The Agenda

Charles Blahous on the Simpson-Bowles Social Security Proposal

Charles Blahous has just written an Economics 21 commentary that cuts through the confusion regarding the Simpson-Bowles co-chair’s mark on Social Security. Naturally, as an Economics 21er myself, I think it’s thoughtful, fair-minded, and on-target, but I do hope critics of Simpson-Bowles read the piece. Some of the commentary I’ve seen so far, often from very smart people, has struck me as depressingly underinformed or deliberately misleading, e.g., one noted columnist has claimed that the mark’s “Zero Plan” cuts income taxes (ignoring the cuts to tax expenditures that make the proposal revenue neutral) and a well-known anti-tax activist claims that it represents an egregious tax increase (ignoring the impact of top-line marginal tax rates on work incentives).

The discussion of the Social Security proposals has been particularly unedifying, with most of it focusing on the notion that Social Security can and should be fixed “painlessly,” through gentle tax and benefit tweaks over two decades as the Social Security shortfall is ultimately trivial. Let’s get this straight. The Social Security shortfall isn’t nearly as big as the long-term Medicare shortfall, where, incidentally, the co-chairs’ have a very tough proposal indeed. But it is really, really big, as Andrew Biggs has observed on numerous occasions. Those “gentle tweaks” have to be put in place now. If we move quickly, we can insulate near-retirees from major changes to the retirement age, etc. But the window is closing, as Blahous explains:

One reason the plan would be such an improvement from the standpoint of fiscal conservatism is that continued delay in correcting the Social Security imbalance is incredibly costly. Every year that a new cohort of retirees hits the rolls, their benefits become politically inviolate. Moreover, because each cohort’s benefits are generally higher than the one before, the minimum politically acceptable level of subsequent benefit payments rises as well. In short, the longer that time goes by, the greater the share of the problem inevitably solved with large tax increases. Under any reasonable expectation, the level of additional tax revenues under this plan is substantially less than would be required if action on Social Security were delayed for several more years.

Moreover, Blahous brings some much-needed historical context to the Social Security picture. What many people don’t understand is that “Social Security benefits began to be indexed to growth in the national average wage index” in the Carter-era, not in the FDR-era. Fiscal conservatives who hope to tweak the formula are, in a sense, calling for a restoration of FDR’s approach. Now, I don’t think FDR was right about everything, and of course U.S. society has changed considerably since the mid-1930s. But it has also changed since the 1970s, and the notion that Carter-era benefit increases should be held sacrosanct strikes me as peculiar.

Last week, I wrote a short post about Silja Haeusermann’s argument for raising benefits for the most vulnerable to make adjustments at the middle and the top more politically sustainable. The Simpson-Bowles proposal protects the oldest and poorest retirees:

The Simpson-Bowles plan is a progressive one. In addition to the progressive bend point factor changes, the plan would create an increased minimum benefit to ensure that no one retires into poverty after a full working career. The best way to design such a provision is to have the new minimum benefit phase upward with years of earnings so that it doesn’t create a disincentive to work. Information passed from the commission suggests that this is indeed how this provision is designed.

The plan also contains a provision to increase benefits for those who have been eligible for 20 years. This is designed to address the risk of the oldest-old outliving their savings and falling into poverty.

Put these various provisions together, and Simpson-Bowles is highly progressive. The medium-wage earner would still see substantial real benefit growth over the long-term.

On the lower-income end, the rate of benefit growth would be far faster than shown above. In fact, 

On the lower-income end, the rate of benefit growth would be far faster than shown above. In fact, benefits for the lowest-income quintile would actually grow faster under Simpson-Bowles than they would even if taxes were raised substantially to finance the currently-scheduled benefit formula.

Reasonable people can disagree on the optimal Social Security plan. It is, however, ridiculous to allege that the Simpson-Bowles outline represents an attack on working Americans. Retirement income security for low-income workers would be enormously greater under Simpson-Bowles than under current law: first because it would increase their benefits outright, and second because it would eliminate the threat of benefit reductions that would persist under the status quo. [Emphasis added.]

Like Blahous, I imagine I would design my Social Security reform plan differently. But it certainly reflects my values and aspirations for what Social Security should be: more generous benefits for the poorest and the oldest old, and a stable, sustainable safety net for everyone else.

To my great and lasting frustration, the sum total of the fiscal conservatism of many of my center-left friends is captured by their willingness to raise the most damaging taxes and their willingness to embrace structurally unsustainable planned reductions to Medicare spending as a means of passing a budget-busting new health entitlement. And conservatives, of course, have been wary of proposing sustainable solutions of their own. Simpson-Bowles presents us all with a great opportunity.

Also, I’d like to stress the gutsiness of Erskine Bowles, who has taken on a thankless task and will likely be pilloried by many of his erstwhile allies for making an earnest attempt to think through these pressing fiscal issues. One of the reasons I am a big-tent conservative is that I’m convinced the right could learn from profit tremendously from the insights of people like Bowles and Alice Rivlin, who increasingly find themselves at odds with a political coalition that considers a 21% federal tax take — more than 3 points higher than the 1946-2008 historical average — to be a better floor than a ceiling. 

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