Understanding the Proposed Cuts to Social Security Benefits

Understanding the Proposed Cuts to Social Security Benefits
Greg Anrig, Jr., The Century Foundation, 4/29/2005


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Because the proposals are complicated and are often couched in rhetoric that is confusing and even misleading, this brief provides some basic information about them to clarify what is at stake:

The newly proposed cuts in guaranteed benefits would not reduce the huge amount of federal debt required to finance the previously announced plans for private accounts. Paying for the new accounts would still require $4.9 trillion in additional federal borrowing over the first 20 years of the plan, while depleting Social Security's trust funds more than 10 years sooner than would be the case without private accounts. The proposed benefit reductions would not change those projections. <snip>

http://www.socsec.org/publications.asp?pubid=530

progressive indexing as a hit-too-big on the middle class and as a Trojan horse to turn Social Security into a program for the poor

Bush Social Security Plan Would Not Fully Close Financing Gap
BY JED GRAHAM

INVESTOR'S BUSINESS DAILY

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In an interview, Pozen said the politics make it "just too hard" to get the 75-year gap down to zero. He maintains it isn't necessary to do so, as long as the borrowing ends and solvency is reached within 75 years.

Ed Lorenzen, executive director of Centrists.org, which seeks bipartisan policy-making, said, "You need both 75-year solvency and sustainable solvency to be credible."

While the president's plan isn't an exact replica of Pozen's, the differences suggest it will be harder to fund his plan.

He offers a protection against poverty that appears more generous, and his plan protects all future benefits for the disabled, unlike Pozen's, says Brookings Institution senior fellow Peter Orszag. Bush prefers accounts that let workers contribute 4% of payroll, which creates bigger cash-flow issues.

Orszag figures that Bush's plan may wipe out only 40% of the 75-year shortfall.

"There's a huge chunk that is missing," Orszag said. All the options for filling the gap "involve pain."
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http://www.investors.com/editorial/general.asp?v=5/1
http://www.socsec.org/publications.asp?pubid=530




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Far less severe cuts in guaranteed benefits, without the added costs of private accounts, could eliminate Social Security's projected shortfall decades from now. For example, a plan proposed by economists Peter Diamond on MIT and Peter Orszag of the Brookings Institution would restore Social Security's long-term fiscal balance indefinitely while imposing benefit reductions roughly half the size of those the president endorsed. Adding revenue to the system by, for example, raising the $90,000 ceiling on income subject to the payroll tax or earmarking future estate taxes to Social Security can significantly limit the need for such painful benefit cuts.

Despite claims about protecting future retirees from poverty, the benefit reductions would leave far greater numbers of Americans closer to the poverty level or below it. More than half of households between the ages of 65 and 75 are living on less than $30,000 a year, and more than half of households over 75 are living on less than $20,000. Social Security provides more than half the income of nearly 40 percent of households aged 65 to 75; among households over 75 years old, 60 percent get the majority of their income from Social Security. (See AARP, The State of 50+ America.) Most retirees in these categories would have significantly lower benefits today if the proposed system had been in effect in the past.

The rationale for the benefit reductions breaks a promise made years ago to working Americans. Under the president's proposal, the level of benefits that middle- and upper-income workers receive upon their retirement would become tied to the inflation of prices over their working years rather than past wage growth. Prices generally increase more slowly than wages, and wage growth in excess of price inflation is what enables living standards to improve over time. Those better living standards derive directly from the labor of workers. By eroding the practice of linking Social Security benefits to improvements in living standards, the "price-indexing" proposal conveys to future workers that they will not be able to enjoy the fruits of their own labor. Instead, their living standards in retirement would be tied to living standards back when price indexing was originally introduced. Ultimately by 2100, as Jason Furman of the Center on Budget and Policy Priorities has pointed out, the majority of workers would get an identical baseline Social Security benefit regardless of their previous earnings and payroll tax contributions.

The proposal creates perverse incentives. Under price indexing, the faster real wage growth is in the future, the larger Social Security benefit cuts relative to current law will be. For example, Furman calculates that under the Social Security Trustees' assumptions of 1.1 percent annual real wage growth, an average-wage earner retiring in 2075 would get a 28 percent benefit reduction; but if real wages were to grow at 1.6 percent, the same worker would face a 35 percent benefit cut. In essence, the change would punish future retirees for stronger economic performance that they contribute to during their working careers. In addition, while stronger future economic growth now means that full benefits can be paid with no changes, under price indexing stronger economic growth would just lock in ever deeper benefit reductions.

CONCLUSION

If no changes are made to Social Security, it will be able to continue paying currently promised benefits in full until the year 2041 (according to projections of the system's Trustees) or 2052 (according to the Congressional Budget Office). After those dates, promised benefits would have to be reduced between 20 percent and 30 percent. Avoiding that shortfall down the road is an important challenge that requires serious attention. But the proposed changes would unnecessarily add trillions of dollars of new federal debt while imposing far deeper benefit reductions than necessary. In the process, the nation's most successful government program would be fundamentally transformed and weakened.