Originally Published on TheHill, 8/19/2016
The article was published in 2016, but remains largely the same. Saving Social Security exclusively for Boomers is a stagger cost. That hasn't changed - it is now higher.
Rep. Reid Ribble (R-Wis.), who is retiring after six years in office, has decided it is time to touch the 3rd rail of politics – Social Security. He introduced the legislation “Save Our Social Security” Act (H.R. 5747), which promises to improve the long-term solvency of the program for future generations to come.
The stated point of the legislation is, of course, to avoid the projected benefit reductions of 21 percent across the entire population of beneficiaries that experts believe will start in the 2030s. The subtle subtext of the legislation, however, is more interesting. It sheds light the cost of getting the Boomers through Social Security under the terms of 1983 reforms because by and large they are exempt from this legislation.
At a high level, the legislation accomplishes this goal in roughly three equal parts; 1/3 in tax increases, 1/3 in changes to the retirement age, and 1/3 in a variety of changes to the benefit formula. The proposal begs the question: Do the changes make any sense? Are we fixing Social Security or looking for ways to pay for a completely broken system.
These changes primarily fall on those born 1965 and after. This approach presents a challenge because this is same audience that was hit hardest in the 1983 reforms. Tax rates peaked in 1990 so the person born in 1968 is really the first to expect to pay the 12.4 percent rate for more than 45 years. The law phased in the new age retirements so that those born 1960 and later absorbed the largest benefit cuts. In conjunction the changes really fell on people who were 17 and younger at the time.
Raises Retirement Age from 67 to 69
The policy staple of increasing retirement age by two years equates to a 13.3 percent reduction of benefits because people can continue to retire at 67 with lower benefits based on early retirement.
Policy managers justify this change by saying that we are living longer. Life expectancies have increased, but the question remains whether that change is occurring in retirement. The leading cause of increases in overall life expectancy in Americans has been falling infant mortality, a force that tends to make Social Security more solvent rather than less.
The retirement age for Social Security started to change in 2003. According to research (Actuarial Study 120) provided by the Social Security Administration (“SSA”), someone retiring in 2003 on average expected to live a little over 18 years. Today, the person born in 1965, retiring in 2032, expects to live less time in retirement, but has a slightly higher probability of living to retirement.
If we raise the normal retirement age to 69, that person would have a lower probability of reaching full retirement age would receive full benefits for 16.62 years, which is consistent with someone who was born in 1900. We are asking this audience to work 4 more years to earn retirement benefits because they expect to collect about 3 more years of benefits.
Lowers Benefits
Changes to benefits formula would substantially further penalize higher-wage earners, who already lose money on the system. Today, workers pay $103 of tax on $1,000 of earnings. At the margin, the higher wage workers receive an inflation adjusted benefit increase of $4.29 per year. (15 percent weight on 1/35th of $1,000.) That means someone must live roughly 25 years in retirement in order to break even.
The new formula would use 38 years of earnings rather than 35. Adding 3 more years to the equation lowers the incremental bump to $3.94 per year, a drop of nearly 8%. By additionally lowering the bend point weight from 15 percent to 5 percent, the annual compensation drops to $1.31, or roughly 70 percent reductions in benefits on high wage contributions. We are not talking about millionaires. The 15 percent tier affects people with average wages of $61,885.
The proposal would create a new bend point for the truly high-wage earners where the last $103 provides an incremental benefit of $.066 per year. The break-even for these workers approaches 150 years in retirement.
Higher Taxes
Lower benefits by themselves do not solve the problem. So the proposal would increase the revenue reach of the system adding another $3.5 trillion over time. By committing this revenue to Social Security, the government will have less ability for other priorities like paying down the debt, free college, or shoring up Medicare. While the tax revenue will come from the higher income earners, the inability to finance other priorities will affect everyone.
No one seriously questions whether the system has financial imbalances. The cause of that gap is however not the life expectancy of people born in 1965. They have contributed more to the system than anyone thus far. Changing the retirement age for the program makes no more sense than cutting the benefits of people whose last name contains an “S”. Yes, the change may bring the system into balance, but no it is not addressing the core problems which caused the imbalance.
The proposal doesn’t fix Social Security. It shifts the consequences
of the gaps to people who had nothing to do with the creation of them.
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