One of the more glaring possible outcomes in the grand bargain would be a plan to “reform” Social Security for the long term. The President was praised by the Strengthen Social Security coalition for not proposing benefit cuts in the State of the Union or the 2012 budget proposal. The budget also added funds to the Social Security Administration to get through the backlog in disability determinations, and proposed a $250 one-time payment to beneficiaries to make up for the lack of a COLA increase over the past two years. These are good things, and certainly preferable to House Republicans’ near-term shutdown of the SSA due to budget cuts. Eric Kingson, co-chair of the Strengthen Social Security Campaign, said, “We applaud his efforts to seek solutions for our struggling economy while keeping our nation’s most successful and popular program intact. This is totally consistent with what the public wants.”
However, Obama did lay out in the budget a set of principles for a conversation ahead. None of the principles conflicted with the basic outline of the cat food commission plan. Obama opposes reducing benefits for current retirees, but only opposes slashing benefits for future retirees. That’s an invitation to cut. The principles do not include anything about the retirement age.
Bowles-Simpson accomplished their Social Security reform through changes reducing the COLA increase over time, “progressive price indexing” giving slightly more to those at the lowest rung of the income scale and less to everyone else, phasing in an increased retirement age over time and increasing the taxable base to 90% of wages. Again, this does not deviate from the Administration’s set of principles.
It will be important to explain progressive price indexing properly over the next several months. This will be called “means testing,” and it will be seen as positive to give lower-income people a better benefit from Social Security while giving the people who can afford it a little less. The problem is that this is a chimera. You cannot means test Social Security and achieve any real savings without dipping into the middle class and beyond for cuts.
Well, it turns out that Social Security is already means tested: your benefit level is calculated as 90% of your first $749 in monthly pre-retirement earnings, 32% of earnings up to $4,517, and 15% of your earnings above that. This means that high-income earners get a smaller benefit as a percentage of their income than low earners do.
One way to means test even more would be to reduce the third “bend point” to, say, 10% of earnings above $4,517. This would decrease benefits for the well off without touching benefits for anyone else, and it’s easy to do since the system is already built with this structure in place. In fact, this is exactly the recommendation of the Rivlin-Domenici deficit reduction report.
So how much does it save? Answer: $59 billion in 2040, which is a grand total of 1.6% of the savings in their entire Social Security plan. You could reduce the third bend point to 0% and it still wouldn’t be more than a nit. And note that this starts to bite at an income of $54,000 per year, which is hardly anyone’s idea of rich. Raise that limit even to upper middle class territory and you’ll save even less.
By contrast, if you want to impose the burden for bringing Social Security into long-term balance on those who can afford it, you can simply eliminate the payroll tax cap and solve the entire problem, keeping Social Security solvent for at least the next 75 years, according to the Congressional Research Service.
It’s just not that hard a problem, and certainly not something that needs to be thrown into a grand bargain in order to bully Democrats into supporting it.