September 14, 2012

Let's Hope Joe Biden is Wrong about Social Security

I've been posting this week about the political debate over Medicare reform, a major issue in our search for ways to resolve our fiscal crisis. Fixing Social Security is also a crucial factor. An off-the-cuff remark by Joe Biden last week illustrated the tendency of Democratic pols to demagogue on this issue.

I love Joe Biden. He's a "Happy Warrior" who loves people and the rough-and-tumble of politics (unlike his boss). But he often wanders off the reservation boundaries established by Obama's re-election campaign strategists, who prefer ambiguous campaign remarks to clear position statements.

Joe did it again recently at a campaign stop in southern Virginia, where he encountered a coffee shop patron who said, "I'm glad you all are not talking about doing anything with Social Security." Biden responded, "I guarantee you, flat guarantee you, there will be no changes in Social Security. I flat guarantee you."

Not good. Social Security is going broke. The trustees of the Social Security Trust Fund -- who include the President's cabinet secretaries at treasury, labor, and health and human services -- said in their annual report (delivered to Biden in April in his capacity as Senate President) that the disability portion of the trust fund "becomes exhausted in 2016, so legislative action is needed as soon as possible." The overall fund, combining retirement and disability, will "become exhausted and unable to pay scheduled benefits in full on a timely basis in 2033."

This leaves Congress with four choices, the trustees explained:

  • raise the payroll tax, 
  • reduce benefits, 
  • direct other revenues to Social Security, or
  • create some combination of the above. 
The report concluded: "With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations."

Virtually all experts agree that fixing Social Security is easy compared to reining in the costs of Medicare, Medicaid, and other health care features. Social Security could be shored up with a few simple tweaks: change the inflation calculator to the one that slows down the rate of cost-of-living increases, and moderately raise the ceiling on incomes subject to the payroll tax.

This year, the ceiling on earnings subject to the Social Security tax is $110,100. The payroll tax is 4.2 percent for employees and 6.2 percent for employers. (There is no income limit on the Medicare tax rate, which is 1.45 percent for both employees and employers.)

A History Lesson
Often cited as one of the great achievements of the Reagan Administration is the bipartisan compromise on Social Security than was hammered out by a commission headed by Federal Reserve Board Chairman Alan Greenspan, and signed by President Reagan. It saved Social Security for the Greatest Generation just as they were entering retirement.

The deal gradually raised the payroll tax rate, indexed the ceiling on income subject to the taxation, and lifted the retirement age to 67, but not until the middle part of the Baby Boomers reach retirement age. Those born in 1960 or later are subject to the normal retirement age of 67.

The payroll tax ceiling agreed to in that deal was designed to hit about 90 percent of wages and salary income subject to the tax. The architects of the compromise calculated the revenue would be sufficient to maintain the system for the next 75 years -- to 2058.

But, as noted above, the Social Security Trustees in their April annual report said Social Security would go broke in 2033, not 2058 as predicted by the Greenspan commission. What happened? No surprise. The culprit is the extraordinary rise in income inequality over the last 30 years.

The total share of wages subject to taxation has fallen from 90 percent to about 83 percent, not because a greater number of people are making more than the salary cap; that number has actually gone down. In 1983,  6.3 percent of employees made more than the cap. Today, that number has fallen below 6.0 percent.

People above the cap are making a hell of a lot more money. The 1983 Greenspan commission had no way of predicting the huge salaries being paid to CEOs and Wall Street gamblers these days. Changing the payroll tax so that it gets back to covering 90 percent of earnings would go a long way to adding years to the fiscal soundness of Social Security.

Where the Politicians Are on the Social Security Changes
In spite of Biden's off-the-cuff comment about not changing Social Security, I bet he wouldn't object to raising the salary cap on payroll taxes. In a speech earlier this year, President Obama suggested doing just that. And during the failed negotiations with House Speaker John Boehner last summer, the president put cost-of-living calculation adjustments on the table.

(Bob Woodward's recent book about these negotiations shows how Obama's reluctance to engage in the usual political schmoozing got in the way of working out a deal. Larry Summers, President Clinton's treasury secretary and an economic adviser to Obama, is quoted as saying Obama "really doesn't like these guys," referring to the congressional negotiators from both parties.)

Congressman Ryan has opposed any increases in Social Security taxes. As usual, it's difficult to figure out Mitt Romney's current position.

In yesterday's post about the difficult, complicated matter of Medicare reform, I said both sides actually seemed closer together in their proposals than the debate noise might suggest. With Social Security, a fix would be much easier to structure, along the lines of the compromise reached by the 1983 Greenspan Commission.

But in 1983, we had a functioning democracy. Today, we don't.

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