CRFB’s Constructive Social Security Proposal
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The Committee for a Responsible Federal Budget (CRFB), the bipartisan fiscal watchdog group, is releasing a series of papers entitled, “Let’s Get Specific.” Already on its web site are papers offering specific reforms to address Social Security, health care and the larger federal budget.
CRFB is performing a valuable public service with these papers. Those of us who have served in decision-making capacities within the White House and Congress are all too aware of the difficulty of moving the political system from general goals to specific solutions. A solvent Social Security system sounds great to most of the public; raising the retirement age, raising taxes and constraining benefit growth all sound much less so. A similar principle applies across the federal budget.
Because of this, it is vital that groups advocating fiscal responsibility build public support not only for general aspirations but for specific reforms. This is exactly what CRFB is attempting with its “Let’s Get Specific” series.
CRFB’s Social Security plan represents a serious effort to protect the interests of beneficiaries and taxpayers alike, to get the program’s numbers to add up, and to do it all in a way that reasonably approximates the political center. It’s not the Social Security plan that I would produce if I were king for a day. But that’s, in part, the point: this is a committee product, one that balances competing perspectives on how to do the job. It’s doubtful that the CRFB plan represents the precise ideal in the eyes of any one of its contributors. Instead it represents what responsible people on both sides of the aisle might be willing to agree to.
To help readers understand the CRFB plan, I will first simply describe its elements, and then offer subjective views on its provisions.
As my forthcoming book, Social Security: The Unfinished Work, explains in greater detail, Social Security plans can be generally understood in relation to four basic value judgments:
1)The balance between tax increases and cost constraint;
2)Pre-funding future benefits vs. pay-as-you-go financing;
3)The degree of progressivity (income redistribution);
4)Incentives, especially with regard to workforce participation.
Revenues/costs: The CRFB plan adopts the approach of some other bipartisan plans to bridging differences between Republicans and Democrats. Republicans generally don’t want to raise taxes to shore up Social Security. Democrats generally don’t want to constrain cost growth sufficiently to avoid a tax increase. Under the CRFB plan, workers would be required to make additional out-of-pocket contributions equal to 2% of their taxable wages. But these additional contributions would go into their own personal accounts rather than add to the government’s pool of spending money.
The basic bargain in the CRFB plan is thus as follows: Republicans would be asked to agree that new revenues be part of the solution, but the traditional portion of Social Security would be fixed without a tax increase while all new revenues would go to personally-owned accounts. Democrats would succeed in mandating higher contributions for the system as a whole, but would also agree to constrain cost growth enough to avoid a tax increase for the traditional part of the system. This may or may not be the perfect substantive solution, but bipartisan groups have struggled mightily to find other ways of bridging the gap between the parties on the revenue question.
Overall, the CRFB plan leans slightly in the direction of new revenues over cost containment. The additional 2% of wages that workers must contribute out of pocket is roughly 60% of what would be required (under current estimates) to permanently balance Social Security through tax increases alone.
The plan relies principally on three measures to contain cost growth in the traditional system. The largest is “progressive indexing” of benefits. From now through roughly 2055, initial benefit levels would grow with the national average wage index (generally faster than price inflation) for the poorest 30% of workers. The highest-income workers would have benefits that grow with price inflation, and everyone else would be somewhere in between. After mid-century, wage-indexing would return for everyone.
The CRFB plan would also gradually raise Social Security’s early eligibility age (62) and normal retirement age (now scheduled to reach 67) to 63 and 68, respectively, by the late 2020s, then index each to expected longevity growth after that. By the end of the 75-year valuation period, the early and normal retirement ages would be roughly 65 and 70, respectively.
Finally, the plan would change the index used to calculate annual COLAs (and many other federal program adjustments) to the chained Consumer Price Index (CPI). This would be done to more accurately model inflation, and according to actuarial estimates would reduce projected annual COLAs by roughly 0.3 points per year.
In its cost containment measures, the CRFB plan resembles plans put forward by Senator Robert Bennett and Congressman Paul Ryan, which also rely upon progressive indexing and longevity indexing to attain solvency. To these, the CRFB adds CPI reform as well as additional benefit increases.
Pre-funding vs. Pay-go: Under the CRFB plan, Social Security would remain mostly a pay-as-you-go system, with pre-funding limited to each worker’s mandatory 2% “add-on” personal account. This puts the CRFB plan near the mainstream of most Social Security proposals. Some proposals (e.g., Diamond-Orszag) attempt to stay entirely within pay-as-you-go, and others on the opposite end (e.g., Johnson ) ultimately aim for nearly full funding. But the majority of existing plans have landed somewhere in the middle ground of partial pre-funding. The CRFB plan is on the low end of these (i.e. smaller funded accounts), but reasonably close to the center.
Progressive income redistribution: The CRFB plan is fairly aggressive in proposing to increase the existing progressive income redistribution within Social Security. Some of its provisions, such as its progressive indexing, its low-income benefit enhancements, and a benefit “bump-up” for older workers at risk of outliving their savings, have appeared in other proposals. The plan also envisions an increase in benefits for the disabled (a “super-COLA”), though it is less specific as to how this will be done.
The CRFB plan, however, goes a significant step further than most others. It proposes an exclusion from payroll taxes for the first $4,500 of wage income, paid for by an increase in the $106,800 cap on taxable wages. This would do more than to simply increase Social Security’s progressivity in a traditional way; it would break with the system’s historic structure by eliminating the contribution-benefit link. That is to say, on the first $4,500 of wages, workers would receive full benefit credits but would not pay payroll taxes. This would be a very fundamental change to Social Security.
Incentives: The CRFB plan would not, as some plans do, attempt to fundamentally reform Social Security’s workforce participation incentives. Some elements of the plan, such as its increase in the retirement age and its general containment of benefit growth, would incentivize more labor participation. Others, such as the increased progressivity both in the benefit formula and the tax structure, as well as the targeted increases for the disabled, would work the other way. It is not clear at first glance what would be the plan’s net effects upon returns on work.
The CRFB proposal is clearly a constructive addition to the Social Security debate. The following subjective opinions are offered as a supplement to the preceding factual analysis.
There is much more good than bad in the CRFB proposal. It is honestly scored and appears to be financially sustainable. CRFB’s scoring of it may actually be somewhat conservative, in that the progressive indexing provision in particular might well produce more savings than estimated.
The CRFB proposal includes many elements likely to be a part of any ultimate bipartisan Social Security deal. It brings new revenues into the national retirement system but leaves them under personal ownership, avoiding a traditional tax increase. Many of the plan’s specific provisions, such as its changes to the retirement age and its benefit enhancements for low-income workers and for older retirees, have attracted many plan authors.
If I had to identify the single biggest problem with the plan, it would be the provision to create an exclusion from the payroll tax for the first $4,500 of wage earnings. Crediting these earnings for benefit purposes without collecting taxes on them would sever the connection between contributions and Social Security benefits. It’s unlikely that the severance would end there. Once that connection is undone, it is unlikely ever to be restored or even to remain permanently limited to CRFB’s suggested exclusion. Social Security would immediately cease to be a true earned-benefit program, and would thereafter operate more and more like welfare.
Although the mandatory add-on account may be one way of splitting the difference between Republicans and Democrats on additional revenues, from a policy perspective the plan would probably be stronger without the add-on account than with it. The inclusion of the mandatory add-on runs the substantial risk that workers will be obliged to part with more of their take-home pay than is optimal even from a retirement savings perspective. As the work of Biggs and Springstead has shown, workers in the bottom two income quintiles now generally expect Social Security replacement rates exceeding 70% of final pre-retirement earnings (a common target for financial planners), even without the CRFB plan’s benefit enhancements or add-on accounts. Requiring still higher mandated savings from these liquidity-constrained workers may undercut critical individual discretion over their retirement savings decisions, likely in a sub-optimal way.
The obvious policy answer to this problem is to further constrain the growth of the traditional system’s pay-go obligations, and to fund the personal accounts in part with projected payroll tax revenues. Some have a fierce ideological objection to this, however, which is likely why the CRFB proposal results in a somewhat larger, more expensive system than is substantively needed.
If I were given full latitude to tinker with the CRFB proposal, I would examine other provisions as well. Establishing a separate “super-COLA” for the disabled, relative to other beneficiaries, is potentially a problematic concept. The plan also declines to address certain elements of Social Security crying out for reform, such as possibly inadequate adjustments for early and delayed benefit claims, and an AIME (wage history) formula that inadvertently worsens benefit returns the longer one works.
Apart from these targeted criticisms, however, CRFB deserves enormous credit not only for being specific, but for being specific with well-considered provisions. If the CRFB plan were signed into law without alteration, the financial stability of Social Security would be enormously improved relative to the status quo.
Charles Blahous serves as one of the two public trustees for the Social Security and Medicare programs. He is also the author of Social Security: The Unfinished Work.