Safer Social Security By PETER ORSZAG

November 14, 2010
Safer Social Security By PETER ORSZAG
Social Security is not the key fiscal problem facing the nation. Payments to its beneficiaries amount to 5 percent of the economy now; by 2050, they’re projected to rise to about 6 percent. Over the same period, federal health care costs will increase six times as much.

Nevertheless, Social Security does face an actuarial deficit. Current projections suggest that, after 2037, benefits would need to be reduced by more than 20 percent to match revenue. Measured over the next 75 years, the deficit in Social Security is expected to amount to 0.7 percent of the economy — not a huge amount, but a deficit nonetheless.

So it would be desirable to put the system on sounder financial footing. And that is precisely what the co-chairmen of President Obama’s bipartisan commission on reducing the national debt have bravely proposed to do. It’s too bad their proposal has been greeted with so much criticism, especially from progressives — who really should look at it as an opportunity to fix Social Security without privatizing it. Although the plan leans too much on future benefit reductions and not enough on revenue increases, it still offers a good starting point for reform.

The proposal put forward last week by Alan Simpson, the former Senate Republican leader, and Erskine Bowles, who was a White House chief of staff under President Bill Clinton, has four main elements.

First, it would make the payroll tax more progressive by increasing the maximum earnings level to which it applies. Over the past several decades, as higher earners have enjoyed particularly rapid wage gains, a growing share of their wages has escaped the tax because they have been above the maximum taxable level. Today, about 15 percent of total wages are not taxed. The chairmen recommend gradually raising the maximum threshold so that, by 2050, only 10 percent of total wages wouldn’t be taxed — decreasing the 75-year Social Security deficit by more than a third.

Second, Mr. Simpson and Mr. Bowles recommend indexing the age at which full Social Security benefits can be received to increases in life expectancy. This age is already increasing to 67, and under the proposal the gradual rise would continue, to 68 by 2050. A better approach would be to leave the full benefit age alone and instead directly reduce the monthly benefits as life expectancy rises, to keep average lifetime benefits roughly constant. But the chairmen’s approach would by itself narrow the Social Security gap by about a fifth.

The third suggested change is to make the formula for determining Social Security benefits more progressive, by reducing future payments to high earners while increasing them for people at the bottom. These adjustments would close at least another third of the projected deficit. And they would also help offset a little-noticed trend: affluent Americans are increasingly living longer than others. This pushes the Social Security system toward being less progressive, as higher earners collect benefits for more years.

Finally, Mr. Bowles and Mr. Simpson would have Congress adjust the cost-of-living index that’s used to determine annual increases in Social Security benefits so that it would measure inflation more accurately. Making this switch would fill in more than a quarter of the long-term deficit, because the new index would grow more slowly.

If Congress were to take all four of these recommended steps, it could not only eliminate the long-term deficit in Social Security but also make the system much more progressive. Even compared with the benefits promised by the current system, the recommended benefits for the poorest 20 percent of recipients would increase by about 5 percent, while those for the wealthiest retirees would fall by almost 20 percent.

Furthermore, the plan would not create private accounts within Social Security — the most controversial issue that came up when reform was last debated in 2005. Why not lock in a reform when private accounts are off the table? (Note to progressives: the Social Security plan put forward by Paul Ryan of Wisconsin, the expected new chairman of the House Budget Committee, does include private accounts.)

The main flaw in the proposed Social Security plan is that it relies too little on revenue increases and too much on future benefit reductions. A reasonable objective would be a 50-50 balance between changes in benefits and changes in revenues. But the way to bring reform into better proportion is to adjust the components of this proposal, not to fundamentally remodel it.

Finally, even though Social Security is not a major contributor to our long-term deficits, reforming it could help the federal government establish much-needed credibility on solving out-year fiscal problems — which in turn could improve the political prospects for providing additional short-term stimulus for the economy. All of which suggests that Democrats in Congress should support the basic construct of the Bowles-Simpson proposal, while arguing for some changes to improve it. That has not, however, been their reaction thus far.

It is therefore crucial that the Obama administration recognize the opportunity and respond to it more positively. The White House has been handed a highly progressive reform plan for Social Security that could attract Republican support as well.

Peter Orszag, the director of the White House Office of Management and Budget from 2009 to 2010 and a distinguished visiting fellow at the Council on Foreign Relations, is a contributing columnist for The Times.