The Time for Social Security Reform is Now
Today, the House Ways and Means Subcommittee on Social Security held a hearing on bipartisan proposals to reform Social Security. Members of the subcommittee and the witnesses all agreed that now is the time to reform Social Security, which is currently projected to be unable to pay full benefits by 2033. Testifying once again before the subcommittee was CRFB Senior Advisor and Executive Director of the Moment of Truth Project Ed Lorenzen. In his testimony, Lorenzen provided an overview of the original Simpson-Bowles plan's recommendations to reform Social Security.
Lorenzen explained that the Commission's plan relied on a mix of changes in benefits and revenues, with the net reduction in costs from benefit changes accounting for about 54 percent of the savings over 75 years and a net increase in revenues responsible for roughly 46 percent of the savings. As a result, the Trustees projected at the time that the Commission’s plan would fully close the shortfall over 75 years and in the 75th year. The shortfall projection has increased in recent years, so the plan may have to be tweaked some to achieve the same result.
His testimony highlighted the Commission’s recommendation for progressive changes in the benefit formula to slow benefit growth for higher earners and enhanced benefits for low-wage workers, such as creating a new special minimum benefit to provide stronger poverty protections. Lorenzen also explained that some tweaks to the benefit enhancements outlined in the Commission’s 2010 report will be necessary in order to fully achieve the intent of Commission members who supported the final recommendations regarding protecting benefits for workers in the bottom quintile of earnings. These include making the formula change even more progressive by increasing the 90 percent bottom replacement factor and phasing up the minimum benefit more rapidly for retirees with less work history.
The other major element of the Commission’s proposal which Lorenzen underlined was indexing the normal retirement and early retirement eligibility ages to increases in longevity to account for increasing life expectancy. This would result in increasing the retirement ages by one month every two years after the retirement age reaches age 67 under current law, and would include certain hardship exemptions. He also discussed the distributional and economic impacts of raising the age:
Indexing the retirement age to longevity as opposed to setting a fixed schedule for increasing the retirement age provides additional robustness to ensure that the program remains on a fiscally sustainable course even if actual outcomes differ from projections...the actual effects of an increase in the retirement ages are slightly progressive because it is a benefit cut that exempts those who first collect through the disability system – who tend to be lower income.
By making the program sustainably solvent, the Simpson-Bowles framework would prevent a 25 percent across-the-board benefit reduction in 2033 under current law. Additionally, the SSA’s Chief Actuary found that for some low-income beneficiaries, the Commission’s plan would be more beneficial than scheduled benefits (ignoring trust fund solvency), and in some cases much better.
Distribution of Simpson-Bowles Plan for Social Security by Illustrative Earner (Percent of Scheduled Benefits)
Source: Social Security Administration
The hearing included additional testimonies by Bill Hoagland, Senior Vice President, Bipartisan Policy Center; Dr. Jason Fichtner, Senior Research Fellow, Mercatus Center; Leticia Miranda, Senior Policy Advisor, National Council of La Raza; Donald Fuerst, Senior Pension Fellow, American Academy of Actuaries; and CRFB board member Gene Steuerle, Institute Fellow, Urban Institute.
Gene Steuerle’s testimony echoed the potential benefits that raising the normal retirement age would have for the Social Security program. He described reforms that would ensure that Social Security meets its primary purpose of "providing greater protections for those truly old or with limited resources" while helping to improve the program's long-term solvency. Specifically, he recommended that policymakers:
Further adjust minimum benefits and the rate schedule and indexing of that schedule over time to achieve final cost and distributional goals. For instance, for those with higher incomes, cap benefits or use limited wage indexing; for middle-income workers, add another rate or extend the length of a rate bracket. The extent of these adjustments will also depend upon the tax rate and base structure agreed upon.
Overall, today’s hearing was a reminder of the various proposals which are available to policymakers to address the solvency issues with Social Security. Beyond the Simpson-Bowles plan, there are also many other plans which would improve the finances of the program. When asked by the Chairman when Social Security reform needs to happen, all six witnesses responded with very soon, and that we've already waited too long. Lorenzen noted that he had been working on Social Security reform for over fifteen years and that choices had only become more difficult over time.
There is no reason for delay; numerous options are available for policymakers to fix the program. In fact, the Committee for a Responsible Federal Budget will soon release an interactive tool called "The Reformer" to enable policymakers and the public to estimate the effects of a range of Social Security reforms on the finances of the program. It will be released at an event with a discussion about the challenges facing Social Security. While much of the recent budget debate in Washington has often evaded the issue of reforming Social Security, it's time for a bipartisan solution to put the program on a more sustainable path to ensure its promise for future generations.