Demagoguing 101: Social Security

With the November elections just two weeks, demagoguing has reached a fever pitch. So, predictably, when the SSA sent a letter to Rep. Earl Pomeroy about how different reform provisions would affect benefit levels, reform opponents (or at least spending side reform opponents) took aim at the most notorious reform plan in Washington right now: Paul Ryan's Roadmap.

The letter estimated the effect of instituting progressive price indexing, raising the retirement age, and switching to the chained CPI-U for COLAs (which by the way, are the proposals we include in our Let’s Get Specific on Social Security paper). All the proposals showed cuts in average benefits, leading CBPP and Pomeroy (who you might recognize from the ad-hoc COLA debacle) to go on the offensive against Ryan's plan, which includes progressive indexing and an increase in the retirement age.

There are a few problems with the attacks. Let's go through them.

  • Comparisons to promised benefits: SSA compared benefit levels under different reform options to scheduled benefits. Scheduled benefits assume that all the current benefit calculations remain the same. The problem with this is that the system doesn't have the money to pay these benefits. If no changes are made to Social Security, scheduled benefits won't happen: once the Trust Fund runs out, the SSA will only be able to pay less than 80% of scheduled benefits (and that assumes immediate cuts for all those already retired, which no reform plan would do).
  • Using wage-indexed dollars: SSA also used wage-indexed 2010 dollars to measure benefit levels. If you don't look closely enough to realize this, the letter makes it look like these provisions drastically cut the nominal benefit level over time when, in fact, that's not the case. Even if progressive price indexing and an increased retirement age were implemented, nominal benefits and real benefits would still increase over time, since real benefits by definition account for price inflation. The only people who might see their real benefits decrease would be the highest earners. Reform plans merely slow the growth of benefits relative to the scheduled benefits baseline.
  • Attacking (and misrepresenting) Ryan's plan specifically: Even though CBPP claims the Goss letter "allows one to calculate the size of the benefit reductions that Rep. Paul Ryan’s budget plan would generate" that is not true. This only measures some of the benefit reduction  provisions of the Roadmap plan, but doesn't include many of the benefit increases, such as the low earner enhancement or the benefits from private accounts. It’s like attacking your company for cutting health insurance benefits while ignoring a big wage increase they also gave you. Listen, Social Security is unsustainable. Just about any credible plan is going to show a reduction in benefits. Critics need not stack the deck against reform—the reality is that benefits will have to be lower than what we have promised.
Roadmap Benefits Compared to Payable Benefits
  10 Year Birth Cohort Starting in Year Total Benefits as Percentage of Payable Benefits
10th Percentile of Earnings 1970 130%
1980 145%
1990 145%
2000 145%
50th Percentile of Earnings 1970 100%
1980 105%
1990 95%
2000 95%
90th Percentile of Earnings 1970 80%
1980 75%
1990 70%
2000 90%

Source: Congressional Budget Office

  • How about producing a plan instead of throwing stones: It's perfectly fine to disagree with a reform plan, but then provide an alternative.. For those who have not, we have to assume the plan is to drain the budget of resources over the next few decades to repay the Trust Funds and then abruptly cut benefits across the board by more than 20% in 2038, when the Trust Funds run out. That must be little comfort to those who will be depending on Social Security for the bulk of their retirement income. Pomeroy to his credit points out that "a cut in benefits after 2037 can be avoided if steps are taken by Congress before that time to improve the financial status of the program over the long-term" but the longer he and others delay action of any kind, the more drastic the "steps" need to be.

On a more positive note, though, an alternative plan was just recently scored by the SSA from Rep. Ted Deutch. Basically, it's a no-benefit-cut scenario. Deutch would eliminate the payroll tax cap (currently at $106,800) and he would provide a small benefit credit--an "AIME+" for the earnings above the cap. Also, it would use the CPI-E for COLAs--which is about 0.2 percentage points higher than the CPI-W--and provide a $250 payment whenever there is no COLA (you know our thoughts on this). 

We applaud Deutch for getting specific on how he thinks we should fix the program. That said, his plan does not do nearly enough to put the system on a sustainable track. Though it technically makes the system solvent through the 75-year period, it does not achieve sustainable solvency since it doesn't get to permanent (near) cash balance. Beginning in 2024, under the Congressman's plan, costs exceed revenue and the system draws on the trust fund (meaning the rest of the budget has to pay for it) until the point when it empties in the 2080s. Keeping the system solvent and achieving cash-flow balance would require eventually raising payroll taxes by another 2 percentage points or so. Effectively, looking to the 75th year, Congressman Deutch's plan would only solve about half the problem.

Nonetheless, we very much appreciate Deutch's willingness to get specific on Social Security. It is certainly more constructive than election year demagoguery and is exactly the type of specific plan we need to start the comparison between different approaches to reform. Thank you, Congressman Ryan and Deutch. Anyone else ready to step up?