Conventional wisdom suggests that when it comes to changing Social Security, there's nothing new under the sun. To ensure its long-term stability, you have two choices: Raise taxes or cut benefits.
Yet there are many ways to go about these tasks, including some ideas that haven't been a part of the many past debates.
Despite recent controversy over whether Social Security is endangered, everyone agrees that there is no short-term crisis. But the program will be on the table when President Obama's deficit commission sits down to tackle the country's long-term fiscal issues later this year.
Experts of all political stripes have heaped skepticism the commission’s chances of coming to any agreement, given Republican members’ sworn opposition to tax hikes and Democrats’ desire to preserve current benefits.
“They're not going to have any success,” said Douglas Holtz-Eakin, president of American Action Forum, a new right-leaning think tank and a former head of the Congressional Budget Office. “I don’t see Jeb Hensarling and Andy Stern shaking hands at the end of this,” he said, referring to the anti-tax Texas Republican congressman and the head of the Service Employees International Union, both commission members.
Even if the commission fails to agree on recommendations, its deliberations may nonetheless shape the future debate over Social Security. “It'll provide at least some reference point for measures the president might want to include in” his next budget, said Robert Reischauer, president of the Urban Institute and another former CBO head.
But even among those like Reischauer and Holtz-Eakin, who agree that a serious long-term problem needs to be dealt with, there’s a familiar ideological divide. Conservatives want to put the emphasis on reducing or slowing spending growth, not raising revenue, while liberals tend to argue nearly the opposite.
“That has to be the number one priority: slow the growth of benefits,” said Holtz-Eakin.
Henry Aaron, a senior fellow at the Brookings Institution, countered that U.S. retirement benefits are skimpier than other countries and, compared to income, have been heading downward. “Given the modesty of benefits, I think benefit cuts should be well down on the list of priorities,” he said.
At the same time that they consider its overall fiscal health, many on the left seek to make the program more “redistributive,” to shift the burden up the income scale while shifting benefits down it.
Here are some of the proposals they will consider.
-- Raise the retirement age. Gradually raising both the retirement age and the "early retirement" age (at which people can start to draw reduced benefits) helps balance the books. The current retirement age is 66, and the early retirement age is 62. The official age also can be set to increase as life spans get longer.
-- Index benefits to grow more slowly. Benefits are now pegged to growth in wages, which have outpaced cost-of-living indexes like the consumer price index. To match them instead to inflation would slow their growth.
-- Some have suggested a progressive system in which high wage earners would see their benefits indexed to grow more slowly, while low earners would keep the current growth rate. Critics say this still amounts to a cut that hurts middle-income workers while giving nothing extra to the neediest beneficiaries. The cuts would be "bigger for higher earners, but they're still pretty big for average wage earners," said Jed Graham, author of A Well-Tailored Safety Net, a new book that lays out a complex plan to shore up the system. "Progressive benefit cuts make sense, but it's not progressive to cut benefits for somebody who's 90," he added.
--And yes, raise taxes. Currently, payroll taxes only come out of your first $106,800 of income. Raising that cap would raise revenue, as would raising the tax rate. Alternatively, Congress could impose a surtax on those with income above the cap.
Past proposals have included many combinations of these ideas, so there is little here that Washington has not chewed over before. One plan, for example, coauthored in 2004 by the current White House budget director, Peter Orszag, called for several tax hikes on high-income earners along with tweaks to all benefits and tax rates. That plan also would gain revenue by adding the millions of state workers who do not currently pay into the system.
Graham’s plan might be an exception. He argues that Social Security’s safety net aspect must be preserved for the very old and for low-income earners early in retirement. His plan would provide incentives to delay retirement and create benefits that effectively grow the older you get. New retirees would take a cut to their expected benefits, but that cut would shrink each year. Retirees could block the cut by staying at work beyond retirement age.
One idea you're not likely to see under serious consideration: private accounts that individuals can invest in the stock market. That idea fizzled in 2005 during President George W. Bush’s attempt to change Social Security, and the economic crisis since has left many Americans with little confidence in the safety of the stock market. "It would have to be an add-on," Holtz-Eakin said, meaning that it would not be carved out of existing benefits.
Since the new health care law has already tapped government health programs for savings, with unknown results, Social Security may be in the commission’s crosshairs. On the other hand, although the commission's chairs have declared that all programs are up for scrutiny, the panel is charged with coming up with a deficit reduction plan, not changes to Social Security. As Aaron points out, it could fulfill its responsibility without touching Social Security at all.
"The commission is not charged to balance the Social Security Trust Fund," he said. "One can restore Social Security's long-term balance and still leave the budget in a terrible mess."
Check out our experts' debate on the fate of Social Security: Henry Aaron on Social Security's alarmist math; Lawrence Haas on looking for savings; and George Hager on its accounting fictions; Joseph White on the difficulty in changing the system.