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In Defense of the Simpson-Bowles Social Security Plan: Part 1

Charles Blahous | 02/28/2011 |

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In previous articles I have sought primarily to explain the Simpson-Bowles fiscal commission Social Security proposal rather than to promote it. I took a favorable position in one public debate about the plan and was comfortable asserting that it is a well-considered, reasonable compromise approach.

My own subjective policy views are to the right of Simpson-Bowles. As my policy ideal, I would prefer a plan that does more to contain cost growth and less to increase revenues. I am nevertheless concerned enough by other recent critical descriptions of the plan – based in part on a recent paper by the Center on Budget and Policy Priorities (CBPP) – that I feel compelled to write again about Simpson-Bowles to offer a competing – more positive – perspective.

A few additional disclaimers first: I have enormous respect for the CBPP authors. I recently co-authored a paper with Bob Greenstein on the Social Security financing challenge, and immensely enjoyed my opportunity to work with him and with CBPP’s other well-informed experts. Indeed, it is precisely because of the credibility that their criticisms will enjoy that I feel obliged to offer this alternative perspective.

The recent CBPP paper offers several criticisms of the Simpson-Bowles Social Security proposal. I group my responses to these criticisms into three general categories:

  1. Places where I agree both with CBPP’s analytical description and their policy conclusion.
  2. Places where I agree with CBPP’s analytical description but have a different policy view.
  3. Places where I disagree with both the analytical description and the policy conclusion.

Let’s start with the points of agreement first. Because I am ordering by level of agreement, these points are not in the order that they appear in the CBPP paper.

 

Criticism #1: The Plan “Weakens the Link Between Earnings and Benefits.”

CBPP notes (correctly) that under Simpson-Bowles, over time the benefits of high earners and low earners would gradually drift closer together despite the fact that higher earners would have made substantially larger contributions to Social Security. The concern is expressed that this would weaken the link between earnings and benefits and jeopardize Social Security’s future political support.

From a purely analytical standpoint, this is undoubtedly true. My previous articles have agreed on this point, noting that the extent to which Simpson-Bowles would reorient program resources toward lower-wage individuals is “the single most striking substantive feature of the proposal.”

In fairness to Simpson-Bowles, however, it is important to recognize a few additional policy realities. One is that under current Social Security, the link between earnings and benefits is already quite tenuous. In my recent book, I show how one can think of one’s individual Social Security 12.4% tax as effectively being split into three pieces:

  • part A (benefits earned for oneself through one’s own contributions);
  • part B (a safety net for low earners financed by high earners);
  • part C (contributions to support previous generations that don’t yield benefits for younger workers).

These three pieces are now roughly equal in size, though not exactly so. Simpson-Bowles would shrink Part A somewhat and expand Part B, but this qualitative feature of Social Security already exists under current law.

Another important constraint is that most authors of plans, on both sides of the aisle, appear to have concluded that income redistribution within Social Security should increase, specifically to shield low-income workers from costs of restoring the system to sustainable solvency. We see evidence of this in the multitude of plans that require higher-income workers to bear the brunt of cost restraints, as well as in President Obama’s reform principle that “reform should strengthen retirement security for the most vulnerable.” These approaches would increase income redistribution, inevitably weakening the connection between earnings and benefits.

How redistributive Social Security should be is a critical societal value judgment and a difficult policy balancing act. It involves the competing considerations of, on the one hand, targeting resources on those of greatest need, while on the other, maintaining Social Security’s contribution-benefit link and ensuring its political support among all income classes.

It’s reasonable to argue that Simpson-Bowles is too progressive. This could be addressed by any of:

  • scaling back the plan’s new benefits for low earners;
  • replacing some of its progressive benefit changes with a faster increase in the retirement age;
  • scaling back the plan’s increase in the cap on taxable wages, or;
  • modifying its benefit formula changes – which would constrain benefit growth mostly for those in the upper half of the wage spectrum – to spread out the constraints among a larger number of workers, including some lower-wage ones.

Any of these changes would be perceived as moving the plan to the right of where it currently is. I have no especial insight as to whether such modifications would make Simpson-Bowles more or less attractive to legislators, but they are the types of measures that would be necessary to respond to the criticism.

 

Criticism #2: The Plan’s “Hardship Exemption” and Flexible Benefit Claim Options Are Inadequately Developed

Simpson-Bowles contains provisions designed to shield physical laborers from the effects of gradually raising Social Security’s eligibility ages. Among these are a “hardship exemption” for longtime physical laborers and a new “flexible claim” option that would permit all workers to continue to claim at least part of their benefits at age 62. These proposals are criticized as lacking sufficient details and failing to accomplish their intended goals.

Although I have spoken favorably of Simpson-Bowles generally, I too have expressed concerns about these particular provisions. They would add complexity to Social Security’s benefit claim process, and it is far from clear whether they address a real need and would avoid unintended consequences in meeting that need. The proposal might well be better without them.

CBPP and I have different reasons for being concerned about these provisions. I have no problem with the plan’s other early eligibility age changes, which concern CBPP. But we agree that the new benefit claim options may be problematic. They could easily be dropped from Simpson-Bowles without undoing its projected fiscal and other policy achievements.

Now, to places where I agree with CBPP’s analytical portrayal but disagree with their policy conclusions.

 

Criticism #3: The Plan’s Minimum Benefit Provision for Low-Income Workers is “Poorly Conceived.”

Two headline comments are made about the Simpson-Bowles minimum benefit provision.

  1. It’s “poorly conceived” – for reasons that include its implementation schedule, potential adverse impacts on SSI beneficiaries, reduced work incentives, and inefficient targeting of benefits (with inefficiencies on both sides of the line – giving increases to people who don’t need them, and missing people who do).
  2. It’s not all the fault of Simpson-Bowles: A key paragraph from the CBPP paper states: “Unfortunately, it is hard to design a well-targeted minimum benefit at reasonable cost. Rather than enact a poorly designed minimum-benefit provision as part of Social Security reform, policymakers should seriously consider alternatives, such as strengthening SSI.

CBPP’s second point above is a fair one. It is difficult to design a well-targeted minimum Social Security benefit at reasonable cost (for reasons, I believe, rooted in existing flaws in Social Security). Moreover, it’s certainly reasonable to argue that SSI rather than Social Security should be the principal means of providing the “safety net” against elderly poverty, freeing Social Security to focus more directly on providing a truly earned retirement benefit.

I disagree, however, that Simpson-Bowles’s minimum benefit is “poorly conceived.” In my many years as Social Security policy staff, I had opportunities to crunch numbers on a variety of possible approaches to designing minimum benefit provisions. Although I did not arrive at the particular formula used in Simpson-Bowles, like them I concluded that a minimum benefit provision that phases up with the number of years worked is conceptually the best way to do it. Such an approach, in my experience, offers the best opportunity both to preserve work incentives and to also target benefits most efficiently on the households of greatest need. Relative to Simpson-Bowles, I would design a formula that phases in at a higher number of work years, but I believe their general approach makes good sense.

CBPP criticizes the Simpson-Bowles minimum benefit in part because it does not provide significant additional assistance to people who are in the low-income category due to having few coverage years. But one of Social Security’s current flaws is that it sometimes mistakes higher-income people who have sporadic work histories for low-income people, because it averages one’s earnings over a full career (including any “zero earnings years” therein). Many higher-income individuals who pass in and out of the Social Security-covered workforce – including some immigrants, state/local workers and spouses of high-earners – fall into this category. Indeed, one of the reasons Social Security has to have a complex Windfall Elimination Provision (WEP) is to correct for this flaw in the system’s treatment of state/local workers.

These quirks of the current benefit formula are among the reasons that many policy experts, including myself, have recommended that it be redesigned to pay benefits based on each year of earnings, rather than on a single-number career average that poorly handles gaps in one’s Social Security earnings record.

As a result, any effort to modify Simpson-Bowles to also provide further benefit increases for workers with few earnings years would likely be very inefficient. It would expend scarce system resources to increase benefits for many people who do not need them. It would also substantially reduce incremental returns on work and further weaken the earnings-benefit connection. Genuinely low-income people who are poor because of unavoidable gaps in their earnings record are exactly those who might be better helped via CBPP’s suggestion of bolstering SSI.

The criticism was also voiced that increasing Social Security’s benefits for low-income people could do harm by reducing eligibility for SSI and Medicaid. Again, however, this is a general argument against increasing Social Security’s benefits for low-income workers, and does not really reflect a problem unique to Simpson-Bowles. CBPP also critiques the Simpson-Bowles implementation schedule, but this criticism could be easily met by simply phasing in the provision over a few years.

In sum, if we accept the view of President Obama and most Congressional reformers that increasing Social Security’s benefits for low-income individuals is a goal, then I believe the Simpson-Bowles approach is a reasonable way to do it, and one that would ameliorate substantial flaws in the existing benefit formulas. I personally would prefer that we further correct those current flaws, and I would design a different minimum benefit provision if working alone, but neither of these points is an argument for the status quo.

In the next piece, I will turn to the criticisms of Simpson-Bowles with which I disagree more fully.

Charles Blahous is a research fellow with the Hoover Institution and the author of Social Security: The Unfinished Work.


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