Opinion Editorial on Pensions
Social Security, Present and FutureEditorial Board
In last year’s “fiscal cliff” debate, President Obama offered to reduce the annual cost-of-living adjustment, or COLA, for Social Security benefits, a spending cut favored by Republicans and scorned by Democrats. Republicans rejected the offer because Mr. Obama wanted tax increases in exchange, while Democrats said it would be too harmful. More recently, Senate Democrats did not include Social Security reforms in their budget and specifically rejected a COLA cut. The House Republican budget also steered clear of explicit cuts to Social Security, a move partly aimed at isolating Mr. Obama.
The question now is whether Mr. Obama will again propose to cut the COLA when he unveils his budget next week. We think he should not do so. The president might want to seem like he is willing to compromise by renewing his call for a COLA cut. But Republicans already spurned his offer and are unlikely to take him up on it now. They are more likely to paint him as a foe of Social Security, which would be reinforced by Democrats’ opposition to the cut.
Even if Mr. Obama avoided those pitfalls, a COLA cut is a bad idea, as we will explain in this editorial. It also is a distraction from the real problems of Social Security.
WHAT IS THE PROBLEM WITH SOCIAL SECURITY? The answer is a long-term shortfall. Social Security plans for solvency over 75 years, but because of demographic pressures and the weak economy, it is currently solvent only until 2033. After that, without reforms, it would pay about 75 percent of promised benefits.
Meanwhile, the nation is having a retirement crisis. Even before the recession, people had not saved enough to make up for the loss of traditional pensions. The downturn and slow recovery have made things worse. Less than half of households ages 55 to 64 have retirement savings, and of those, half have less than $120,000. Many near-retirees also have lost home equity or a job.
All that will leave most retirees heavily reliant on Social Security, which currently pays a modest benefit, on average, of $1,265 a month. Already, the majority of retirees — with annual incomes up to $32,600 — get two-thirds to all of their income from Social Security.
Even at higher incomes, up to $57,960, Social Security is the single biggest source, accounting for almost half. Only the top fifth of seniors, with incomes above $57,960, do not rely on Social Security as their largest source of income; most of them are still working.
Going forward, there is no escaping the reality that Social Security will be more vital than ever. To save it, we need consensus on direction and principles, among Democrats and across the aisle, along these lines:
SHOULD IT BE USED FOR DEFICIT REDUCTION? This is part of a larger question about whether any deficit reduction is appropriate when the economy is weak and unemployment high. The short answer to both questions is no. But as long as the deficit occupies center stage, the best approach would be for politicians to debate, and even agree, on spending cuts and tax increases to take effect as the economy strengthens.
Social Security reforms should be decided separately because the program is not driving the deficit. That distinction goes to chronic revenue shortfalls and rising health costs that propel spending on Medicare and Medicaid. Social Security did not cause today’s deficits, because the payroll taxes that support it have been more than adequate; and it will not contribute to future debt, because it is barred from spending more than it takes in.
The reason Social Security is wrapped up in the political budget debate is that government deficit projections assume Social Security will always pay promised benefits in full, even though the system is expected to run short in 20 years. That shortfall is reflected in deficit projections, so reducing it would improve the budget outlook.
The answer is to address Social Security’s problems, not to conflate reforms with the broader deficit reduction efforts.
HOW SHOULD SOCIAL SECURITY BE REFORMED? The drive to cut the COLA is based on the premise that the inflation gauge used to compute the adjustment overstates the rising cost of living. That is a flawed premise. A good case can be made that the gauge is an inaccurate way to track inflation for working-age people, but there is no empirical evidence that it overstates inflation among retirees, who tend to spend more on health care and other necessities for which there are few, if any, cheaper substitutes.
To ensure that the system is paying proper COLAs, Congress should instruct the Bureau of Labor Statistics to develop a statistically rigorous index of inflation among retirees. Until that is done, cutting the COLA on grounds that it is too large would be unjustified and disingenuous.
In the meantime, the debate over reforming Social Security will come down to tax increases versus benefit cuts. With retirements at risk, reducing benefits is dangerous, though trimming benefits for upper-income recipients, who live longer and draw larger benefits, could close about 10 percent of the system’s long-term funding gap.
Another overdue reform, which would close about a third of the gap, is to raise the level of wages subject to Social Security payroll tax to about $200,000 from the current $113,700. That would bring the taxable wage base in line with rising incomes among top earners.
A sensible change is to raise the payroll tax rate, currently 6.2 percent for both workers and employers. The rate has not been raised since 1990. A one percentage point increase could be phased in over 20 years and still raise enough revenue to close about half of the funding gap.
It is imperative that the frenzy that passes these days for deficit debate not engulf Social Security. There are rational and acceptable fixes to the program that could preserve it for generations to come, if political will can be found to enact them.
Press Clip Relevance
The President's plan to lower the Cost of Living Adjustment (COLA) for Social Security payments fails to recognize that Americans, many without pensions or sufficient personal savings, are increasingly dependent on Social Security in retirement. Pension reform is part of the answer.