Friday, February 25, 2005

Social Security Reform: A Democratic Alternative

Social Security Check, originally uploaded by Wazdat!.

It's Time We Stopped Being On The Defensive, And Proposed An Alternative Of Our Own!

Social Security Reform – progressive style

I think it is time that we Progressives went on the offensive as far as Social Security is concerned, with our own ideas of Social Security reform. The problem with simply being on the defensive is that we are setting ourselves up for being called “naysayers” and “deniers.” If all that Social Security needs is fine tuning then let us explain to the people what we mean.

I have seen the preliminaries on the Diamond-Orszag plan. So far, it makes sense to me.

According to Diamond-Orszag , earnings rose most rapidly over the past two decades among workers whose earnings were the highest. Life expectancy among higher earners with more education has grown faster than it has for lower earners with less education. The resulting life expectancy gap adds to Social Security’s finance gap, making the system less progressive.

OK, time for balancing revenue and benefit adjustments.

1) Raise the maximum taxable earnings base gradually until the total earnings share (that is above the base and doesn’t get payroll taxed) has declined to 13 % roughly where it was over the past twenty years.

2) Next, to offset the gap in life expectancy between higher earners and lower earners, benefits for the highest earning percentage of workers, (15%) should be reduced. Lifetime earnings in the top tier of the benefit formula (according to Diamond-Orszag that is about $44,000 in 2003) add less to benefits than current law permits. Instead of a benefit of 15 cents for each dollar of top tier lifetime earnings, the Diamond-Orszag plan would gradually reduce the benefit rate to 10 cents of benefits for each dollar of top tier lifetime earnings.

3) The third portion of the plan has to do with the Legacy Debt.

The Legacy Debt stems from the Great Depression. People were in horrifying straits back in the 30’s. Social Security was mean to be a form of insurance. The younger generation (who could still work) was obliged to pay for their elders, (who are retired) and-or disabled. Now the proportion of benefits given would usually be according to the amount paid into the system, however with the extreme poverty of the time, it was only human, that when the aged, or disabled were given their checks, they were proportionally overpaid just to return them to level of well being appropriate for that time.

But by paying out more than the share we paid in, we incurred that Legacy Debt. Our present trust fund problems would be greatly improved if paid back that debt.

1. First: Mandatory Social Security coverage for new state and local government workers, so that eventually all workers bear a portion of the cost of benefits paid to earlier generations. According to Diamond-Orszag , while most state and local workers are covered by Social Security, 4 million of them are not. They are not contributing to paying back the debt.

2. Next to make sure that very high earners contribute to paying down the Legacy Debt in proportion to their full earnings, we should lay down a tax on earnings above the maximum taxable earnings base. The legacy tax above that base starts at 3% and, gradually rises along with the universal legacy charge we shall impose, for everyone reaching 3.5% by 2080.

3. The universal legacy charge would be on all future workers and beneficiaries half in the form of benefit reductions eligible in or after 2023, the other half in gradual very modest increases in payroll tax from 2023 onward. Personally, I would do that a lot sooner from a political point of view to preclude the other side’s ability to argue that we would impose heavy taxes later.

An partial alternative to benefit reductions or tax increases is to get revenue from some other specific source such as, reform the estate tax rather than remove it entirely, and use some or all of it’s revenue for Social Security.

This plan would restore the balance to Social Security over the next seventy-five years according to Diamond-Orszag . The system should also be expected to remain in balance ever after. In addition, there are resources for improving benefits for particularly vulnerable beneficiaries, such as: widows and widowers, workers with low lifetime earnings and disabled workers.

1. Presently, workers with low lifetime earnings receive small benefits from Social Security. Diamond-Orszag would increase their benefits so that workers with at least 35 years of work receive a benefit equal to the poverty line of 2012. After 2012, benefits for workers with low lifetime earnings would gradually increase above the poverty line.

2. Widows who typically suffer a 30% drop in living standards when their husbands die. Diamond-Orszag increases the benefits of both widows and widowers with the aim of leaving the survivor with three fourths what the couple received when both spouses were alive. Those with lower benefits will find them increased by financing from the larger program. Higher-benefit couples will have their survivor’s benefits financed by a reduction of their combined benefits while both were alive.

3. Holding total benefits for disabled workers constant for the next 75 years, the Diamond-Orszag proposal would move benefits towards workers who become disabled at a younger age, and away from those who become disabled at more a more senior age. Today, under the present system, younger workers who are disabled fall very far behind the growth of the economy. The Diamond-Orszag plan would reduce this somewhat by raising benefits for disabled beneficiaries faster than inflation. The same procedure would apply for young survivors of deceased workers.

Today we have no protection against unexpectedly high inflation in the in between ages sixty and sixty-two. The inflation adjusted level of benefits of workers in these two years would experience a significant decline if inflation were to be particularly severe for those two years.
The Diamond-Orszag Policy Brief gives this example:

“For example, a repeat of the inflation rates of 1980 and 1981 (14.3
percent and 11.2 percent) would reduce the real benefits for a particular group by almost 25 percent. To protect against this risk, the plan modifies benefit determination in a cost-neutral fashion.”

Diamond-Orszag believes that these changes would be sufficient to restore the actuarial balance. Also according to the plan, the life of the Social Security trust fund is not only extended throughout the projection period, but the trust fund is slowly rising relative to annual benefits at the end of the seventy-five year period.

Workers over fifty-five will not experience any change in their benefits from those under current law.

To it’s detractors I would remind them that there would be no problem with the very budget of this country if it hadn’t been for the irresponsible tax cuts and examples of overspending done by this administration, chief of which is this unnecessary war in Iraq. What I’ve learned about Social Security is that maintaining it is a matter of moving money around, taking some of it from where you don’t need it, and putting it where you do. If we had started out this way in the first place, we wouldn’t have any problem at all.

More on this in later posts.

Brookings Institution policy Brief # 126 Reforming Social Security: A Balanced Plan

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