lucky enough to have them, are increasingly in the form of 401(k)’s with modest balances rather than defined-benefit pensions.
Simply put, more and more Americans just don’t have enough for retirement. The National Retirement Risk Index, which I helped develop, shows that 51 percent of households are at risk of not being able to maintain their pre-retirement living standards after retirement.
Solving Social Security’s financing problem is conceptually easy — it’s relatively manageable and dozens of proposals have been evaluated. While experts have put forth various solutions, it seems reasonable to draw on the recent work of the Debt Reduction Task Force, a panel convened by the Bipartisan Policy Center and led by Pete V. Domenici, a Republican who is a former senator from New Mexico, and Alice M. Rivlin, a Democrat who is a former director of both White House and Congressional budget offices.
The task force suggested four major changes: indexing the full retirement age (after it reaches 67) to improvements in longevity; switching to a measure of inflation that grows more slowly than the one now used to calculate Social Security’s cost-of-living adjustment; gradually increasing the earnings subject to the payroll tax (and the basis for benefits) to about $180,000 from $106,800 today; and gradually subjecting both employer and employee premiums for group health insurance to payroll and income taxes.
A balanced plan of benefit cuts and tax increases can more than solve the Social Security problem for 75 years. While the Domenici-Rivlin plan is far from perfect — for example, the change in the cost-of-living adjustment would hurt the oldest of the old — it can serve as a starting point. Restoring balance to Social Security would make Americans feel more secure, increase national confidence in our finances and set a precedent for bipartisan action. This is not a political game. Someone has to go first and put a proposal on the table.
Alicia H. Munnell, a member of the Council of Economic Advisers under President Bill Clinton, is the director of the Center for Retirement Research at Boston College.
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