Last week, Henry Aaron argued in this space that raising the retirement age to help Social Security's solvency amounted to a cloaked benefit cut. He said it's also unlikely to be much help in reducing the deficit. The way he frames the challenges facing the budget pretty much assure that conclusion. But there are other ways of looking at the impact of raising the retirement age, and more structural – dare I say “progressive” – ways of reforming Social Security in the context of alleviating the long-term deficit problem.
Aaron is right that changing either the normal or the early retirement age will have little effect on the 2015 budget – unless international creditors perceive a real impact on long-term deficits and there is an interest rate effect through a reduced risk premium. But looking at 2015, or even 2020, is hardly the appropriate benchmark for evaluating solutions to a multi-decade budget problem.
As Aaron points out, no serious politician is going to propose significant reductions in spending on those nearing retirement. Indeed, major and abrupt reductions would be very unfair to older Americans unable to re-plan and refinance their retirement. But phased-in, structural changes that might gain support and make a real difference over time typically won’t have much impact by 2015. So President Obama’s arbitrary short-term deadline virtually rules out politically feasible long-term Social Security reform.
The CBO and its congressional master does not help either. CBO’s focus on the next five or 10 years rather than the long-term picture is literally short-sighted and should not be the context for entitlement reform. It is both politically more astute and socially more fair to modify retirement entitlements over decades.
By the same token, the short budget window pushes lawmakers toward fixes that may seem to improve the short-term deficit picture yet create potentially huge liabilities in the future. For example, the health reform legislation’s CLASS act disability/long-term care program was touted as easing the deficit problem, and partly financing the new health entitlement, because it brings in premium revenue for the first few years before the benefit outlays begin. Aaron’s suggestion of extending Social Security to those currently outside the system is another unfortunate and similar example. Sure, revenue would come in by 2015 from new payroll taxes. But long-term obligations would rise.
So until Congress’ budget process puts the primary emphasis on showing the long-term effect of policy proposals, it is going to be hard to focus attention on long-term answers and evaluate proposals properly.
That said, it’s still not clear that Aaron presents the complete picture on raising the retirement age even in the short term. For one thing, besides the impact on payroll tax revenue due to individuals' working longer, there is also the impact on federal and state budgets of additional income tax revenue. That’s why I agree with Aaron’s recommendation that we encourage Americans to remain economically active for longer. The net potential impact on the total deficit (not just Social Security’s net contribution to it) results from several economic and revenue factors – and the projections depend of course on the assumptions that are made.
More importantly, raising the retirement age does not necessary mean an across-the-board cut in benefits. I would agree that cutting benefits would be very unfair to the career low-wage worker who pays payroll taxes for 35 years and then ends up with a sub-poverty benefit and (in many instances) a negative real rate of return. But there are alternatives to an across-the-board cut if the retirement age is raised.
That’s why a form of progressive indexing should be applied to Social Security benefits. The safety net benefits for low-income workers and seniors should be strengthened. But for those above that income level, we should move steadily away from the current vision of Social Security as traditional social insurance, which assures a stream of benefits for all, and towards one based more on “real insurance.” In the latter model a stronger safety net of basic benefits would preserve the social solidarity features of social insurance, but benefits for retirees with a good income from other savings or retirement plans would be reduced or even eliminated. Social Security would be an insurance policy against hard times, not a defined benefit for all. Will Bill Gates really need Social Security to enable him to scrape by during retirement? Probably not. But if unimaginable calamity struck him the real insurance aspect of a reformed system would still be available to him.
So let’s stop using 2015, or 2020, as the evaluation point for judging progress in tackling a long-term problem. And let’s look at raising the retirement age as part of a redesign of Social Security intended to revise the social contract as a positive move that will also slowly help to dig us out of the country’s financial hole.
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Stuart M. Butler is Vice-President for Domestic and Economic Policy Studies at The Heritage Foundation in Washington DC.