Kathy Ruffing and Paul N. Van de Water at the Center on Budget and Policy Priorities have written an important analysis of Social Security proposals that the deficit-choppers have presented to keep the system solvent. The plan proposed by Erskine Bowles and Alan Simpson, who co-chaired the President’s fiscal commission, seeks benefit cuts for two-thirds of its savings over the next 75 years. The Bipartisan Policy Center's proposal depends on more or less equal amounts of benefit cuts and tax increases. A proposal of the Center for American Progress would rely mostly on tax increases on employers.
Ruffing and Van de Water say policymakers need to keep five key facts in mind:
• Social Security benefits are quite modest.
• The majority of beneficiaries have little significant income from other sources.
• For most seniors, Social Security is the only income they will receive that is guaranteed to last as long as they live and to provide full inflation protection.
• Social Security benefits in the United States are low compared with other advanced countries.
• Future retirees already face lower benefits (relative to their past earnings) than current retirees as a result of a rising Social Security retirement age and escalating Medicare premiums.
There is no imminent crisis, and policymakers have time to do the job right, although it is desirable to act sooner rather than later. The major reason for acting sooner is that a carefully crafted solvency package can restore public confidence in the program, share sacrifices fairly across generations, and give workers plenty of notice so that they can plan their work, savings, and retirement. ...
4. Social Security Benefits in the United States Are Low Compared With Other Advanced Countries
Governments around the world are feeling fiscal pressure, and some are adopting austerity programs that trim retirement benefits. Why, some commentators ask, should the United States be different? They ignore the fact that most other developed countries have considerably more generous public-pension systems than the United States.
The Organisation for Economic Cooperation and Development (OECD) has tallied the percentage of past earnings that the public-pension system replaces for various workers. For a median worker, the U.S. ranks 26th out of the 30 OECD nations. ... The average OECD nation has a public-pension program that replaces about 61 percent of earnings for a median worker; the U.S. system is only two-thirds as generous.
5. Future Retirees Already Face a Benefit Squeeze
Social Security has always aimed to provide retired or disabled wage-earners (or their survivors) with a benefit that replaces a reasonable fraction of their lost earnings. Benefits make up a larger fraction of past earnings for lower-paid workers than for higher-paid workers, which is one of the program’s progressive features. In Social Security jargon, lower-wage workers receive a higher “replacement rate.”
Although individual circumstances vary, financial planners recommend as a rule of thumb that retirees aim to build a portfolio — from Social Security, pensions, and savings — that replaces 70 percent of their previous income. Social Security will get them only partway toward that goal. For a medium worker (with earnings of about $43,000 in 2010 dollars) who retires at age 65 in 2010, Social Security will replace only about 41 percent of previous earnings. And that figure will fall as the program’s age for full benefits (sometimes referred to as the “normal retirement age” or “full retirement age”), which increased from 65 to 66 in the past decade, rises further from 66 to 67.
Look back at that five-point list of Ruffini and Van de Water. There are many changes that could and should be made to improve Social Security. Like, for instance, bringing the old-age portion of the program more into line with the rest of the OECD countries instead of clocking in at No. 26 out of 30. But such pipe dreams aside there isn't that much that has to be done to adjust the system so that solvency is assured until today's 1-year-olds are retirement age. The reason is shown in this chart dug out of the 2010 Annual of the Board of Trustees for Social Security by Kevin Drum at Mother Jones. Last November, he called it the most important Social Security chart ever, and Ezra Klein agreed:
What's it show? Baby boomer retirements will put some pressure on the system until the last of them - born in 1964 - reach retirement age (67) in 2031. And then, no additional pressure. So, a little fix now, which could be some combination of a small cut in benefits and a small increase in taxes would solve the problem until we're banging on the door to the 22nd Century. Or solvency could be ensured solely by a modest increase in taxes, most especially by raising the ceiling on income affected by Social Security. Nothing harsh is needed for this fix.
Such tinkering wouldn't, of course, put America's old-age security system on a par with that of Sweden or France or Canada. Which is what we ought to be thinking about in the 76th year since the Social Security Act was passed. But that is obviously beyond the vision of the single-minded deficit-choppers.