locussolus - Fixing Social Security

February 25, 2004

PG takes issue with Alan Greenspan's recommendations on Social Security. Specifically, she's concerned about the idea of changing the CPI calculation and indexing the retirement age to the life expectancy. We agree in principle, but I have several caveats and elaborations.

Despite having worked for SSA for 3 years, I don't know much about how the CPI is computed. My impression is that it's already a pretty lean number compared to inflation; my cost of living salary increases, for instance, were always significantly higher than what Social Security recipients received. But if you're going to fix the system, benefits are going to have to be reduced, and this is a reasonably painless way of doing that, from a political standpoint. The obvious drawback is that it affects all beneficiaries equally.

Indexing the retirement age to life expectancy seems like a particularly bad idea, for the same reason that indexing benefit increases to inflation is so messy: there are different expert views on what the life expectancy is. But again, raising the full retirement age is pretty much unavoidable if you still want people to have a benefit that will keep them out of poverty and not bankrupt the country. The argument that somehow a privileged guy like Greenspan doesn't understand how old old is just doesn't fly... it's a fact that life expectancies are increasing, and that people are able to work longer. My experience at Social Security was that all different kinds of people worked beyond full retirement age, not just those with cushy office jobs like Mr. Greenspan.

PG also talks about the concern that if you make Social Security more welfare-like, people will be forced to sell off their assets to qualify. I'm not so concerned about people selling off their assets, but there are serious questions about how to link a Social Security benefit to need. Many people aren't aware of this, but there's already a significant cushion in the Social Security benefit computation for those with fewer earnings over their lifetime; in that sense, Social Security is already welfare-like. But adding a means test at retirement (or every year thereafter) would create incentives for workers not to save over their careers. Is this what we want? Americans already have difficulty saving...

I am totally in favor of increasing the cap on what earnings are taxed under Social Security, and I'd even support tax credits for those at the bottom. But simply changing the cap won't solve the problem. Almost nobody in this country has more than $200k/year in wages... it just doesn't happen. By the time you're making that much, it's not being paid as wages anymore, because income tax law has created incentives to pay that income in different ways (stock options, retirement plans, etc). So, while raising or eliminating the cap would help a little , it wouldn't get at the really rich, most of whose income is non-wage. Esentially it would place the whole burden on the upper middle class, and create more incentives to receive income through alternate means.

My own observation is that Mr. Greenspan is right: we need to fix Social Security now. It may be hard for politicians to talk about this, but Greenspan holds a position much harder to assail (unless you're Al Sharpton), and it's the responsible thing to be talking about. I applaud him for speaking out. I don't much care for the private accounts idea, but we are at the point where the program as it exists can't continue, and we need to do some serious thinking. We either have to cut benefits across the board, or we have to begin reimagining the most successful social program in history.

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