A few years ago, I succumbed and joined the AARP. My economic interest overcame my ideology: by joining, I would save more on one optometrist appointment than the annual fee.
As a result, I get their magazine in the mail and look it over quickly. I’m used to their email warnings about awful Republican politicians who want to rein in the growth of benefits. So it was a surprise to read an article in the November issue of AARP Bulletin that slightly opened the door to Social Security reform. The piece, by Kenneth Terrell, is titled “Social Security: The Real Facts.”
What caught my attention is this:
3. Some ideas to reform funding are starting to take shape
One proposal is to either raise or eliminate the wage cap on how much income is subject to the Social Security payroll tax. In 2019, that cap will be $132,900, which means that any amount a worker earns beyond that is not taxed. Remove that cap, and higher-income earners would contribute far more to the system. Other options lawmakers might consider include either raising the percentage rate of the payroll tax or raising the age for full retirement benefits.
I’m used to the first proposal: “either raise or eliminate the wage cap on how much income is subject to the Social Security payroll tax.” That’s standard fare for the AARP.
But the last proposal above, “raising the age for full retirement benefits,” is not standard fare at all.
It’s true that the author is not advocating this. He’s not advocating anything. He’s simply laying out facts. But what I’m used to in AARP publications and in the emails I get are attacks on people who suggest raising the age. The formulation “might consider” comes close to saying “should consider.” Not all the way, of course. But that formulation opens the door a little to reform.
One thing I learned from my Hoover colleague John Cogan, when we were discussing my review of his excellent book on entitlement spending, The High Cost of Good Intentions, is that when changes in such spending are legislated prospectively, that is, people are given a few years to adjust, they don’t object that strongly. He gave me a striking example, which I don’t think is in the book, of a change that gave people only about 3 or 4 years to adjust and there was surprisingly little opposition.
READER COMMENTS
Alan Goldhammer
Nov 21 2018 at 8:08am
David – one thing that is constantly ignored in comments such as these (I have not read the AARP bulletin yet) is that Social Security benefits are subject to taxation. It doesn’t take very much additional income to hit the threshold when taxes kick in and with joint incomes above $44K, up to 85% of a couple’s Soc Sec benefits can be taxed. I believe that these tax receipts go into the general treasury and not the Soc Sec trust fund but perhaps that could be addressed with legislation.
A couple where both worked full time and deferred Soc Sec until age 70 will probably end up with >$50K/year in benefit payments.
David Henderson
Nov 21 2018 at 9:19am
Actually, unless things have changed since the 1983 “reforms,” the tax revenues do go into the Social Security account.
You’re right about the over $50K. My wife worked part-time but because she gets half of mine and I started at age 67 (my 68th birthday is today), we get about $48K annually. By the way, don’t tell anyone but the California government, for all its greedy grabbing of tax revenue, still doesn’t tax Californians on their SS benefits.
John Hare
Nov 21 2018 at 2:30pm
Happy birthday David.
robc
Nov 21 2018 at 9:33am
I always thought the reform that raised the “full” retirement age from 65 to 67 should have continued. It raised it by 2 months per birth year for those born between 1938-1942 and 1955-1959. Those born in between have 66 as retirement age, and those born 1960 and on have it at 67.
After 1959, they should have continued it on…forever.
So it would go to 68 for those born in 1966, 69 for 1972, 70 for 1978, 71 for 1984, 72 for 1990, 73 for 1996, 74 for 2002, 75 for 2008, 76 for 2014, and 77 for those to be born in 2020 (and etc)
This eventually would fix the SS problem entirely.
David Henderson
Nov 21 2018 at 10:00am
I think it would come close.
J Scheppers
Nov 21 2018 at 1:02pm
My simple political view is as follows:
Robc has beautiful idea, but I would suggest that the retirement age be set at XX% of average life expectancy. I would think 85% to 86% would do the trick.
Adjustment would be done every year but would be evaluated every year and projected 10 years out before the change was implemented. Retirement is not free and setting a uniform percentage of expected life seems more reasonable, especially when the only way to pay people more is to take more out of their paychecks.
Modifying the framework to think of social security as a pay as you go system and eliminate the trust fund idea would bring a much more effective framing, the mal-investments of past social security surplus are all sunk costs with little to no return to SS funding, but it does not mean we should not have any system or commitment to those that paid in to support many previously retired people one of them being me(declaring my bias).
robc
Nov 21 2018 at 3:27pm
In 1935, 65 years old was 105% of life expectancy.
I say we use my plan until we get back to that point, which would be at least 80 years old (and probably higher by the time we get there in 2038).
Robert EV
Nov 22 2018 at 12:00pm
We have the actuary tables now to guess the life expectancy of individuals based on the cohorts they belong to.
Why should Asian-Americans from New Jersey (life expectancy 89.4 years) have the same retirement age as Native Americans in South Dakota (life expectancy 68.2 years)? https://www.kff.org/other/state-indicator/life-expectancy-by-re/
Jonathan
Nov 21 2018 at 4:37pm
Raising the FRA has a huge impact because it reduces the number of years after FRA to accrue “delayed requirement credits” of 8%/year. If your FRA is 66, you have four years to age 70 to boost your lifetime benefit by 4 * 8% = 32%. When your FRA is 67, you have only three years, and so a 3 * 8% = 24% boost – a 1-(124/132)=6.1% reduction in the monthly (and present) value. Perhaps the rules should be changed to allow these credits to accrue four years after FRA so that healthy individuals still have an incentive to delay taking their benefit, or perhaps not.
Even though I am now receiving benefits from Social Security, I have many objections to the system and would support a voluntary opt-out. Social Security will ruin the Federal fisc; it discourages savings and investment; it’s funded by a regressive tax; seemingly random rules have huge, often unfair effects; it creates a sense of entitlement among the relatively affluent… And finally, it’s a perverse inter-generational wealth transfer: my mother stopped telling me how wonderful the system was when I pointed out that her benefits roughly equaled the taxes paid by her three sons, all of whom were struggling to support families with young children.
Floccina
Nov 21 2018 at 9:37am
I think a reasonable goal would be to get them to cap COLA increases for everyone getting more than $1,000/month in 2017 dollars until all retirees get $1,000/month.
David Henderson
Nov 21 2018 at 10:01am
Sounds reasonable.
Thaomas
Nov 21 2018 at 3:46pm
Why not all of the above to increase benefits? Increasing the “retirement” age is a good idea because it undermines the idea of age-defined “retirement” completely. And instead of raising the percentage of the wage tax, why not finance Medicare and social security with a broad based consumption tax like a VAT.
David Henderson
Nov 21 2018 at 4:27pm
I thought the reason would be obvious to someone who has read the blog for as long as you have, but I guess not.
The reason not to increase benefits and raise taxes is that I want more economic freedom, not less.
Thaomas
Nov 22 2018 at 11:15am
The question is rhetorical, address to all discussants, not you personally. 🙂
As a matter of fact I think think that raising the “retirement” age and shifting from a wage tax to a consumption tax are much more important reforms. And while we are at it, I’d shift from a tax deduction to a partial tax credit with a higher cap to encourage private retirement savings.
Adam Wildavsky
Nov 21 2018 at 4:52pm
Thanks for your article, David! I too have been putting off joining AARP.
We should allow potential recipients to defer the age at which they start to collect benefits indefinitely, with a commensurate increase in payments once they do start. There’s no good reason for the current cap of 70 years. Deferment beyond that age will not increase benefits, so there is no incentive to defer.
If we did this then SS could serve as a kind of “longevity insurance.” I am happily retired and expect that I have enough saved to last until I’m 90 or so. But suppose I live to 100 or 110? I’d love to be able to postpone my SS benefits until I need them. Most who defer until an advanced age will expire without collecting a cent, while those who do collect will be happy for the added financial flexibility. This would be a win both for those recipients who choose to take advantage of it and for the solvency of the system as a whole.
Benefit reference: https://www.ssa.gov/planners/retire/1943-delay.html
David Henderson
Nov 21 2018 at 6:00pm
Interesting idea. If they did it, I think they should make the annual increase 6%, not 8%. Actuarially, this is more reasonable.
Be aware, though, that even with the 8% (non-compounded) escalator, few people wait. So your proposal, while it makes sense, would not save much money.
Jerome Schindler
Nov 22 2018 at 9:24pm
The Social Security System is essentially a welfare program. Unlike most private retirement plans where the benefits are largely based on past income (e.g an $80,000 earner’s pension is twice that of a $40,000 earner) , the ss retirement amount provides significantly more return on contributions for lower income workers than higher income workers. Soc Sec retirement benefits are based on three tiers. The first tier replaces 90% of AIME (Average Indexed Monthly Income) , the next tier replaces 32% of AIME, and the last replaces 15% of AIME. Anything over an AIME of $5,000 ($60,000/year) gets you peanuts in terms of a ss benefit. In addition, those in that third tier are the ones most likely to have 85% of their ss benefit subject to income tax. When you consider the ss disability, survivor and retirement benefits the typical low or middle income individual would be hard pressed to get as good a deal from any private insurer. As for Medicare, everyone that meets the 40 quarters test gets the same benefits. Higher earner not only pay more in Medicare payroll tax in their lifetime than lower earners, but those higher earners often have income in retirement that trigger substantially higher Part B and Part D premiums. Also consider a trust fund baby who essentially lives off inheritance and investment income but works just enough to capture the 90% return on those earning plus all the benefits of Medicare coverage. My AIME was established based on my highest earnings over the prior 35 years, However, for the past decade I have worked part-time and paid thousands of dollars in soc sec and Medicare taxes on those earnings, but the impact on my AIME was minimal so my monthly benefit so far has increased less than $10 a month. For all of the above reasons I strongly oppose means testing for ss benefits as ss benefits are already severely means tested. The “fix” should include a modest rise int he full retirement age, a modest increase in the ss and Medicare tax rate, and a modest reduction in that cost of living cost of adjustment. Perhaps those trust babies who live off trust fund income should be required to pay ss and Medicare tax on that income, though the number of those are so small that I don’t think that would raise much money.is probably too small to generate any significant revenue for ss or Medicare.
Thaomas
Nov 24 2018 at 1:26pm
Well put, but I’d suggest that a VAT is a better tax than the capped wage tax for funding the payment of benefits. It avoids both beneficiaries mistakenly believing that they are just getting their own money back (and are not “on welfare”) and the political difficulty of keeping revenues in line with aggregate benefits.
michael pettengill
Nov 23 2018 at 8:47am
Why do so many republicans, conservatives, economists want a big drop in GDP?
Or do they believe in free lunch economics?
Ie, the less (retired) worker incomes, the higher consumer spending because workers are never consumers, consumers never workers.
It’s not like most people drawing social security:
Have large savings; many are lucky to have $50,000
Are the first, or even second choice, of employers to fill jobs
Those drawing Social Security at 62 are seldom living high on the hog on multimillion dollar retirement funds, or quitting great jobs. Most are doing so to get their spending up over $1000 per month.
Note, Social Security benefits are “means” tested with high income retires paying income taxes on their benefits at rates almost as high as their other retirement income. Plus some pay more in Medicare fees and taxes than both Social Security and Medicare benefits are worth, e.g. the Buffett and Gates class.
Michael Rulle
Nov 23 2018 at 9:51am
It is difficult to not get really irritated when thinking about how we have managed Social Security. In particular, the concept of the Social Security Trust Fund (for that matter, any government based pension plan—-meaning states as well) is really fraudulent, although not legally so.
The Feds have used payments into the system to fund other government activities. I believe the IOUs in the so called Trust Fund approaches $6 trillion. IOUs have to be sold to raise cash, i.e., they represent the amount of SS taxes that have been used for expenditures not related to SS. They are NOT the same as bonds, which is why they are called IOUs. IOUs are merely accounting entries——no cash. The cash was “lent to the Treasury”—-but to get paid back, Treasury needs to sell bonds to the public. This should have always been separated from the unified budget because politicians obviously cannot be trusted. They should have been like 401ks.
To simply raise the income level on which SS taxes are charged and play around with age requirements merely continues the scam. No one seems interested in getting rid of SS all together, which really is the solution. Granted it might take 75 years (or more) to wipe it out all together (and replace with a true savings plan) as we do morally owe money to all who have paid SS taxes. But knowing we have a solution is itself a positive. It still amazes me we can have this level of corruption in plain sight, and not believe this kind of corruption is endemic to the entirety of government.
Arguing over Trump or Obama, Beto, or Hillary seems almost designed to take our eye off the ball. It is truly sad, when you think about it.
David Henderson
Nov 23 2018 at 11:11am
You make good points in your first two paragraphs.
It’s with the first sentence of your third paragraph that I disagree. You write:
I agree with you that raising the income level on which SS taxes are charged continues the scam. But I strongly disagree that “playing around with,” that is, raising, age requirements continues the scam. And that gets me to your next sentence:
Touche, if your point is that I should have mentioned that that’s a desirable goal. I agree with you but, for those who don’t know my writing on this well—I devoted a whole chapter of The Joy of Freedom: An Economist’s Odyssey to getting rid of Social Security in slow motion—this would not have been obvious. My apology.
But now go back to the idea of raising age requirements. Raising age requirements does, to some extent, get rid of SS. Not altogether, admittedly, but there’s a way to get rid of SS simply by raising age requirements. Take the proposal of robc above but make it more aggressive. So, for example, instead of his “it would go to 68 for those born in 1966, 69 for 1972, 70 for 1978, 71 for 1984, 72 for 1990, 73 for 1996, 74 for 2002, 75 for 2008, 76 for 2014, and 77 for those to be born in 2020 (and etc),” make it “it would go to 69 for those born in 1966, 71 for 1972, 73 for 1978, 75 for 1984, 77 for 1990, 79 for 1996, 81 for 2002, 83 for 2008, 85 for 2014, and 87 for those to be born in 2020 (and etc),” and you would be there in about 95 years instead of 75 years you suggest.
Swami
Nov 24 2018 at 1:52pm
My suggestion for fixing social security is to give everyone an option — either pay more on SS, OR get benefits at a later date. Everyone could choose, obviously anyone anywhere near retirement would choose the former (which applies to all current and soon to be AARP members who are not already retired and gain just from getting better funding security).
Those decades away away from retirement have plenty of time to prepare for whichever alternative they choose.
Problem solved.
john hare
Nov 24 2018 at 5:27pm
What about an ability to opt out once some particular contribution has been made? Say pay in SS for an amount equal to 10 years of the median income and then be eligible to leave the system completely forgoing all future benefits. That way people that believe the system is broken, as I do, could pay in their “fair” share and then have a few decades to invest as they wish.
Olga Kramar
Dec 2 2018 at 2:14pm
Everyone talks about longevity, which, thanks to modern medicine, is now far greater than a few generations ago. But what about the age at which a person is able to solidly work a full-time job? Human physiology hasn’t suddenly hurled forward to make us as capable at 65 or 70 as we were at 50. The human body and mind still age, and expecting someone in their late 60s and onward to keep up with a job whether corporate or manual labor is unreasonable. Should the employer keep paying full-bore for an employee whose capability has declined, as most in their 60s would readily admit? Of course, there are exceptions, I know, our president is past retirement age. But for most, they’re not going to be competitive employees, and without Social Security, it’s a grim picture.
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