Howard Gleckman offers six “common-sense principles” for fixing Social Security:
1. Create a respectable minimum benefit for low-income workers, increase some widows’ benefits, and create an additional benefit for the very old (say, 85 or older).
2. Raise the retirement age, including the minimum benefit age of 62. An extra year of work would solve about one-third of the program’s funding problems. More and more of us can work into our 70s and a modern Social Security system should reflect that. It makes no sense for government to signal that we should stop working at 62 when we are likely to live for two more decades.
3. Protect those who work physicially demanding jobs. While the percentage of older Americans who do manual labor is shrinking, those who do this work need to be protected. Long overdue reforms in Social Security’s badly broken disability system would help.
4. Increase contributions and reduce benefits for high-earners. Everybody would still get some benefit—Social Security is not welfare and must retain its status as social insurance. But there is no reason why it can’t be made more progressive.
5. Preserve the defined benefit nature of Social Security. Adding an additional savings component is a good idea. But the public is not interested in taking on additional risk with their retirement.
6. Be absolutely transparent about benefits and structural changes. Whatever Congress does, there should be no surprises. As it is, many young people have no confidence in Social Security. Reforms should restore their faith in this key piece of the old-age safety net. But government should also be clear that in the future Social Security will only supplement—and not replace– other retirement savings for middle- and upper-income retirees.
This reminded me of AEI’s contribution to the Peterson Solutions Initiative, which included an excellent Social Security reform proposal (which I assume was the work of Andrew Biggs, one of the four authors of the report). Though the report goes into much greater detail, the core provisions are as follows:
For individuals entering the workforce this year, the benefit at retirement or disability would be a flat payment equal to the single over‐65 poverty threshold (approximately $850 per month), wage‐indexed forward to rise with the standard of living in the economy as a whole. The policy change would be implemented by first granting the flat minimum benefit, which would be fully phased in by2017, then gradually reducing the traditional PIA replacement factors from 2020 through 2050 until all beneficiaries receive the flat benefit payment. The benefit would be granted to all individuals reaching retirement age, regardless of work history, and would assume the responsibilities of both the redistributive element of Social Security as well as the pure welfare approach of Supplemental Security Income (SSI). The base benefit would be equal to approximately 25 percent of the average wage of workers at the time. Because the benefit is a fixed value, it would be relatively more generous to lower earning individuals. Effective immediately, survivors would receive 75 percent of the couple’s total benefit when both spouses were alive, better enabling the widow or widower to retain their prior standard of living. In effect, the flat benefit payment would guarantee that no Social Security beneficiary was forced to live below the poverty line. Relative to current law, where roughly 10 percent of theelderly live in poverty, the Social Security safety net would be strengthened considerably. However, this flat benefit would come at the cost that middle and high earning individuals must save more for retirement, as they would receive lower benefits than under current law.
This flat benefit reflects principles (1), (4), (5), and (6).
To supplement the basic benefit, each worker would automatically be enrolled in a defined contribution retirement saving account funded with 5 percent of worker’s earnings, with a contribution of 2.5 percent of individuals earnings matched 2.5 percent by employers. If invested in government bonds, the total combined benefit would approximately equal both the generosity and the progressivity of the current law benefit formula. However, the default investment portfolio could be a relativelyconservative “life cycle” portfolio that gradually shifted from stocks to bonds over time.
Universal retirement savings accounts are in tune with principles (5) and (6).
The Earliest Eligibility Age (generally referred to as the early retirement age) would gradually be increased from 62 to 65 for those born in 1966 and retiring in the 2030s. The normal retirement age would not be affected. While individuals could in general not claim retirement benefitsprior to 65, their benefits would be increased to account for the mandatory delay in claiming. To assist those who could not work longer, disability benefits would remain available and the age of eligibility for SSI aged benefits would be reduced from 65 to 62.
This proposal takes care of principles (2) and (3).
Eliminate Social Security payroll tax (employee and employer share) for all individuals aged 62 and older, beginning in 2011.
Eliminate the Retirement Earnings Test. The RET reduces benefits for early retirees who continue to work and earn more than $14,160 in a given year. Benefits are reduced by 50 cents for each dollar of earnings above the threshold. At the normal retirement age, the RET is stopped and benefits are adjusted upwards to compensate for any reductions due to the RET in early retirement. Over the course of a typical retirement, total benefits are the same with or without the RET.
This gets at what should be our seventh “common-sense principle,” i.e., encourage older workers to remain attached to the workforce, both to make the Social Security system more sustainable and to extend healthy lifespan.
Beginning in 2020, reduce annual COLA payments by 0.11 percentage points toapproximate the effects of using a chain‐weighted version of the CPI based upon the purchasing habitsof the elderly.
This is a no-brainer.
And I also like the AEI plan’s approach to reforming disability benefits, for more on (3):
The growth of costs for the Disability Insurance program has exceed that of the Old Age and Survivors component of Social Security and the DI trust fund is projected to be insolvent in 2019. This component adopts reform proposals that have been discussed by experts on disability insurance reform as a means to slow the growth of beneficiary rolls. This provision would provide for experience‐rating of Social Security disability taxes paid by employers based on the propensity of their employees to claim DI benefits. This step, similar to the way that taxes for Unemployment Insurance and Workers Compensation are levied, would give employers the incentive to offer rehabilitation, retraining and other accommodations to keep workers on the job. Moreover, employers who offer private disability insurance for their employees, as suggested in a recent proposal from Autor and Duggan (2010) would receive a rebate based upon plans’ ability to reduce rates of worker entering the DI rolls.
We discussed the Autor and Duggan proposal earlier this year. It sounds promising.