Social Security Reform and Extreme Longevity

by Reihan Salam

Many advocates of entitlement reform favor a reduction in Social Security cost-of-living adjustments for those with relatively high lifetime earnings, also known as progressive price indexing, e.g., Yuval Levin writing in the New York Times:

In Social Security, there are even more opportunities for means-testing. Andrew G. Biggs of the American Enterprise Institute has proposed having the top third of beneficiaries (by lifetime income) receive no annual cost-of-living adjustment in retirement. The middle third would get half of today’s adjustment, and the bottom third would receive the same annual increase they do now. Such a reform, Mr. Biggs found, would reduce Social Security spending by more than a tenth over a decade and fix the program’s long-term financing. (Greater annual adjustments could be made for those who reach extreme old age and are running out of resources.)

One problem, however, is that progressive price indexing increases the risk that some older Americans will outlive their savings. As more Americans live to 90 and beyond, progressive price indexing will have real bite for at least some seniors who had been better-off in their prime earning years. Granted, shifting to progressive price indexing would be a good reason for middle- and high-income U.S. workers to increase retirement savings, and there will be many years between when progressive price indexing is put in place and when Social Security beneficiaries will start to feel its effects. But this is also why it takes a very long time for progressive price indexing to yield significant savings. 

Jed Graham of Investor’s Business Daily offers a different approach in A Well-Tailored Safety Net. Essentially, Graham restructures the program so that Social Security benefits increase as one grows older, which means that the biggest cut comes in the first year of retirement. He also provides strong incentives for delayed retirement:

Under Old-Age Risk-Sharing, a career-average earner ($42,000 in 2009) retiring after 2032 would face an upfront benefit cut of 20%, which would gradually unwind over 20 years to keep the safety net intact. However, thanks to enhanced incentives for delayed retirement, that worker could fully overcome this upfront cut and attain an extra measure of income security in very old age by working two years past the official retirement age.

A lower earner would face a 10% upfront cut that could be overcome with one extra year of work, while a high earner would need to work three extra years to overcome a 30% upfront benefit cut.

The surest way of tilting Social Security’s incentives toward delayed retirement (in a way that saves money) is by scaling back the incentives, i.e. benefits, for retiring early. The front-loaded benefit cuts prescribed in Old-Age Risk-Sharing would go further in this regard than the lifelong benefit cuts in the traditional menu of Social Security policy options. And because the cuts are front-loaded, the savings would accrue much faster.

But for all the virtues of Graham’s approach, these substantial upfront benefit cuts are likely to prove even less politically palatable than progressive price indexing, the impact of which is back-loaded as opposed to front-loaded.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.