Huffington Post | January 9, 2014
The recent column by Jane White on Social Security reform mischaracterized the position of the Committee for a Responsible Federal Budget (CRFB) and ignored fiscal realities facing Social Security. CRFB is not calling for a 16.5 percent across-the-board cut in Social Security benefits as White suggests. We are, however, calling on policymakers to act sooner rather than later to address the very real financial challenges facing Social Security that White ignores.
The paper that White references compares the cost of fixing Social Security now as opposed to if we wait. It shows how much benefits would need to be reduced now, or revenues would need to be increased, to restore Social Security solvency, compared to the changes that would be required in ten or twenty years from now. The paper in no way advocates an across-the-board cut in benefits (or an across-the-board increase in the payroll tax) as the way to restore solvency, but simply provides estimates to illustrate how the magnitude of changes required will increase if we delay acting.
While CRFB has not endorsed a specific Social Security reform plan, we have commented favorably on a variety of plans which rely on a mix of reductions in promised benefits, increased revenues and targeted benefit enhancements. We have also developed an online tool, the Social Security Reformer, which allows individuals to view the options for changes in benefits and revenues and design their own plan to restore solvency.
Despite acknowledging that she is not knowledgeable on Social Security's finances and needs to research options for fixing Social Security, she pre-emptively rules out any reductions in promised benefits and speaks favorably about proposals to increase benefits. Taking any reduction in promised benefits off the table will jeopardize the ability of policymakers to take action to ensure Social Security is financially sound for future generations and the government is able to meet other priorities. If White were to begin her research into options for fixing Social Security with an open mind, she would learn several facts which might cause her to reconsider her knee-jerk reaction to any reductions in scheduled Social Security benefits:
1. Benefits will be cut by over 23% within the next twenty years if no changes are made. The Social Security system is already running cash shortfalls, which are projected to exhaust the trust fund by 2031 (according to the Congressional Budget Office) or 2033 (according to the Social Security Trustees). At that point, the benefits Social Security would be legally able to pay would be limited to the revenues coming into the program, which would only be sufficient to pay approximately 77 percent of promised benefits. The 23% cut in benefits would apply to all beneficiaries, including those already receiving benefits and low income seniors with benefits at or below the poverty level.
2. Social Security benefits will increase in real terms for future retirees even with changes in benefits to restore solvency Social Security benefits are indexed to wage growth, which increases faster than inflation. As a result, initial Social Security benefits for future retirees will be higher than they are for current beneficiaries even after adjusting for inflation. In addition, increasing life expectancy means future retirees will receive benefits for more years, resulting in much greater lifetime benefits. Under current law, the average lifetime benefit would double in real terms over the next 75 years. Social Security reform plans which include "cuts" in Social Security benefits to restore solvency simply scale back part of this increase and still result in future retirees receiving higher initial benefits and total lifetime benefits than current retirees.
3. The Social Security shortfall cannot be closed solely through increased taxes on upper income taxpayers. Contrary to the assertion being made by some progressives that the problems facing Social Security can be solved simply by eliminating the cap on taxable wages, the Social Security actuaries estimate that eliminating the cap would close about 70 percent of the program's 75-year shortfall and only about 33 percent of the gap in the 75th year. A proposal from Senator Tom Harkin that would also increase benefits across-the-board would solve even less: closing only half of the 75-year shortfall and 20 percent of the gap in the 75th year.
Under the current structure of the system, a portion of the increased revenues raised from wealthier taxpayers by eliminating the wage cap would go to finance higher benefits for these same wealthy individuals when they retire. The amount of the shortfall that would be closed would be somewhat greater - roughly 86% -- if the wages above the current cap were not credited toward benefits. However, breaking any link between higher contributions and higher benefits would represent a fundamental change in the social insurance nature of the program that causes concern among many supporters of social insurance who believe that the link between contributions and benefits is a key feature of the program.
Eliminating the taxable maximum entirely would also make it harder economically and politically to enact further tax increases on upper income taxpayers to meet other needs. Relying on elimination of the taxable maximum to restore Social Security solvency represents a judgment that preserving 100% of promised benefits under Social Security for everyone, including wealthy retirees, is a greater priority than other possible uses of the additional revenues from upper income taxpayers that would be generated by eliminating the taxable maximum.
4. Delaying action will make the options for restoring solvency more painful Not only does waiting to act mean any tax increases or benefit cuts will be steeper, it literally means they will need to be bigger. A shortfall which could be solved with a 16.5 percent across-the-board benefit cut or 2.7 percentage point increase in the payroll tax today would require a 19 percent cut in benefits or 3.3 percentage point increase in payroll tax if we wait a decade to act. This is true for at least two reasons. First, waiting will mean that there are fewer total people to share in the tax increases or spending cuts - that means more increases/cuts per person. Secondly, the longer we wait, the less money is in the trust fund and the less interest it will generate. Ironically, the actions of those who resist efforts to reform Social Security by downplaying the magnitude of the problem and the need for action to address the shortfalls now will actually lead to deeper cuts in benefits for all beneficiaries and/or greater increases in payroll taxes for workers than would otherwise be the case.
5. The major Social Security plans that rely on a combination of benefit changes and increased revenues to restore solvency include targeted benefit enhancements for vulnerable populations at greatest risk of poverty. The Social Security reform proposals in the Simpson-Bowles and Domenici-Rivlin plans include an increase in the minimum benefit that would enhance benefits for low-income workers and a progressive benefit bump up in benefits for the very old and long-term disabled most at risk of outliving their retirement savings. These provisions would provide greater poverty protections than current law.
Earlier plans to restore Social Security solvency such as the plan proposed by CRFB President Maya MacGuineas along with Jeff Liebman and Andrew Samwick and the legislation introduced by CRFB board members Charlie Stenholm and Jim Kolbe had similar benefit enhancements for low-income populations. Providing benefit enhancements targeted at those most at risk of poverty is a much better use of limited resources than an across-the-board increase in benefits for all retirees, including wealthy seniors, as the legislation introduced by Senator Tom Harkin would do.
The future of the Social Security program is a serious issue that deserves a serious debate that honestly acknowledges the challenges facing the program and trade-offs involved in addressing the problem. Absolutist positions ruling out options before even considering them does a disservice to the debate.
CQ Researcher | July 18, 2013
Should we measure inflation as accurately as possible? Of course we should, particularly when the fiscal implications of measuring inaccurately are so large. The so-called chained Consumer Price Index (CPI), a far more accurate inflation index than the one used now, would better reflect retirees’ actual spending patterns and the cost increases they encounter. Economists from the left, right and center broadly agree on that, and their view is affirmed by the nonpartisan Congressional Budget Office (CBO) and the Bureau of Labor Statistics. Adopting this improved measure would also generate more tax revenue, slow government spending growth and strengthen the Social Security system.
So how can anyone oppose this change? Some special interest groups do so for their own financial benefit, while others argue that seniors face faster price growth or the most vulnerable would be hurt by this change.
Yet alternative measures that purport to show seniors spending more are highly flawed — including in the ways they measure housing and health care — to the point that the CBO has concluded, “It is unclear...whether the cost of living actually grows at a faster rate for the elderly than for younger people.”
Even if a better measure were produced for measuring cost increases affecting only retirees, adopting it would raise serious fairness concerns. Should the one-third of Social Security beneficiaries who are not retirees receive smaller cost-of-living adjustments so seniors can receive larger ones? Should New Yorkers, with their high cost of living, receive a higher percentage than Detroiters? Should each government program get its own index or only those backed by powerful interest groups?
As for the most vulnerable, it makes little sense to measure inflation incorrectly for everyone in order to retain a desired windfall for the neediest. Doing so would cut taxes for the top 1 percent by $1,000 each in order to keep an average $20 tax cut for the lowest fifth. Instead, desired tax relief and benefit enhancements for the most vulnerable should be achieved through targeted reforms designed specifically to strengthen those populations.
Ultimately, the best thing we can do for the most vulnerable in society — at least within Social Security — is to make the program sustainable and solvent and avoid the 23 percent across-the-board benefit cut currently scheduled for when the program’s funds dry up. If we can’t even measure inflation correctly, how can we hope to make the hard choices necessary to keep Social Security funded for future generations?
The Hill | June 4, 2014
The latest Social Security Trustees report, released last week, shows a program in peril. Within three years, the Social Security disability trust fund will run out of money, at which point the program will only be able to pay 80 percent of benefits to disabled workers. Assuming policymakers decide to allow the disability fund to take money from the old-age fund, the whole program will become insolvent in 2033.
The good news from the trustees report is that the program is in no worse shape than last year. But that should be of little comfort to anyone on the program two decades from now, who will face an immediate 23 percent benefit cut regardless of age or income.
Fortunately, this tremendously unfair and indiscriminate cut can be avoided. And if we act today, it can be averted through a number of modest and gradual changes that mostly slow and speed growth and give workers plenty of time to plan.
There is no shortage of policy ideas to fix Social Security, and as far as government programs go, Social Security is a relatively simple one. Most of the goals of reform can be met by adjusting a few levers — the initial benefit formula, the retirement age, the cost-of-living adjustment, the payroll tax rate and the maximum income subject to the payroll tax.
Indeed, with an online program called The Reformer: An Interactive Tool to Fix Social Security, anyone with a computer and an Internet connection can design his or her own reform. The tool lets users identify the tax and benefit changes they like in order to make the system sustainably solvent for the next 75 years and beyond.
Want to close the shortfall mainly on the spending side? Start by slowing benefit growth for the top 70 percent of beneficiaries and indexing the retirement age to growing life expectancy. Those two changes alone will get you three-quarters of the way toward solvency.
Want to close the shortfall mainly on the revenue side? You can close that same three-quarters of the gap by increasing the payroll tax from 12.4 to 13.5 percent and raising the maximum amount of income subject to the payroll tax from $114,000 to roughly twice that (though this plan would do far less in the 75th year).
Reforms ranging from measuring inflation more accurately to altering disability benefits to applying the payroll tax more broadly can close the remaining gap and even leave room to enhance benefits for some populations.
As a matter of policy, reforming Social Security just isn’t that hard. And changes can be made in ways that encourage work, exempt current retirees from benefit reductions, protect or enhance benefits for the most vulnerable and keep future benefits at least as generous as today’s for almost everyone else.
Unfortunately, politics has gotten in the way, and politics could be the program’s undoing. Benefit changes as sensible as measuring inflation more accurately have become an anathema to the AARP and to many on the left. And revenue changes as modest as gradually increasing the percentage of wages taxed to the levels seen in the mid-1980s are opposed by Grover Norquist and many on the right.
As a result, inaction may be good politics today, but it is incredibly myopic.
While both sides may prefer to wait until they are in a position to enact a solution on their own terms, the choices necessary to close the shortfall will be much more painful for both sides if we wait. As the baby boomers retire and benefits continue to grow, policymakers will soon lose the ability to phase changes in gradually and allow benefits continue to grow for new beneficiaries in real terms. And not too many years in the future, it will become impossible to exempt current retirees from changes or avoid broad benefit changes that affect even the lowest income beneficiaries.
At the same time, waiting will lead to larger and more broad-based tax increases as fewer generations will be able to share in the burden and benefit change simply won’t be able to phase in fast enough.
In the end, waiting to act will lead to unfair and unnecessarily abrupt changes that would rob today’s workers of the ability to plan and adjust.
Luckily, we have an opportunity to fix Social Security now — the easy way — if both parties are willing to come together and negotiate in good faith. But time is running out.
The Hill | May 9, 2013
Over the last few days, politically driven critics have called on the president to abandon his support for changing the way the government indexes provisions in the budget to inflation by switching to “chained CPI.” Looking beyond politics, we’re here to say that these critics’ arguments are wrong on their merits.
As economists from opposite ends of the political spectrum, we would strongly urge the president and leaders in Congress to continue to support moving to chained CPI, which represents the most accurate available measure of inflation and cost-of-living increases. Switching to this more accurate measure of inflation represents the right technical, fiscal and retirement policy — and policymakers should not delay any further in making this improvement.
From a technical sense, the current CPI — or consumer price index — that is used to index many parts of the budget and tax code is widely understood to overstate inflation. This is because it fails to account for so-called “substitution bias,” in which consumers reallocate their purchases depending on the relative prices of similar goods. For example, if the price of apples goes up, consumers will buy more oranges. However, this behavior is not accounted for in standard CPI measurements.
The Bureau of Labor Statistics, which calculates the CPI, is very aware of this shortcoming, which is why it has developed and refined the chained CPI for more than a decade. The nonpartisan Congressional Budget Office states that the chained CPI “provides an unbiased estimate of changes in the cost of living from one month to the next.”
Some argue that using the chained CPI to index Social Security benefits is inappropriate because it does not reflect inflation for retirees, which critics suggest is higher than it is for working-age adults because of the elderly’s higher rate of spending on healthcare. However, the CBO has said that based on the available research, it is unclear whether the cost of living actually grows at a faster rate for the elderly than for younger people, and that the CPI-E —“E” for “experimental” — which was intended to provide a more accurate measure of inflation for seniors, has several methodological flaws that overstate inflation, including underestimating the rate of improvement in healthcare.
Beyond the technical case for the chained CPI, there is a strong fiscal case. Because current measures currently overstate inflation by about 0.25 percent per year, moving to a more accurate measure would result in real deficit reduction. Measuring inflation more accurately would generate savings from throughout government: about $390 billion in the first decade alone. Roughly one-third of those savings would come from slower growth in Social Security benefits, another third from revenue increases (as certain tax provisions such as the cutoff points of income tax brackets are indexed to inflation) and the remaining savings from a combination of other spending programs and lower interest payments on the debt. Given the very real need to begin to put our debt on a sustainable path, this would be a small but important contribution. The savings would be gradual, with only a small amount in the near term, thus protecting our fragile recovery from immediate austerity.
Finally, switching to chained CPI is the right retirement policy — or rather, a small piece of it. The Social Security program is on a path to exhaust its trust fund. Current projections indicate that this will occur in 2033, threatening cuts for all beneficiaries, including the very rich and the very poor, the very young and the very old, veterans, disabled workers and others. Improving the way we measure inflation won’t prevent the program’s looming insolvency, but it will eliminate a full fifth of the long-term funding gap.
To the extent that the overpayments under the current formula offset the shortcomings of our current retirement system for the lowest-income and most-elderly beneficiaries, a switch to chained CPI can and should be accompanied by targeted policy changes providing benefit enhancements designed to help the affected populations, rather than providing higher-than-justified inflation adjustments for all beneficiaries.
The federal government should not knowingly continue to measure inflation inaccurately, especially given the costs to the budget and to the Social Security program. Changes that cut Social Security benefits are a tough sell for Democrats, and changes that increase revenue are a tough sell for Republicans. But if they cannot even agree to a technical correction to those areas of the budget, how will they be able to make the hard choices to control our debt and reform our government over the long term?
The Hill | April 30, 2013
In his recent blog entry on chained CPI (Chained CPI: Unfair and inaccurate, April 26th), AARP President Robert Romasco highlights his groups opposition to the change, charging that it would be “Unfair and Inaaccurate.” In fact, nothing could be further from the truth.
A coalition of strange bedfellows, including Grover Norquist’s Americans for Tax Reform and Moveon.org, have announced their opposition to this policy, even as many responsible policymakers from both sides of the aisle and at the highest levels of government continue to support it – notably, the president and the Speaker of the House.
It is no surprise that groups from the left and right have mobilized to defend the status quo in order to avoid the tough choices that must accompany any responsible deficit reduction plan. Yet, the resistance to a reform as simple and obvious as using the most accurate measure of inflation for price-indexed provisions in the budget is both astounding and disappointing.
Economists from the left, right, and center are in broad agreement that chained CPI more accurately reflects cost-of-living increases by accounting for the small-sample and substitution biases in the current inflation measure. This view is shared by experts at the non-partisan Congressional Budget Office as well as the experts at Bureau of Labor Statistics who are responsible for measuring inflation. Adopting the chained CPI doesn’t represent a policy change, but rather would best reflect the current intent of the law to index various provisions to inflation.
And while some argue that seniors face faster cost-growth than other populations, there is little evidence of a significant difference when one accounts for the fact that seniors are more likely to own their own homes mortgage free, have different shopping habits than younger populations, are able to take advantage of senior discounts, and receive constantly improving health treatments. Indeed, according to the Congressional Budget Office, “it is unclear, however, whether the cost of living actually grows at a faster rate for the elderly than for younger people.”
Moreover, offering seniors a preferential inflation measure raises more fairness concerns than it answers. If seniors receive a higher inflation measure, should non-seniors on the Social Security program receive a lower measure? Geographic inflation disparities are far larger than alleged age disparities (inflation has averaged 2.7 percent in New York and 1.8 percent in Detroit over the last decade); why protect seniors and not New Yorkers? What about other government programs and tax provisions? Should each be indexed to costs within its population? Or only those backed by powerful interest groups?
Indeed, it would be highly unfair to politicize inflation indexing or to exempt any government program or tax provision from the most accurate available measure of inflation.
More unfair would be ignoring our fiscal and retirement challenges and leaving the job to a future politicians. According to the left-leaning Center on Budget and Policy Priorities, the President’s chained CPI proposal would result in benefit levels 1 to 2 percentage points lower than under current law – and it accompanies the switch with benefit enhancements for the old that actually reduce poverty among that group. By comparison, there is a 25 percent cut scheduled to occur under current law when the trust funds dry up in 2033. The greatest unfairness would be allowing this across-the-board benefit cut to hit every beneficiary regardless of age or income – when this cut could be easily avoided through a balanced package of revenue and benefit adjustments.
Mr. Romasco is right, we need a national conversation on improving retirement security, including how to make Social Security sustainably solvent in order to avoid abrupt benefit cuts and ensure the system is better protecting those who rely on it. Ideally, we’d have this conversation now. However, the overheated reaction to a technical correction in cost of living adjustments suggests that the political system may not be ready to tackle comprehensive Social Security reform. Continuing to index benefits improperly while we wait for this reform to materialize would be a costly mistake that will only make future Social Security changes more painful.