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March 14, 2005

Gene Steuerle on Social Security

If you want a right-of-center take on Social Security, ask Gene Steurle--Reagan's Assistant Secretary of the Treasury for Tax Policy. Via Max Sawicky:

washingtonpost.com: Whichever Way We Go, Some Get Left Behind: Social Security has morphed into a middle-age retirement system even though the very old have greater healthcare needs, can work less, and are more likely to have no spouses to help out.

That's why those Bush foes who insist on protecting the Social Security program exactly as it is are misguided. By the same token, Bush has not made the original Social Security mission -- protecting the vulnerable -- his primary one. The president has focused instead on giving Americans 'ownership' over their retirement benefits by creating private accounts, which simply give back the most to those who pay in the most.

The Social Security program was never intended to treat everyone equally. And it currently redistributes income in five major ways:

  1. From richer workers to poorer workers through a progressive benefit formula.... Social Security's formula provides a benefit equal to 90 percent of former earnings to those with very low incomes, but only 40 percent to those with average earnings.
  2. From shorter-lived groups (such as men, African Americans and the less educated) to longer-lived groups (such as women and the highly educated) through annuities whose value depends upon life expectancy...
  3. From singles to married couples...
  4. From the healthy to the disabled, through disability benefits; and from later generations to earlier ones.

Like other public programs, Social Security will have winners and losers if its rules are rewritten. But when Lee Cohen, a Social Security Administration economist, Adam Carasso of the Urban Institute and I studied the numbers, we found that some widespread assumptions about who is hurt and who isn't are wrong. For instance, though Social Security is perceived as progressive, blacks don't get much better rates of returns (in the form of benefits) on the taxes they pay during their lifetimes than whites. Nor do high school dropouts fare better than the college educated. In both cases, shorter life expectancy for the poorer groups offset the Social Security formula's tilt in their direction.... [I]t is possible to design reforms -- even those that cut the growth rate of future benefits -- that would do a better job than current law does in protecting the elderly, disabled and survivors against poverty.

For instance, giving the truly old and those with lower lifetime incomes a greater edge in the Social Security system wouldn't be hard. A solid minimum benefit of about $9,000 per person (roughly the poverty line) could be provided easily, especially if concentrated on the later part of old age.... With any proposal aimed at protecting the elderly, solid testing and assessment are required. Currently, the government does not make public the information needed to measure Social Security's effectiveness as an anti-poverty program for the elderly against proposed alternatives.

The seemingly straightforward goal of protecting the most vulnerable first and foremost has been muddled in the recent Social Security debates. The right argues that personal accounts are fairer to blacks and those with less education because these people die younger on average and otherwise can't spend their retirement money freely before their time comes. The left, meanwhile, insists that the retirement age can't be increased for the same reason: It's unfair to the poor, who are less healthy and more likely to hold physically demanding jobs.

Both arguments share the same flaw -- the assumption that the fairness and effectiveness of the whole system can be judged by looking at a specific provision or particular set of losers or winners....

Making protection of the vulnerable the first order of business does have a cost. It means less -- whether lower benefits or higher taxes -- for those of us who are not as likely to be poor. But if that seems threatening, remember that Social Security benefits are already equivalent in value to about a $400,000 401(k) plan for the average-income couple retiring today. Add in Medicare, and the total package of benefits for a couple is projected within less than 25 years to exceed $1 million.

With benefits soaring this high, Social Security reform should not be mainly about enabling the average American to retire in middle age, pay little tax and avoid saving. Rather, changes should aim to keep necessary sacrifices manageable while demanding fewer transfers from our children to us and more from them to our grandchildren. Social Security's creators believed the system should keep the wolf from the door at the end of life. Any system that does that helps reassure us all since none of us knows whether we will outlive our good health -- and our money.

Posted by DeLong at March 14, 2005 08:14 PM