Social Security reform is like putting lipstick on a duck


by Scott Burns

Source: Dallas Morning News

Just 25 years ago, Alan Greenspan declared that the reforms recommended by his National Commission on Social Security Reform had made Social Security secure for another 75 years.

He was wrong.

Social Security is in the hole again. The most recent Social Security trustees report tells us that the 12.4 percent payroll rate (employer and employee portions combined) would need to be increased 2.1 percentage points to cover unfunded liabilities over the next 75 years. It would need to be increased 3.6 percentage points to avoid a repeat of Greenspan’s error — a 75-year cure that goes bad in less than 25.

A 3.6-percentage-point increase in the tax rate all workers pay on the first $106,800 of income represents a 29 percent increase in the tax for every worker in America, a sure nonstarter. Those in Washington, of either party, would prefer to disguise the tax increase.

The issue, however, is real. A recent report from the National Center for Policy Analysis in Dallas calls the needed increase a “solvency tax” since that is the amount the tax would have to increase to avoid benefit reductions now or in the future. The report examines the major proposals for changing Social Security to eliminate its shortfall.

Lipstick on a duck

The first thing we learn in this report is that not having the employment tax rise 3.6 percentage points does not mean taxes won’t go up. It just means our friends in Washington are searching for a mechanism that will allow them to reduce current benefit commitments. The slippery alternative is to reduce benefits for some people, at some point. Instead of everyone paying higher taxes, some workers would get less for their tax dollars than they are currently promised. Think of it this way: They’re trying to figure out the best way to put lipstick on a duck.

The question is, who will bear the burden?

That’s where the National Center for Policy Analysis study is instructive. Researchers Liqun Liu and Andrew J. Rettenmaier, both at Texas A&M, examine each of the four major proposals for change:

Eliminating the ceiling on income subject to the tax.
Raising the retirement age.
Progressive price indexing.
Changing the benefit formula.

Here’s who would lose

The report then shows who would lose on each proposal. Here’s how it works out.

The most popular option with voters is to eliminate the wage base maximum, because 94 percent of workers earn less than the wage base maximum. Take this step (and raise the overall employment tax by 1.3 percentage points), and the program will immediately be solvent. Indeed, revenue would immediately exceed benefit payments for another decade, just as it did from 1984 until recently. Can we trust Congress with the extra cash? Ho ho ho.

Raising the retirement age is a nice idea for its simplicity. It also requires a 1.3 percentage-point increase in the employment tax. The researchers note that it would be the least progressive option because workers with high incomes tend to live 20 percent longer than average while low-income workers tend to live 7 percent shorter than average.

Progressive price indexing, a tool that would affect how retirement benefits are increased, would require only a small, 0.6-percentage-point solvency tax. It would also be the most progressive in terms of benefit distributions, giving more to lower-income workers and less to higher-income workers. It would also increase the lifetime tax rate for younger workers because their benefits would be reduced the most. It is a subtle and slow-acting tax on the young.

Changing the benefit formula would also result in workers’ receiving less in future benefits. This method would reduce future benefits the most, but it would require no additional solvency tax. Like progressive price indexing, it would shift the burden to the young, requiring them to pay the same taxes to receive smaller benefits. A single medium-income male worker born in 1945, the report estimates, would lose $39,061 in lifetime benefits relative to current law. But the same worker born in 1985 would lose $179,947 in benefits, over $140,000 more.

That’s quite a difference.

What can we do about it? Well, it depends on how old you are. If you’re young, you need to protect yourself from the weasels in Washington. They will do their best to shaft you before they increase current taxes. If you’re older, this is a good time to start thinking about sharing a burden that will otherwise be carried almost entirely by the young.

Scott Burns is a syndicated columnist and a principal of the Plano-based investment firm AssetBuilder Inc. Email questions to scott@scottburns.com.

READ THE NATIONAL CENTER FOR POLICY ANALYSIS report on Social Security reform.

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