Social Security Trustee Warns About Expansion Proposals

Late in 2013, a debate about Social Security erupted centering around calls from some progressives to broadly increase Social Security benefits at a time when the program is already financial unsound. We weighed in a few weeks ago, explaining that given the program's existing actuarial shortfall, expanding it with broad-based benefit increases would be misguided (though targeted benefit enhancements may be warranted). Shortly after, Social Security trustee Charles Blahous also responded on e21 and listed ten things to keep in mind when talking about Social Security in the current debates.

Specifically, he explains:

1. On the positive side, these proposals acknowledge that the Social Security benefit formula should be changed.
2. Social Security benefits are already increasing substantially under current law, and would continue to increase under various proposals to maintain solvency.
3. Unless current-law benefit increases are substantially slowed, younger workers will shoulder unprecedented cost burdens.
4. The left’s latest proposals embody a conscious effort to recast the Social Security debate by adopting a policy position well outside of longstanding mainstream opinion.
5. Looking solely at Social Security benefits is uninformative; a meaningful analysis must compare both ends of the equation – the taxes collected from workers as well as the benefits paid later.
6. Further increasing Social Security benefits does not increase total resources available to finance retirement income.
7. Further increasing Social Security benefits for current participants would worsen existing inequities.
8. Social Security benefits and cost burdens are already increasing faster than participants’ pre-retirement income.
9. Social Security benefits and costs have already risen to the point of destroying many individuals’ ability and incentive to save.
10. Social Security benefits are already growing so fast that Americans’ reliance on Social Security for retirement income increases even as national incomes rise.

An important point to be pulled from these ten is that real benefits across generations are already scheduled to increase in real terms, since initial benefits from year to year increase with average wages, and benefits are maintained at that inflation-adjusted level through cost-of-living adjustments. Blahous shows how initial benefits will increase over time for a medium earner.

Blahous also shows that rising tax burdens mean that maintaining current benefit levels will require pre-retirement living standards to fall significantly relative to retirement living standards. In other words, support for retirement is not only rising in real terms but also rising relative to after-tax income as well. Thought of another way, pre-retirement standards are falling relative to post-retirement living standards. Expanding Social Security benefits would accelerate this trend.

As we argued recently, there is a need to improve retirement security for Americans -- but that should start with ensuring that Social Security is on sound financial footing in order to prevent the 23 percent across-the-board cut scheduled under current law. Such reform could distribute the costs of solvent fairly across ages, incomes, and generations through gradual and well targeted tax and benefit changes, and those changes could increase benefit levels for low-income seniors.

Moving quickly to reform Social Security would be commendable, since it would provide a stable system for future retirees, ensure that the changes be smaller than if they were delayed, and give future beneficiaries time to prepare for changes. Our readers can try their hand at reforming the system by visiting our Social Security Reformer. The Reformer does offer the option to increase benefits across the board, though we worry doing so could be a costly mistake. Blahous' piece explains why, concluding by arguing:

Backers of proposals to expand Social Security benefits acknowledge their intent to recast the Social Security debate to draw new attention to thinking well outside the longstanding spectrum of bipartisan opinion. But there are good reasons why such proposals have not been supported by mainstream Social Security analysts to date. Not only would such a benefit expansion render it still more difficult to maintain Social Security solvency without large, economically damaging tax increases, it would worsen many existing program inequities, depress worker living standards, and further undermine low-income individuals’ ability and incentive to put aside savings of their own. Though such proposals may bear a superficial political attraction for some, the policy consequences of their actual enactment would be hugely damaging.

Read the full piece here.