Debt panel's Social Security fix: Raise taxes, cut benefits

McClatchy NewspapersNovember 23, 2010 

WASHINGTON — Social Security taxes would rise and benefits would fall under proposals from the co-chairmen of the special deficit-reduction panel that's due to report to Congress by Dec. 1.

The draft from the co-chairmen of the National Commission on Fiscal Responsibility and Reform would apply Social Security payroll taxes to much higher earnings than current law does. It'd also create new higher benefits for poorer workers who've had low-wage careers.

"We're solving Social Security for its own self, not for deficit reduction. And we had two goals, protect the truly disadvantaged and get (Social Security) solvency out to 75 years," co-chairman Erskine Bowles told reporters on Nov. 19.

Their panel must issue its report by Dec. 1. Nothing in it will become law unless Congress and President Barack Obama go along. Still, their proposals have ignited a vigorous debate.

Bowles was President Bill Clinton's White House chief of staff and now is the president of the University of North Carolina system. He and his co-chairman, former Sen. Alan Simpson, R-Wyo., laid out their proposed deficit reduction plan earlier this month. It called for painful tradeoffs as the best way to harness the rising debt.

None of their proposals commands more public attention than those to change Social Security, perhaps the nation's most revered federal program.

They say the ratio of their proposed Social Security benefit changes to revenue increases is 57 to 43 — meaning they'd cut more in spending than they'd raise in taxes.

Critics, including House Speaker Nancy Pelosi, D-Calif., say that today's 20-year-old worker would see a 36 percent reduction in Social Security benefits compared with what today's beneficiaries get, and want benefits to stay on schedule.

Bowles scoffs at the comparison.

"Scheduled is a joke. It's scheduled, but it's like my daddy said, 'Don't make promises you can't keep.' We can't meet the schedule. In 2037, this thing runs out of money. All of the (Social Security) trust fund and interest earned in the trust fund is gone," he said. "In 2037, benefits will be cut by 22 percent" unless changes are made before then.

The full-benefit retirement age will rise to 67 in 2037 under current law.

Bowles and Simpson propose to index Social Security's retirement age to average U.S. longevity; the longer Americans live, the later they'd reach retirement age for full Social Security benefits. They anticipate a full-retirement age of 68 in 2050 and 69 in 2075. Critics complain this would be a back-door 7 percent cut in benefits each time the age is raised.

It also could inadvertently raise the system's costs, according to the Government Accountability Office. In a Nov. 18 letter to Sen. Herb Kohl, D-Wis., chairman of the Senate Special Committee on Aging, the GAO said that raising the full retirement age could push more people, especially low-income workers, into seeking disability insurance, further straining the system's finances.

Bowles-Simpson would create a special hardship exemption for workers unable physically to work beyond age 62.

They'd direct the Social Security Administration to provide for early retirement of workers in physically demanding jobs. This would have to be in place, with a dedicated source of funding, before the retirement age is raised.

Recognizing that people are living longer, the Bowles-Simpson plan also would allow retirees to collect half of their benefits early and the other half at a later age. Currently, if a recipient collects Social Security benefits early, they get a smaller monthly payment for the rest of their life.

"First of all, we made our job harder, because . . . one of our primary principles is we're not going to do anything to hurt the truly disadvantaged. So we upped the payment for the truly disadvantaged to 125 percent of the poverty (line), which is more than they get today," Bowles said. "Second thing we did, people said, 'You've got to take care of the older old.' And that's people between 81 and 85, so we're taking it up 1 percent a year for those" older Americans.

Many of these proposed changes would impose more costs on the retirement program; they'd cut other costs to pay for them.

Wealthier workers would see more of their income subjected to payroll taxes. By 2050, 90 percent of earned income would be subjected to the payroll tax under Bowles-Simpson. The formulas for monthly retirement benefits also would be rebalanced in a way that ultimately could lower benefits for all but the poorest future workers.

Today the government taxes only from the first $106,800 of annual earnings for Social Security. That's scheduled to increase in 2020 to the first $160,000 of earnings. Under Bowles-Simpson, it would increase to the first $190,000 of earnings in 2020.

"This increases the marginal tax rate on work by 12.4 percentage points for workers in this income range," said Americans for Tax Reform, a conservative group that slams the Bowles-Simpson plan as full of tax increases. (The pair calls it closing tax loopholes.)

Liberals also complained, arguing for elimination of any cap on income subjected to payroll tax deductions.

"We would scrap the cap, and if we did that alone, we could entirely address the projected shortfall . . . and that's critically important," said Eric Kingson, a Syracuse University professor and co-director of Social Security Works, a group that promotes economic security for the disadvantaged.

Bowles and Simpson considered scrapping the cap on payroll deductions entirely, but concluded it would be too severe a move.

The Center for Budget and Policy Priorities, a liberal policy research group, praised the Bowles-Simpson proposal to increase benefits for the lowest fifth of Social Security beneficiaries. But it argues that adding new costs and extending the retirement age would amount to benefit cuts for the next-poorest 40 percent of workers.

"We would argue for larger tax increases and smaller benefit cuts, with the latter directed chiefly at higher earners," said Paul Van de Water, a senior fellow at the center.

"We thought we'd spread the pain around in a progressive manner, but the good thing we did is we made Social Security solvent for the next 75 years," Bowles said. "Could you do more on revenues and the benefits? Yes and no. But we tried to find the balance we were comfortable with and we think we've achieved that."

One of the most powerful lobbies against changes to Social Security is AARP, which advocates on behalf of older Americans. The group didn't mince words its reaction to Bowles-Simpson.

"During these tough economic times, the last thing we should be considering is targeting the guaranteed, inflation-protected Social Security benefits that millions of Americans count on every day," Nancy LeaMond, AARP's executive vice president, said in a statement.

HOW BENEFITS ARE CALCULATED

The sum you are entitled to at your full retirement is known as your primary insurance amount, shorthanded as a PIA. Most benefits are determined in relation an individual's PIA.

To calculate a PIA, the Social Security Administration looks at a person's lifetime earnings, adjusted for overall wage growth. It ranks the 35 best years of adjusted earnings, then adds them up, dividing that sum by 420 — the number of months in 35 years. From that division, the averaged monthly indexed earnings (AIME) are derived.

Then, the SSA applies a formula that "replaces" different percentages of earnings along three different ranges of the average monthly indexed earnings. These brackets are defined by so-called bend points — and they're designed so that the Social Security benefits of a lower earner "replace" more income, usually around half of past monthly earnings. Higher earners "replace" a lower percentage of the averaged monthly indexed earnings, closer to about 25 percent.

ON THE WEB

Bowles-Simpson draft proposal

GAO Study

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