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Thursday, February 17, 2011

"Why Social Security Isn’t a Problem"

This is my preferred method of bringing the Social Security system back into balance:

Why Social Security Isn’t a Problem for 26 Years, and the Best Way to Fix It Permanently, by Robert Reich: ...Back in 1983, Alan Greenspan’s Social Security commission was supposed to have fixed the system for good – by gradually increasing payroll taxes and raising the retirement age. (Early boomers like me can start collecting full benefits at age 66; late boomers born after 1960 will have to wait until they’re 67.)
Greenspan’s commission must have failed to predict something. But what? It fairly accurately predicted how quickly the boomers would age. It had a pretty good idea of how fast the US economy would grow. ... So what did Greenspan’s commission fail to see coming? Inequality.
Remember, the Social Security payroll tax applies only to earnings up to a certain ceiling. (That ceiling is now $106,800.) The ceiling rises every year according to a formula roughly matching inflation.
Back in 1983, the ceiling was set so the Social Security payroll tax would hit 90 percent of all wages covered by Social Security. That ... Greenspan Commission’s fixes ... assumed that ... the Social Security payroll tax would continue to hit 90 percent of total income.
Today, though, the Social Security payroll tax hits only about 84 percent of total income. It went from 90 percent to 84 percent because a larger and larger portion of total income has gone to the top. ...
If we want to go back to 90 percent, the ceiling on income subject to the Social Security tax would need to be raised to $180,000. Presto. Social Security’s long-term ... problem would be solved.
So there’s no reason even to consider reducing Social Security benefits or raising the age of eligibility. The logical response to the increasing concentration of income at the top is simply to raise the ceiling.
Not incidentally, several months ago the White House considered proposing that the ceiling be lifted to $180,000. Somehow, though, that proposal didn’t make it into the President’s budget.

Even though "Social Security isn’t responsible for the federal deficit," the centrist hawkish types in Congress that will make a difference in votes on the budget seem determined to either cut benefits or raise the retirement age to show they are serious about the deficit. They've convinced the public that Social Security is a big part of the budget problem, even though it isn't, and now they're going to show how serious they are by creating real pain.

Why not raise the ceiling? Why doesn't that ever seem to be part of the discussion? For some, it's ideological. Anything that reduces the size of the Social Security program is agreeable. Cutting benefits or raising the retirement age scales things back while raising the ceiling maintains the current size of the program. For others, "fix Social Security" means quit making me (or my kids) pay for other people's benefits. Raising the payroll cap doesn't solve the problem this group has with the Social Security system. In fact, it makes it worse. Finally, it's probably no accident that the solutions being considered fall on the politically less powerful while raising the cap hits the politically well-connected.

But getting reelected is the primary reason politicians shy away from this solution. Obama is thinking ahead to the election in 2012, as are members of Congress. Raising the cap is a tax increase, and they are afraid of the politics associated with tax increases -- the courage to take on the political heat is missing. So even though raising the ceiling is the best way to go, it's just not going to happen.

    Posted by on Thursday, February 17, 2011 at 02:07 AM in Economics, Politics, Social Security | Permalink  Comments (79)


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