03 April 2011

A simple Social Security "fix" that need NOT endanger minimal retirement security income

Maya McGuineas was on Background Briefing last week talking about how social security is in dire need of reform. But her own Committee for a Responsible Federal Budget/New America Foundation makes pretty clear (their position paper here) that it is actually fully solvent, despite being in net cash flow deficit since last year, till 2025, and would not become insolvent until 2037. That's a long time and the notion that no reform or corrections would be performed before then is just silly. 

In my view, these people are basically shills for a center-right or Finance Industry oriented policy position. If you read their paper they keep harping on the "urgent" need for reform, etc., but they pretty much dismiss a revenue-based reform designed to keep the essential retirement security program intact. What they want to do is gradually cut the program, until it is much smaller and less effective. I regard this as just another element of the Rightist and Financial Elite's War on Working People.

The following, which is a more objective view (National Academy of Social Insurance: paper) from several years ago, points out the obvious solution (without specifically advocating it).  I refer you to what they call either "Option 1" or "Option 2a".

Option 1:
Remove the income limit for Social Security taxes completely, but keep the current limits on benefits; i.e. pay no more in benefits than under the current tax scheme. This paper (which is a few years out of date but still essentially accurate) estimates that over 75 years, doing this would produce 116% of the operating funds necessary to pay social security.

Option 2a:

Remove the income limit for Social Security taxes as above, and modify the formulas so that only a portion of the highest levels of income would accrue towards a limited benefit increase. They offer as an example:

Instead of the current benefit (this will have already been modified slightly):

90% of Average Indexed Monthly earnings up to $624/mo. +
32% between $624 and $3760 +
15% above $3760;

the plan would add a fourth bracket:

(15% between $3760 and $7500) +
3% above $7500.

Option 2a would also result in satisfactory elimination of Social Security deficit.

(Option 1 could be modified to just make this final benefit bracket 0% or 0.5%, with much the same effect; remember, both plans involve no cap on taxable earnings.)

All of this presupposes that the Social Security Trust Fund's holding bonds owed by the government is legitimate. Social Security was, and is, designed to be self-funding; those who propose to simply incorporate it into the overall budget are effectively proposing to default on a debt to the working people of this country, and I regard that as totally unacceptable.

The bottom line here is that there is a very, very simple solution to Social Security's financial problems, and that is to remove the cap on income for taxation (i.e., make social security taxes progressive), while limiting benefits to highest income earners. This would clear the way to work on dealing with the exploding medical costs which are endangering our country's other key social safety net programs, Medicare and Medicaid, whose fiscal problems are far worse and more intractable than those of Social Security.

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