Saving Social Security: A Balanced Approach - Brossura

Diamond, Peter A.

Brossura

ISBN 10: 0815718373 ISBN 13: 9780815718376

Casa editrice: Brookings Institution Press, 2005

Riassunto

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New in Paperback. While everyone agrees that Social Security is a vital and necessary government program, there have been widely divergent plans for reforming it. Peter A. Diamond and Peter R. Orszag, two of the nation's foremost economists, propose a reform plan that would rescue the program both from its projected financial problems and from those who would destroy the program in order to save it. Since the publication of the first edition of this book in 2004, the Social Security debate has moved to the center of the domestic policy agenda. In this updated edition of Saving Social Security, the authors analyze the Bush Administration's proposal for individual accounts and discuss the so-called ""price indexing"" proposal to restore long-term solvency through changing how initial benefits would be calculated. Soc ial Security is essis essential reading for policymakers involved in reform, analysts, students, and all those interested in the fate of this safeguard of American lives. ""An honest, transparent and comprehensive approach to making the much needed reforms to the Social Security program.""—Journal of Pensions, Economics, and Finance

""Very accessible presentation of facts, analysis of underlying problems, comparison of opinions, and argument for proposed reforms.""—Future Survey Exhaustively researched and deeply entrenched in practical issues and mathematical calculations... a highly recommended ray of hope against a looming national crisis."" —Wisconsin Bookwatch ""Diamond and Orszag bring some welcome realism and decency to the debate.""—Robert M. Solow, Institute Professor Emeritus, Massachusetts Institute of Technology, Nobel Laureate in Economics

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Informazioni sugli autori

Peter A. Diamond is an Institute Professor at the Massachusetts Institute of Technology. His recent books include Social Security Reform, The 1999 Lindahl Lectures (Oxford University Press, 2002) and Taxation, Incomplete Markets, and Social Security: The 2000 Munich Lectures(MIT Press, 2002). He is a former president of both the American Economic Association and the National Academy of Social Insurance. Peter R. Orszag is director of the U.S. Office of Management and Budget under President Obama. His previous positions include director of the Congressional Budget Office and Joseph A. Pechman Senior Fellow in Economic Studies at the Brookings Institution. He is also a research professor at Georgetown University and a codirector of the Tax Policy Center. He served as special assistant to the president for economic policy during the Clinton administration.

Peter R. Orszag is the Joseph A. Pechman Senior Fellow in Economic Studies at the Brookings Institution.

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Saving Social Security

A Balanced ApproachBy Peter A. Diamond

Brookings Institution Press

Copyright © 2005 Peter A. Diamond
All right reserved.
ISBN: 9780815718376

Chapter One

Introduction

Social Security is one of America's most successful governmentprograms. It has helped millions of Americansavoid poverty in old age, upon becoming disabled, or afterthe death of a family wage earner. As President Bush hasemphasized, "Social Security is one of the greatest achievementsof the American government, and one of the deepestcommitments to the American people." Despite its successes,however, the program faces two principal problems.

First, Social Security faces a long-term deficit, eventhough it is currently running short-term cash surpluses.Addressing the long-term deficit would put both the programitself and the nation's budget on a sounder footing.

Second, two decades have passed since the last significantchanges in Social Security. Since then, as our economyand society have continued to evolve, some aspects of theprogram have become increasingly out of date. The historyof Social Security is one of steady adaptation to evolvingissues, and it is time to adapt the program once again.

Restoring long-term balance to Social Security is necessary,but it is not necessary to destroy the program in orderto save it. To be sure, some analysts reject the view that Social Security'sprojected financial problems are serious enough to warrant any changesright now. Others, in contrast, exaggerate the difficulty of saving SocialSecurity to justify proposals that would shred the most valuable featuresof this exemplary program. Our view is that Social Security's projectedfinancial difficulties are real and that addressing those difficulties soonerrather than later would make sensible reforms easier and more likely. Theprospects are not so dire, however, as to require undercutting the basicstructure of the system. In other words, our purpose is to save Social Securityboth from its financial problems and from some of its "reformers."

In this book we present a plan for saving Social Security. Ourapproach recognizes and preserves the value of Social Security in providinga basic level of benefits for workers and their families that cannot bedecimated by stock market crashes or inflation, and that lasts for the lifeof the beneficiary. Our plan updates Social Security to reflect changes inthe labor market and life expectancies. And it eliminates the long-termdeficit without resorting to accounting gimmicks, thereby putting the programand the federal budget on a sounder financial footing.

Our plan to restore long-term solvency has three components, each ofwhich addresses one of the factors that contribute to the long-term deficitin Social Security: improvements in life expectancy, increased earningsinequality, and the ongoing legacy debt that arises from the program'sgenerosity to its early beneficiaries. Each component of our reform planincludes adjustments to both benefits and revenue to help close the long-termdeficit.

The first of these components is the life expectancy component. Lifeexpectancy at age 65 has risen by four years for men and five years forwomen since 1940, and it is expected to continue rising in the future.Increases in life expectancy make Social Security benefits more valuable torecipients, because the benefits are paid over more years. But for that veryreason, increases in life expectancy also raise the cost of Social Security.

Many observers have recognized that it makes sense to adjust SocialSecurity for the effects of increased life expectancy. Previous proposals todo this, however, have adopted the extreme view that all of the adjustmentshould occur through reductions in benefits. Instead, we propose abalanced approach in which roughly half the life expectancy adjustmentoccurs through changes to benefits and the rest through changes to payrolltaxes.

The second component of our plan addresses earnings inequality,which has risen substantially in the past two decades. Inequality of earningsacross workers in the labor force affects Social Security in severalways. For example, the payroll tax is levied on earnings only up to a certainlevel (in 2003 that level, the maximum taxable earnings base, was$87,000). In each year over the past two decades, about 6 percent ofworkers have had high enough earnings that some of their earnings wereabove the maximum taxable earnings base and therefore not subject tothe payroll tax. These higher-income workers have enjoyed disproportionatelyrapid earnings growth over that period, so that the share ofeconomy-wide earnings not taxed for Social Security has risen substantially.In 1983, when the last major reform of Social Security was undertaken,10 percent of all earnings were above the maximum taxable earningsbase. By 2002 that share had risen to about 15 percent.

In addition to having more of their earnings escape taxation by SocialSecurity, high-income workers have enjoyed increasing life expectanciesrelative to other workers. This increasing difference in life expectancytends to diminish the progressivity of Social Security (that is, its provisionof relatively more generous benefits to lower-earning workers) on alifetime basis. The life expectancy adjustments in the first component ofour plan are based on average increases in life expectancy for the entirepopulation. Since life expectancy for higher earners is increasing morerapidly than the average, an additional adjustment just for higher earnersis warranted.

To address the effect of earnings inequality on Social Security, our planagain includes a balance of revenue and benefit adjustments. First, wepropose gradually raising the maximum taxable earnings base until theshare of earnings that is above the base-and hence escapes the payrolltax-has returned to roughly its average level over the past twenty years.This change would gradually reduce the share of earnings not subject tothe payroll tax until it reaches 13 percent in 2063, roughly halfwaybetween its current level and its level in 1983. Second, to make SocialSecurity somewhat more progressive, and thereby offset the effects of disproportionatelyrapid gains in life expectancy among higher earners, wepropose a benefit reduction that affects only relatively high earners. Currently,about 15 percent of workers newly eligible for Social Security benefitshave sufficiently high earnings that a portion of those earnings fallsin the highest tier of the Social Security benefit formula. Our benefitadjustment for income inequality consists of a gradual, modest reductionin benefits that would affect only those with earnings in this highest tier.

The third component of our plan recognizes the legacy cost stemmingfrom Social Security's history. The first generations of beneficiariesreceived far more in benefits than they had contributed in payroll taxes.Beneficiaries in the earliest years of the program, for example, contributedfor only a few years of their career but then received full benefitsover their whole retirement. The decision to provide ample benefits tothese early beneficiaries is understandable: most of them had experiencedhardship during the Great Depression, many had fought in World War Ior World War II, and elderly poverty rates were unacceptably high. Butthose benefits did not come free: the iron logic of accounting requiresthat since those early retirees received more in benefits than they had paidin, later generations of retirees must receive less. In other words, the system'sgenerosity to early beneficiaries generated an implicit debt, whichwe refer to in this book as Social Security's legacy debt. That debt can bedefined as the accumulated difference between benefits and taxes (accumulatedat the market rate of interest) for past and current beneficiaries.This legacy debt imposes an ongoing cost on participants in the program,which we call the legacy cost. (Box 1-1 further explains the origin of thislegacy and how the burden it imposes on current and future beneficiariescan be understood as the cost of servicing an implicit debt.)

We all inherit a legacy from Social Security's history. Even if we wantedto, nothing we can do now could take back what was given to SocialSecurity's early beneficiaries. In addition, most people are unwilling toreduce benefits for those already receiving them or nearing retirement.Those two facts determine the size of Social Security's legacy debt. Andonce that debt is determined, its cost cannot be avoided: the only issue ishow we finance that cost across different generations.

Social Security's legacy is not new. It has been with us since the originsof the program itself. But the idea of a Social Security reform based inpart on explicitly recognizing the need to share the cost of that legacy isnew. We propose to reform the financing of the legacy debt through threechanges:

-First, we would gradually phase in universal coverage under SocialSecurity, to ensure that all workers bear their fair share of the cost of thenation's generosity to earlier generations. Currently, about 4 millionworkers, almost all of them in state and local governments, are not coveredby Social Security. Their nonparticipation means that those workersescape any contribution to the financing of the legacy debt.

-Second, we would impose a legacy tax on earnings above the maximumtaxable earnings base, thereby ensuring that very high earners contributeto financing the legacy debt in proportion to their full earnings.The legacy tax above the base would start at 3.0 percent and graduallyrise to 3.5 percent by 2080.

-Third, we would impose a universal legacy charge on future workersand beneficiaries, roughly half of which would be in the form of a benefitreduction for all beneficiaries becoming eligible in or after 2023, and therest in the form of a very modest increase in the payroll tax from 2023onward. This universal legacy charge would gradually increase over time,so as to help stabilize the legacy debt as a share of taxable payroll.

This approach to financing the legacy debt reflects a reasonable balancebetween current and distant generations, between lower earners andhigher earners, and between workers who are currently covered by theprogram and workers who are not. As explained in more detail in laterchapters, it is meant to keep the full cost of servicing the legacy debt fromsimply being pushed further into the future for our children and grandchildrento pay.

As an alternative to some of our proposals for benefit reductions orrevenue increases, policymakers could dedicate revenue from another specificsource to Social Security. For example, the estate tax could bereformed rather than eliminated entirely, as the Bush administration hasproposed, and some or all of that revenue could be dedicated to SocialSecurity. In other words, policymakers who object to certain elements inour plan could substitute for those elements a dedicated stream of revenuefrom a reformed estate tax.

Our three-part proposal would restore long-term balance to SocialSecurity as that term is conventionally understood: actuarial balance overa seventy-five-year horizon. Our plan would not only eliminate the seventy-five-year deficit in Social Security, but indeed would produce a modestlygrowing ratio of the Social Security trust fund to annual costs at theend of the seventy-five-year period. This is important because it makes itmore likely that Social Security will not again face a seventy-five-yeardeficit for a long time to come.

Table 1-1 shows how each of the components of the plan contributes torestoring balance. Our plan combines revenue increases and benefit reductions-the same approach taken in the last major Social Security reform,that of the early 1980s, when Alan Greenspan chaired a bipartisan commissionon Social Security. That commission facilitated a reform thatincluded adjustments to both benefits and taxes. Such a balancedapproach was the basis for reaching a consensus between PresidentRonald Reagan and congressional Republicans on one hand and congressionalDemocrats led by House Speaker Thomas P. O'Neill on the other.

In addition to our three-part plan to restore long-term balance toSocial Security, we propose improvements to Social Security's financialprotections for certain particularly vulnerable beneficiaries. We focus onchanges in four areas: benefits for workers with low lifetime earnings;benefits for widows and widowers; benefits for disabled workers andyoung survivors; and further protection for all beneficiaries against unexpectedinflation. These changes would significantly improve Social Security'sability to provide cost-effective social insurance while maintaininglong-term financial balance.

What do these various changes imply for the benefits that individualworkers will receive and for the taxes they will pay? Workers who are 55years old or older in 2004 will experience no change in their benefits fromthose scheduled under current law. For younger workers with averageearnings, our proposal involves a gradual and modest reduction in benefitsfrom those scheduled under current law for successive cohorts. Forexample, a 45-year-old average earner would experience less than a1 percent reduction in benefits under our plan. A 35-year-old averageearner would experience less than a 5 percent reduction. And a 25-year-oldwith average earnings would experience less than a 9 percent reductionin benefits (table 1-2). Higher earners would experience somewhatlarger reductions in benefits than the average, and lower earners wouldexperience smaller reductions. These modest reductions in benefits arealso in keeping with the tradition set in 1983. For example, the 1983reform reduced benefits by about 10 percent for those 25 years old at thetime of the reform, a slightly larger benefit reduction than under our planfor average earners age 25 in 2004.

It is important to underline that the reductions just described are relativeto currently scheduled benefits; they are not absolute reductionsfrom what retirees receive today. (Box 1-2 discusses the use of alternativebaselines in evaluating Social Security reform proposals.) Althoughtoday's younger workers would experience somewhat larger percentagereductions in scheduled benefits when they retire than older workers,those benefits would still be higher, even after adjusting for inflation,than those of the older workers. An average earner who is 25 years oldin 2004, for example, would receive an annual inflation-adjusted benefitat retirement that is more than 25 percent higher than the inflation-adjustedbenefit of an average earner who is 55 years old in 2004. Thereason is that Social Security benefits increase when career earnings rise,and today's 25-year-olds are expected to have higher career earnings thantoday's 55-year-olds because of ongoing productivity gains in the economy.



Continues...

Excerpted from Saving Social Securityby Peter A. Diamond Copyright © 2005 by Peter A. Diamond. Excerpted by permission.
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Dettagli dell?edizione

• Editore: Brookings Institution Press
• Data di pubblicazione: 2005
• ISBN 10: 0815718373
• ISBN 13: 9780815718376
• Rilegatura: Copertina flessibile
• Lingua: Inglese
• Numero di pagine: 321
• Contatto del produttore: non disponibile