The Committee for a Responsible Federal Budget (CRFB) is not one of my favorite groups. But they are a smart and reasonably honest group. They’ve created an interactive tool that allows the user to change the benefits and revenues for Social Security. It is way cool and a whole lot of fun. But it is also Chicken Little style propaganda. When you start the app, the title reads, “Social Security remains insolvent. The trust fund will run out in 2033 at which point all beneficiaries will face a sudden 23% benefit cut.” As regular readers ought to know, Social Security is not a big problem. What they’ve written there is true, but it could be put in a more neutral way, “Social Security will be able to pay full benefits for the next 20 years; at that time, it will only be able to pay 77% of the benefit level at that time; we usually overstate the problem.”
Overall, the app is really great. But even without playing with it, it provides a lot of useful information. For example, how much of the shortfall would Chained-CPI eliminate? Only 21%. And if we provide a fix for retirees who live a long time, this number drops to 16%. The app also allows you to increase benefits. I would prefer to have more flexibility than the program allows, but it is still pretty useful.
On the benefit side, the app allows you to slow the growth at which initial benefit is calculated. Unless you apply this to half or more of retirees, this saves almost nothing. For example, if you apply it to only the upper class (top 20% of earners), it saves 3%. I’m not for reducing benefits regardless. Social Security is actually a pretty stingy program as it is. You can also increase the retirement age. I really don’t understand the mentality of people who call for this. It seems like a way for people in pleasant high paying jobs who don’t ever want to retire to make people in back breaking jobs do the same. Bad idea.
And as I said, you can apply Chained-CPI. I went with increasing benefits by using the CPI-E that better reflects the cost of living increases experienced by older Americans. That cost me 15%.
There are a couple of Disability reforms proposed. Two of them are pretty stupid: put further limits on the program (saves 4%) and force people out of disability at 62 (saves 5%). I did go along with 5% savings from reductions in fraud and over-payment. But I immediately lost the 5% by providing a guaranteed minimum benefit of 125% of the poverty level. You could also offer an old-age bump, but that only makes sense if you are doing Chained-CPI. And you could restore college benefits for kids up to the age of 22. I don’t think that’s a bad idea, but I didn’t do it.
There are three other benefit reductions. It’s shocking but 12% can be saved by basing the initial benefits on 38 rather than the current 35 years. Bad idea. Surprisingly, 8% is saved by phasing out benefits for people in the top 1% of income earners. I know the argument against this: if Social Security isn’t universal, it will become vulnerable. I don’t accept that. Social Security is safe because old people vote. Period. So I’ll go for that one, but I’m not wedded to it. The app also allows you to cut survivor benefits. Another bad idea.
Finally, we get to my favorite part: revenues. As you all should know by now, I’m a big proponent of raising the payroll tax cap. Right now, people only pay it on the first $114,000 of earnings. Raising it would produce a lot of revenue. Eliminating the cap altogether has two problems. First, there is the vulnerability problem. I don’t think it is real. Second, there is the tax avoidance problem: rich people would figure out ways to make all of their incomes capital gains or some other such scheme. That’s a real problem and so I think Social Security reform must be done in a larger context of tax reform. (By that I mean real tax reform and not a euphemism for “reducing taxes on the rich.”)
They offer three choices: eliminate the cap and increase benefits on high income earners; raise the cap to include 90% of all income (it is 84% now, which is lower than it used to be); or add a 3% surcharge on all income made above the current cap. All of these ideas are above the savings gotten from the other cuts and revenue increases: 77%, 32%, and 24%. I went with the full repeal of the cap.
All of these choices put me at, “Social Security remains insolvent. The trust fund will run out in 2061 at which point all beneficiaries will face a sudden 15% benefit cut.” I’m not finished, but I want to note that the trustees’ report normally assumes a very slow increase in economic growth. So even though I’ve only pushed the program out to 85% of benefits in 50 years, that’s probably enough. But I’ll go ahead and finish.
There are other ways to increase revenue. One is to force new state and local employees who are not in the program to start paying into and getting benefits out. I think that’s a good idea and it will save 9%. Currently, people pay their payroll taxes on income before 401(k) contributions, but they are paid on income after things like insurance. We could throw the insurance in with the 401(k). I don’t think that’s a great idea, but I’m willing to do it for a savings of 9%. Again: I’m not wedded to it. And we could fully tax Social Security income. I don’t want to do that.
Finally, we could invest in the stock market. That’s a bad idea. But note, if we did something like Bush’s “carve out” to allow people to invest part of their Social Security in the market, it would hurt the program’s finances.
My final score: “Social Security remains insolvent. The trust fund will run out in 2076 at which point all beneficiaries will face a sudden 16% benefit cut.” I’m fine with that. It doesn’t make sense to think about this stuff too far into the future; 63 years is good enough.
I went back to the app to see what it said if I got rid of the 75 year shortfall. It reported, “Social Security will be solvent over the next 75 years, but 54% of the gap between spending and revenue remains in the 75th year, meaning the program is not yet sustainable.” So even when you do what the program asks, the CRFB still wants to scare you. In order to be congratulated, you must reduce the 75 year shortfall by over 200%. Removing the payroll tax cap and reducing COLA to “CPI minus 1%” only gets you to 169%. So CRFB is only happy if you savage Social Security.