Saturday, January 08, 2005

Social Security - a few intelligent ideas

Matthew Yglesias discusses Social Security, covering a lot of ground in a short post. He is sanguine about the chances of anything being done that might seriously improve the system, but links to a site that I have not seen before that summarizes the picture of Social Security and it's built-in drawbacks as clearly as anything I have found.

Without mentioning the administration's pet notion of "privatization", he simply states that [a]s a political strategy, I don't really think it makes a great deal of sense for a marginalized opposition party to worry too much about what they think really ought to be done. There's a bad idea on the table, and the Democrats ought to kill it. But one hopes liberals will find themselves in a position of power some day reasonably soon, and so it's worth talking about good reforms if only as an intellectual exercise.

In other words, we don't have to buy into the programs being presented, but that doesn't mean that a meaningful discussion of future adjustments is out of the question. I like that kind of pragmatism. Just because it's broke, we don't have to fix it right this minute. Or, as the old saying goes, "there is more than one way to skin a catfish." [I used to think it was "skin a cat," but my mother said "catfish," which makes a lot more sense, especially to anyone who has ever cleaned catfish.]

The Lowest Deep will become yet another bookmark for me to keep up with. Adam O'Neil is an alias. I'm an economist at a large policy-making government agency where I analyze activity in the government sector and assess the economic consequences of tax and spending policy. Adam O'Neill is a pseudonym that ensures that my opinions and observations are not confused with those of my employer. I put this weblog together at the urging of a friend and I use it to test out thoughts, to keep myself up to date on important issues, to archive various ideas, and to contribute what I can to the public discourse. I hope that you find it interesting and useful.

This post from last November is excellent. Brief, clear and comprehensive.

First, a primer: Workers pay 15.3 percent of their income (including the employer contribution) up to about $87,000 to social security. This revenue is transferred to today's retirees. These days workers pay more than retirees receive so there is a surplus. This surplus is held in a so-called "trust fund" that is essentially no more than an accounting fiction. (The fund holds treasury securities so essentially the government is borrowing from Line X of their balance sheet and crediting Line Y. This is like taking cash advances on your credit card and depositing them in your bank account and then calling the bank account your trust fund.)

When you retire the SSA computes your average earnings over the highest 35 years of your life, scales that average up by wage growth between the time of your earnings and the date of your retirement, and then pays you a fraction of your scaled-up average earnings that depends on a progressive scale (low earners get 90% back, high earners get 15%). You're eligible for retirement under current law at 65 (increases to 67 over time) and early retirement at 62 (benefits are reduced by the actuarially fair difference between benefits starting at 62 versus 65). Each year your benefits increase by the rate of the CPI to maintain purchasing power.

Now if someone can just rewrite those two paragraphs to a 4.0 score on a Fleisch-Kinkaid scale and make it available in retail checkout lines between the National Enquirer and the latest diet craze paperback, a lot of people might learn something important that affects them. Despite my byline, I'm not optimistic about that happening.

Anyway, six suggestions follow that could improve the system.

1) When calculating benefits, use average earnings over 40 year earnings history instead of the current 35 year window.

2) When scaling up earnings to retirement age, scale them up by the increase in the cost of living and not by the increase in average wages.

3) Index benefits to a cost of living index and not to the CPI.

4) Raise the retirement age by linking it to health-based measures like life expectancy.

5) Make benefits more progressive.

6) Institute a revenue neutral switch from the current payroll tax to a flat payroll tax.

Each of these easy to grasp ideas is explained briefly in a manner that can be understood.

Without going into detail, I will just add that Matthew's comments are equally clear and reasonable. For anyone who is interested in Social Security reform these two sources are highly recommended.

And for anyone who imagines that privatization of the Social Security system, even in part, is either necessary or prudent, he should take the time to do some homework first.


Anonymous said...

John, you sound like the typical liberal Democrat. I bet you have gone throughout life not saving a nickle and now that your in your sixties you expect the government to bail you out and provide for retirement. I hope you didn't raise your son that way.

Hoots said...

Oh, I'm much worse than that. You must not have read much of my blog. Check out another comment from last month. social security

Hoots said...

Sorry, wrong link.
Try this:

Deborah said...

Anonymous....30+ years of payroll deductions from my paycheck paid for those social security payments in my retirement years. That was not an additional income tax for the goveernment to absorb!

Social Security is not an entitlement program...we paid for it. The only entitlement around here seem to be the government, which thinks it's permanently entitled to my money. In other words, double income taxation.