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Forum
Federal Reserve Board Chairman Alan Greenspan's call for a reduction in Social Security benefits came as Aging Today was working on the "Forum" essay that follows with Robert M. Ball, who was Commissioner of Social Security under Presidents Kennedy, Johnson and Nixon. Ball, the founding chair of the National Academy of Social Insurance in Washington, D.C., challenges many of the notions underlying arguments for major Social Security reforms. His latest book is Insuring the Essentials: Bob Ball on Social Security (New York City: Century Foundation Press, 2000). Now age 90, he is the subject of a new biography, Robert Ball and the Politics of Social Security, by Edward D. Berkowitz (Madison: University of Wisconsin Press, 2004). Things were relatively quiet on the Social Security front in 2003, largely because lawmakers were busy with Medicare. The Administration, however, has made clear its intention to include Social Security reform-meaning partial privatization-in the 2004 presidential campaign, and now Alan Greenspan, chairman of the Federal Reserve Board, is calling for benefit reductions. The program will remain vulnerable to such calls for "reform" and benefit reductions as long as it is said to be facing a major long-term deficit for which there appears to be no politically viable solution. So it's urgent for Social Security defenders to come up with a plan to meet the program obligations-a plan capable of attracting broad public support. What is not widely understood is that major changes are unnecessary. A few sensible steps, desirable in themselves, will do the job.
RESTORING COVERAGE Instead of raising the payroll tax rate, I propose that Social Security go back to covering 90% of all earnings from workers included in the system. This was the level of coverage Congress set the last time it considered the matter in 1983. However, today only about 85% of earnings-not 90%-are taxed and credited to workers' accounts for benefit purposes. Consequently, 15% of earnings, not 10%, are escaping Social Security taxation. This result is not due to a policy decision-it is solely because over the last two decades, earnings at higher levels have increased at a faster rate than earnings at lower levels. Here is how the system works and why payroll taxes don't apply to 100% of income covered by Social Security: A benefit credit is established for every dollar on which a worker must make a contribution, but there is a cutoff point each year ($87,000 in 2003) beyond which a worker is not required to contribute and for which no benefit credits are established. This cutoff amount, which rises each year in accordance with the growth in average wage levels, was established because most people would find it inappropriate in a social insurance system to pay the very high benefits that would result from crediting million-dollar-plus salaries for benefit purposes. At the same time, it would seem unfair-and fundamentally change the nature of Social Security-to require contributions without granting benefit credits. A major part of the Social Security shortfall is due to the fact that a higher and higher proportion of earnings is escaping Social Security taxation.
By adding a 2% increment back each year, Social Security would be restored to collecting contributions based on 90% of covered earnings by 2036. This change would increase the contributions of the 6% of earners who are paid more than the cutoff amount. These higher-paid earners would receive benefit credits for their increased contributions, but under Social Security's weighted benefit formula, additional credits at the higher wage levels would leave a net gain for the system. This proposal is not a new policy, but an old one restored. Although certain to be attacked as a tax increase by those favoring privatization, it would probably have broad support as the best way to bolster long-range Social Security financing. COLA ADUSTMENTS My second proposal is to change the Consumer Price Index (CPI) Social Security uses in determining the amount of the Cost of Living Adjustment (cola) added each year to maintain the purchasing power of Social Security benefits. The CPI currently used by Social Security measures changes in the price of a standard market basket of goods and services. The Bureau of Labor Statistics has developed a more accurate CPI that measures not only price changes for the market basket, but also the effect of switching one type of purchase for another as price changes cause people to make substitutions. Adoption of this improved index would produce slightly lower cola increases and, thus, somewhat reduce Social Security costs. Improving the accuracy of the cola is a change that defenders of Social Security should support on principle, and it is also a change supported by Alan Greenspan and some other critics of the present law. There is every reason to move rapidly ahead on this change. colas have proved vitally important in maintaining the buying power of Social Security benefits, but they are not intended to do more than that. colas should be as accurate as possible-in part so that policymakers can address the question of benefit levels directly rather than letting inaccuracies in the CPI substitute for policy decisions. I am opposed to benefit reductions that go beyond this CPI correction. Social Security benefits are not too high; they are barely adequate as they are. These two steps-updating the cutoff maximum for Social Security contributions and adopting the new CPI-would cut the anticipated long-range deficit in half-from about 2% of payroll to about 1%. If enacted within the next year or two, these changes would extend the date when the savings in the Social Security trust funds would be exhausted from 2042-as is now projected-to 2055. At that point, under present law, Social Security benefits would be supported only by money being paid in contributions at that time by current workers and their employers. This amount would be enough to pay about 70% of the benefits scheduled under present law. The bottom line, however, is that the two changes described would keep the program on track for the next half-century-a reassuring accomplishment in itself. The Social Security deficit, under the middle-range assumptions, would be more than halved again-to only 0.4%-by dedicating a reformed federal estate tax to Social Security. This change could be accomplished by an estate tax exempting estates up to $3.5 million, as would be the case in 2009 under present law. At that level, only one-half of one percent of U.S. estates will be subject to any estate taxes. By closing the projected deficit to within a half percent, this plan would restore Social Security financing to well within what the trustees call close actuarial balance over the customary 75-year period used to measure the program's long-range solvency. (See "A Proposal for Progressive Financing" on this page.) One could argue for financing this cost through general federal revenues instead of an estate tax. But there are no longer any general revenues available. All of the many proposals that purport to solve Social Security's financial problems through schemes making vague reference to future general revenues don't really solve anything. The only source of income that should count as part of a financial solution is a dedicated source not otherwise available to the federal treasury. Restoration of the estate tax and its dedication to Social Security is ideal for this purpose. UNCERTAINTY OF ESTIMATES Should Social Security go beyond close actuarial balance and move to exact balance? In other words, what-if anything-should be done about the 0.4% of payroll deficit shown remaining after taking the three steps I've described? Keep in mind that the 0.4% deficit shows up under only one of the three official scenarios made by the Social Security trustees, the middle-range estimates. Each year, the trustees also develop low-cost and high-cost assumptions-considered possible but unlikely scenarios-to show the range within which actual experience can be expected to fall.
Our planning needs to recognize that no proposal can guarantee balance over a 75-year period. To avoid seriously underfunding the system and putting benefits at risk, or overfinancing it and thereby shortchanging millions of contributing workers and employers through needlessly high contribution rates, the approach should be to adjust the financing of Social Security as cost and revenue estimates change. Although over the last 20 years the projected Social Security deficit has grown with new estimates, we need to keep in mind that the risk of change is not all in one direction. For example, the middle-range estimates may prove too pessimistic. One of the key assumptions governing future costs is the rate of anticipated increases in productivity. It is not only the ratio of workers to retirees-of which we are continuously told-that affects Social Security's future costs, but also how much these workers are able to produce. As additional investments are added to the mix of labor and capital that produce our supply of goods and services, each hour of worker effort (the measure of productivity) produces more. The present middle-range assumptions concerning the rate of increase in future productivity are quite conservative in comparison with what has actually been happening to productivity recently. A BALANCING RATE Therefore, instead of adopting a final employee-and-employer contribution rate that purports to balance long-range income and outgo over the entire 75-year period exactly, I propose that Social Security provide for a rate that would be adjusted as the estimates change. This balancing rate would be based, at any one time, on the trustees' most current middle-range assumptions, but it would be clearly understood-and clearly communicated to the public-that every once in a while this rate would probably need to be adjusted, up or down. (There is an approximately equal chance of either, as long-term forecasts change.) The balancing rate would be a fail-safe provision to take effect automatically if Congress neglected to adjust revenues and costs to changes in the estimates. I propose providing for a balancing rate to become effective in the year in which Social Security trust funds would otherwise start to decline. To illustrate: After taking into account the changes I propose in the maximum earnings base (the cutoff point to taxing income), the CPI and the dedication of the estate tax, the trust funds would continue to grow until about 2053, using the middle-range assumptions. To prevent trust-fund reduction from starting at that time and to provide for funding for a full 75-year period from now, the program would need to schedule a balancing rate increase of roughly 0.9 percentage points each on employers and employees for that year. Alternatively, Social Security could be financed for the full 75-year period by increasing the contribution rate today by 0.2 percentage points each on employees and employers. But if the program actually were to start collecting this total increase of 0.4% of payroll, it might collect more than necessary, overcharging today's workers. My recommended approach of making prudent adjustments now and providing for a balancing rate to be scheduled many years later reduces the possibility of overfinancing while at the same time guarding against underfunding the system. THE BOGUS CRISES This strategy has the added benefit of avoiding periodic false crises about Social Security finances. Currently, when the Social Security trustees annually release their latest 75-year estimates, the media report them as though the middle-range numbers are exact and immutable rather than as one of three educated guesses about how the world will look three-quarters of a century from now. So what is really the trustees' tentative expectation of a possible distant shortfall becomes a crisis, prompting millions of Americans to believe, wrongly, that Social Security is on the brink of collapse and in need of a radical overhaul. If the program is to avoid such bogus crises, it will be critical to acknowledge the impossibility of making accurate 75-year estimates-even while continuing to use long-range forecasting as a tool with which to responsibly ensure that Social Security is adequately funded for the long run. The balancing rate designed to keep the system within close actuarial balance serves this purpose. Social Security doesn't require reforming because it hasn't failed. The system that has served so many so well for so long simply needs some timely maintenance work. Let's get started.
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