Social Security: A Consensus Based on Confusion (Part II)

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

July 20, 2010

This is the second of a two-part opinion piece for The Fiscal Times. “A Consensus Based on Confusion: Part I” was published July 19, 2010.

Yesterday, I explained why raising the “normal” or “full benefits” retirement age under Social Security has little to do with when people retire. It is, simply, an across-the-board benefits cut. Today, I explain why this change is unlikely to do much to help meet President Obama’s deficit reduction targets and why it is an inferior way of dealing with the projected, longer-term deficit in Social Security.

Once upon a time, Social Security benefits were not payable until age 65, and 65 was really “the normal retirement age.” Congress changed all that when it permitted first women and then men to claim reduced benefits as early as age 62, an option that was used increasingly over time. Next, Congress provided increased benefits for those who waited to claim benefits after age 65. Few people availed themselves of this option. In 1983, Congress lowered the ratio of benefits to average, life-time earnings in two steps. This cut was made as an increase in the full-benefits age—first to age 66 and then to age 67, when people would be paid the same ratio of benefits to earnings previously paid at age 65, rather than the increased benefits available to those claiming benefits later. However, Congress didn’t make these cuts effective immediately but maintained the old system for all workers then older than 45. Full implementation was phased in gradually, starting in 2000, seventeen years after enactment, and will not be completed until 2022, a span of nearly four decades!

If the pattern set in 1983 is followed—which appears likely—across-the-board benefit cuts will do little to meet the goal that President Obama set for the deficit reduction commission—reducing budget deficits to 3 percent of gross domestic product by 2015. Nearly everyone, conservatives and liberals alike, agrees that if benefits are cut significantly, they should not apply to the currently retired or those soon to retire. President George W. Bush followed this pattern in his unsuccessful proposal to partially privatize Social Security—all workers age 55 and over were to be exempt from the plan. In his plan to restructure the federal budget, conservative Rep. Paul Ryan (R.- Wisconsin) would exempt those over age 55 from sizeable cuts in traditional Social Security.

If conservatives like Bush and Ryan are not prepared to cut benefits for those over age 55, it is hard to imagine that liberals in Congress, many of whom question whether benefits should be cut at all, would consent to abrupt reductions to workers on the eve of retirement. If workers over age 55 are immune to the cuts, legislation enacted in 2011 would produce no budget savings until 2018. Even then, the savings would be negligible for many years because the large majority of beneficiaries who retired earlier would be unaffected. Thus, Social Security benefit cuts won’t help meet President Obama’s deficit reduction target for 2015.

But such cuts might be the price for conservative support for a broader plan that includes tax increases. If liberals decide deficit reduction is so urgent that cuts in Social Security are necessary, and House Majority Leader Steny Hoyer, D-Maryland, is among those who supports raising the retirement age, there are better ways than what amounts to across-the-board reductions in benefits. Across-the-board reductions would disproportionately burden the majority of retirees, low and moderate earners for whom Social Security is the principal source of retirement income but would not encourage people to work significantly longer. It is important not to be misled by euphemistic terminology into accepting a poorly designed change.

Other proposals that would cut Social Security spending or otherwise help reduce deficits deserve consideration. The first is adoption of an improved price index to adjust benefits after they have been claimed by Social Security recipients and to index the tax system. The current CPI overstates true inflation. An improved version is available, which would more accurately insulate beneficiaries from the effects of inflation. Applying it to the tax system would better assure that personal exemptions, the standard deduction, and tax brackets remain constant in real terms, unless Congress decides explicitly to change them. A second possibility would be to extend Social Security coverage to those state and local workers who are now outside the system. This would improve pension equity and their contributions would lower the budget deficit for many years. A third change, raising the age of initial eligibility for Social Security, would not cut Social Security spending in the long run, but it would lower the budget deficit. It would encourage workers to remain economically active and increase the labor force, thereby boosting national income and revenues and, possibly, lowering spending on other government programs such as Medicare and Medicaid.

These proposals illustrate a longer menu of policies that would either lower Social Security spending or boost revenues. None is painless. All have been and will be controversial. Some may, in the end, be judged unwise. But each targets a real problem. Each can contribute to deficit reduction. Each also differs from the across-the-board cuts in benefits misleadingly described as “raising the retirement age,” that would lower all benefits indiscriminately and contribute little to reducing budget deficits in a timely way.