A Social Security Proposal We Can All Live With

Despite the dramatic changes in the November 2 elections, the “old” American Congress must address two key issues in the lame duck session before Christmas. Everyone knows that Congress must decide whether to let the Bush tax cuts expire at the end of 2010. Less well known is that Congress must make an important decision in early December on the federal budget for the current fiscal year.

Before going on election break, Congress did not enact a budget for the fiscal year beginning on November 1, 2010. Instead, it merely resolved to extend last year’s budget until December 3, 2010. What will happen on that date?

Republicans will not yet have enough votes to pass their own budget in the House, but they will have enough votes to stop a Democrat-driven budget in the Senate. So the most likely result is another extension of last year’s budget until February or March of 2011 when the Republicans will control the House — the starting point for all appropriations bills.

Then will be the moment of truth. It is relatively easy for Republicans and Democrats to agree to continue the Bush tax cuts for another year or two, regardless of the large price tag. It is much more difficult for the parties to agree on substantial budget cuts, since neither can easily muster 60 votes in the Senate.

The best indicator of potential areas of political compromise will be the report of the Budget Commission due in early December of this year. If this bi-partisan Commission cannot agree on recommendations, that will portend gridlock until 2013. However, the Co-Chairs of the Budget Commission have floated some proposals that might garner bi-partisan support.

One proposal would eliminate the $4.7 trillion deficit of Social Security over the next 75 years. While the proposal would bolster Social Security benefits of low wage earners, it would slow the benefit growth of middle and high wage earners.

In the midst of debate over whether these benefit differences are fair, a key fact to keep in mind is that low wage workers live on average two years less than affluent workers. This means that, even if low wage earners receive more benefits for every dollar contributed to Social Security, they receive those benefits for 24 months less. Now add the fact that most affluent workers have private retirement plans — 401ks and IRAs — which are heavily tax-subsidized by the government. By contrast, very few low wage earners participate in private retirement plans.

The proposal would also move back normal retirement age from 67 to 69 between 2027 and 2075. That is a delay of only one month every two years. Moreover, the proposal includes a hardship provision for physical laborers.

On the revenue side, the proposal would gradually raise the maximum wage base subject to Social Security taxes. That wage base used to cover 90% of all wages but now is down to 86 or 85%.

Will this plan get any traction — either with Republicans, who do not like any tax increases, or with Democrats, who object to any benefit reductions? One way or another, Congress must demonstrate that it can control long-term budget deficits; otherwise foreign investors will start to demand much higher interest rates on US Treasury bonds.

There are a limited number of big items in the US budget. Large cuts in defense are unlikely and healthcare is a political football. Restoring Social Security to solvency, as difficult as it seems, is our best first step toward fiscal discipline, as well as a worthwhile goal in itself.