Jewish World Review May 6, 2005 / 27 Nissan, 5765

Fixing Social Secutity is doable — but only if we're willing to sacrifice

By Jack Kelly

	>

http://www.JewishWorldReview.com | Social Security is going broke. To make the system solvent, would you rather:

(1) Pay 50 percent more in Social Security tax? Payroll taxes would have to rise from the current 12.4 percent to about 18 percent if the deficit were to be closed by tax increases alone.

(2) Work an additional year or two before you can retire? When Social Security was going bust in 1983, Congress raised the retirement age for younger workers to 67 from 65, along with raising the payroll tax from 10.8 to 12.4 percent.

(3) Reduce the rate of growth of Social Security benefits to just above the cost of living?

Social Security benefits had been indexed to prices, to make sure retirees could keep pace with inflation. But in 1972, Congress changed the COLA formula. Benefits are now indexed to increases in wages, which have, on average, been increasing one percent more a year than prices.

President Bush opted for door number 3 in his news conference April 28th.

Social Security benefits are paid out roughly in proportion to the amount a worker paid in, but lower income workers receive a proportionately higher benefit. Lower income workers receive about half their pre-retirement income in benefits. Middle income workers get about 40 percent, upper income workers only 27 percent.

The president wants to use the wage index for calculating benefit increases for the first increment of Social Security benefits. But COLAs above those that lower income retirees get would be indexed to prices.

Benefits for all Social Security recipients would go up faster than the actual cost of living, but rise more slowly for middle and upper income workers. Bush thinks this change would wipe out about 70 percent of the Social Security deficit.

Though this plan for "progressive indexation" originated with a Democratic businessman, most Democrats in Congress oppose it. Democrats have not proposed a plan of their own for making Social Security solvent.

Even if progressive indexation were adopted, more would have to be done to put Social Security back in the black. Bush is against raising the payroll tax, because it already places a proportionately heavier burden on low and middle income workers than it does on wealthier wage earners, and it would have the most negative effects on the economy.

The payroll tax is regressive because Social Security was designed as a social insurance program, not a welfare program. Benefits received are supposed to be in rough proportion to taxes paid.

The main complaint Democrats have made against progressive indexation is that it would turn Social Security into more of a welfare program because wealthier workers would pay more and get less. Democrats fear that if Social Security is seen primarily as a welfare program, public support for it will decline.

This complaint applies with greater force to a proposal some Democrats have advanced, to lift the cap on Social Security taxes, currently set at $90,000. About 13 percent of Americans earn more than this.

Lifting the cap would provide a short term infusion of funds, but would do nothing for the long term solvency of Social Security if benefits for wealthier workers rise along with the higher taxes they would pay. If benefits don't rise, this would turn Social Security into a welfare program, and do it at a level that would be burdensome for the middle class, a sure recipe for loss of public favor.

Since half the payroll tax is paid by employers, lifting the cap would have a profoundly negative effect on the economy, a drag that progressive indexation would not impose.

I think the best way to make Social Security solvent for the long term is gradually to raise the retirement age for younger workers. When Social Security established a retirement age of 65 in 1937, average life expectancy was 62. If Social Security were to maintain the same relationship to life expectancy today, the retirement age would have to be raised to 79 or 80.

Nobody is advocating that. But raising the retirement age to 68 or 69, coupled with progressive indexation, would solve Social Security's funding problems for a long time to come.

President Bush proposed personal retirement accounts as the spoonful of sugar to help the medicine go down. But an analysis of why personal accounts are a good idea — and the one big problem with them — will have to wait for another column.