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Don’t Worsen Social Security’s Soaring Cost Problem

Charles Blahous | 12/23/2013
John R. Coughlin

Followers of politics may have noticed a recent push from the left to expand Social Security benefits above and beyond the current-law growth schedule (which itself remains unfinanced). Such an expansion has received support from moveon.org, Paul Krugman, and even from some sitting U.S. Senators. While expanding a popular program carries an obvious political utility, any reasonably careful analysis of Social Security reveals the idea to be highly problematic at best. Listed below are 10 factors to bear in mind whenever proposals to change Social Security benefits are discussed.

#1: On the positive side, these proposals acknowledge that the Social Security benefit formula should be changed. Historically, partisan advocates have too often fueled the misperception that any changes to Social Security benefits violate what Americans “paid for” based on the amount of their tax contributions. This is incorrect, as these latest proposals implicitly acknowledge. Over the years the program’s benefit formula has changed repeatedly; it does not even attempt to reflect the amounts each worker’s contributions have earned. Proof of this lies in the fact that scheduled Social Security benefits exceed the value of total worker contributions by trillions of dollars. Thus, a review of Social Security’s benefit formula is a good thing; the question is what changes to it would treat participants more equitably.

#2: Social Security benefits are already increasing substantially under current law, and would continue to increase under various proposals to maintain solvency. The basic benefit formula is indexed to growth in the Average Wage Index (AWI), which tends over time to rise faster than price inflation. As a result, real per-capita Social Security benefits are already rising substantially under current law. Partisans sometimes apply the misleading terminology of “benefit cuts” to proposals to adjust benefit growth to sustainable rates, but the reality is that under virtually any plausible reform scenario, benefits will still rise in real terms relative to what seniors receive today.

 

 

#3: Unless current-law benefit increases are substantially slowed, younger workers will shoulder unprecedented cost burdens. The number of Social Security beneficiaries is increasing dramatically as the large Baby Boom generation hits the benefit rolls. Paying rising per-capita benefits to a swelling beneficiary population comes with a heavy price. When the boomers began to hit the rolls in 2008, the cost of financing Social Security benefits amounted to 11.6 cents of each taxable dollar American workers earned. Per this graph from the latest trustees’ report, unless benefit growth is slowed the cost of financing scheduled benefits will rise to 17 cents on the dollar by the mid-2030s. 

 

 

#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. For years, policy analysts have grappled with how to reconcile the growing gap between Social Security’s scheduled benefits and the financial resources available to pay for them. Conservatives generally prefer to slow cost growth, and progressives to raise taxes, while bipartisan proposals such as Simpson-Bowles land roughly halfway in the middle. By their own account, the backers of these latest benefit-expansion proposals are trying to reset the Social Security debate by positioning themselves far afield from this bipartisan ground. 

The accompanying graph gives a sense of how radical this attempted paradigm shift is. Social Security benefits have been growing steadily relative to inflation for many years. Even if Social Security were denied additional tax revenue to maintain solvency, beneficiary standards of living in 2035 would be nearly what they are today; by contrast, the program’s scheduled benefit growth could only be funded with a substantial tax increase. Further increasing benefits by, hypothetically, 20 percent, would mean more than a 50 percent rise in beneficiary living standards by 2035, and would also require workers to provide over 20 percent of their taxable wages to support one federal program alone. 

 

 

In some respects the recent maneuvering repeats the tactic employed with the Affordable Care Act (ACA, or so-called “Obamacare.”) Prior to the ACA, mainstream analysts had debated how much of the government’s enormous health care financing shortfall should be closed by raising taxes, and how much by slowing benefit growth. The ACA leapfrogged previous bipartisan discussion by increasing federal health spending commitments even beyond those deemed unaffordable under prior law. That radical shift is one reason why the ACA lacked bipartisan support, why its passage polarized the body politic, and why opposition to it remains entrenched within the political center and right nearly four years later. Proposals to further increase Social Security benefits represent a similar effort to dismiss bipartisan standards of fiscal responsibility.

#5: Looking solely at Social Security benefits is uninformative; a meaningful analysis must compare both ends of the equation – the taxes it collects from workers as well as the benefits it later pays. This seems obvious, but it is striking how many discussions revolve around the adequacy of Social Security benefits without considering their relationship to the taxes required to finance them. If Social Security benefits could materialize from thin air, then obviously everyone could be made better off by increasing them. But they do not; proposals must therefore be evaluated for whether Social Security benefit levels justify the worker tax burdens associated with them.

#6: Further increasing Social Security benefits does not increase total resources available to finance retirement income. Theoretically, a belief that retirement security is inadequate could justify proposals to increase national retirement saving. But Social Security is not a savings program; to the contrary, most analyses find that Social Security reduces national saving. Accordingly, further increasing Social Security benefits at best simply increases some participants’ retirement security at the expense of others’. The important thing to know is whether such additional income transfers would improve or worsen program equity. 

#7: Further increasing Social Security benefits for current participants would worsen existing inequities. Because of how Social Security is financed (i.e., by having younger generations pay for the benefits of older generations), those now entering employment can expect to lose over 4 pecent of their lifetime wages (net of benefits received) through the program under current law. For younger Americans, the program will subtract lifetime income and reduce economic security. These income losses can only be ameliorated if benefit growth is slowed for current participants. If instead current participants’ benefits are further increased, younger Americans’ net income loss through Social Security will worsen, further undermining the program’s long-term efficacy as income protection. 

#8: Social Security benefits and cost burdens are already increasing faster than participants’ pre-retirement income. The growth of per-capita benefits in excess of price inflation, coupled with the rising number of beneficiaries, causes workers’ Social Security tax burdens to rise over time, reducing their after-tax income. As a result, the current benefit formula causes Social Security retirement benefits to grow faster than pre-retirement income – in effect, steadily depressing pre-retirement living standards relative to post-retirement living standards. Further increasing Social Security benefits would worsen this problem.

 

 

#9: Social Security benefits and costs have already risen to the point of destroying many individuals’ ability and incentive to save. The continual lowering of worker living standards relative to beneficiary living standards is a particular problem for low-income individuals. Biggs and Springstead have shown that individuals in the lowest income quintile experience lower standards of living as taxpaying workers than they expect as Social Security beneficiaries. This creates obvious disincentives for individuals to remain in the workforce, to engage in discretionary saving, and to contribute to economic growth. It is small wonder that recent research has found that many low-income groups have no significant savings at all; this is the predictable result of imposing high tax burdens on limited incomes to support a retirement program that does no saving. Further increasing Social Security benefits and costs would worsen this trend of forcing low-income individuals into lower standards of living as workers than as beneficiaries. 

#10: Social Security benefits are already growing so fast that Americans’ reliance on Social Security for retirement income increases even as national incomes rise. If a central purpose of social insurance programs is to provide protection against need, then logically it follows that a wealthier society should be relatively less dependent on such programs. But that is not what happens under current Social Security law; instead, Social Security is designed to expand automatically as American incomes grow. Specifically, as worker incomes rise, Social Security automatically pays higher benefits for a constant level of worker wages. 

 

 

Further increasing Social Security benefits only makes sense if we believe that, as American society grows wealthier, individuals should become more reliant on government and less on their own saving. If we do not believe this, benefit growth should be significantly slowed from current schedules. 

Summary: 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. 

 

Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21. 


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