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Why the Bowles-Simpson Social Security Recommendations Aren’t Adequate

Peter Orszag writes about the Bowles-Simpson recommendations on Social Security, and generally finds them amenable. I don’t know why this should come as a surprise – they basically take a similar form as his Diamond-Orszag recommendations, with a mixture of benefit cuts and payroll tax increases to arrive at long-term solvency.

Orszag rightly notes that Social Security is a lesser-order problem, especially relative to health care expenditures. However, his first NYT op-ed about Bowles-Simpson focuses on Social Security, which undercuts that priority ordering. And he says that the structure of the changes are roughly in line with his recommendations, although he would err more on the side of tax hikes, and he would not raise the retirement age. Furthermore, he’s depressed that progressives aren’t on board with this plan, given that it addresses the long-term solvency of Social Security without privatizing it.

Let’s first address precisely what the Bowles-Simpson outline would do. It would increase the payroll tax cap so that it covers 90% of all income, rather than the 82-85% it captures today. That cuts 1/3 of the total deficit. It uses progressive price indexing to lower benefits for “high-end” earners (if by high-end you mean individuals who make $43,000 a year) and increasing them slightly for “low-end” earners. It changes the cost of living adjustment by tweaking the inflation standard, reducing benefits for scheduled recipients immediately. And over the long-term, it increases both the early retirement age and the retirement age for full benefits, from a range of 62-67 to 64-69, over a long time horizon (the progressive pushback actually worked here to keep the retirement age changes 40 and 65 years out; I believe they’ll eventually get bargained away).

So this arrives at a solution for Social Security’s long-term funding with 1/3 revenue enhancements and 2/3 benefit cuts. Other analyses put this at 57-43 in favor of benefit cuts, but I don’t see how they get at this figure. Even Orszag acknowledges that’s out of balance.

The main flaw in the proposed Social Security plan is that it relies too little on revenue increases and too much on future benefit reductions. A reasonable objective would be a 50-50 balance between changes in benefits and changes in revenues. But the way to bring reform into better proportion is to adjust the components of this proposal, not to fundamentally remodel it.

The only way for this to make sense to anyone is if you believe that Social Security provides adequate benefits today. I’m not surprised that the well-compensated Peter Orszag thinks so. But for the large mass of Americans who don’t have defined-benefit pensions, they would get about $13,000 a year from Social Security, not enough to keep up with their cost of living, certainly not enough if they have significant hospital or prescription drug costs. It is these inadequate benefits that Bowles and Simpson want to reduce by up to 35% on people even at the middle end of the income scale. The great majority of these people have little savings on which to draw, and the Bowles-Simspon report reduces that prospect even more by eliminating the tax deduction for individual retirement accounts. So they want to make it more expensive to save for retirement, while cutting the benefits for that retirement.

I don’t agree that these benefits are adequate in any way for the middle class. Furthermore, I believe that progressive price indexing and other methods that alter the globalized benefit of this program will have a deleterious effect over time. The one thing that has saved Social Security over the years is the fact that everyone gets it at the same rate. It has not become a welfare program subject to easy demonization by those who regard it as going to the “wrong” people.

There is a simple fix for Social Security’s long-term solvency, a two-step process: eliminate the payroll tax cap (or come up with a “donut hole” approach that exempts a level of income between, say, $150,000-$500,000 from the payroll tax, but imposes it above that), and legalize immigrants working in this country to subject them to the payroll tax and enable them to acquire benefits. With those two steps, you would improve the ratio of workers to beneficiaries, increase tax collection, and probably be able to increase benefits to a more adequate level. You certainly wouldn’t have to make construction workers toil until the age of 69 for full benefits, or reduce the COLA, or slash benefits up to 35% for middle-income workers currently in their 20s.

You can only find the Simpson-Bowles recommendations “reasonable” if you think it’s reasonable in the wealthiest nation on Earth to allow seniors to scrimp on about $1,000 a month, which doesn’t fully cover their costs. Social Security is very important to keep seniors out of poverty. They should get to live a decent life with dignity in their later years, too.

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David Dayen

David Dayen