Who Are the Losers in the Graham, Paul, Lee Plan?

By Jun 18, 2011, 12:37 PM Author's Blog  

Three heavy hitter Republican senators have put forward a plan to restructure Social Security. Lindsey Graham (R-SC), Mike Lee (R-UT) and Rand Paul (R-KY) have sponored the Social Security Solvency and Sustainability Act, S. 804.

Overall, I give this plan a “C”. That grade is composed of two distinctly different analyses. On the pure question of economics, I give the plan a “B”. But on the more critical issue of “Is this fair” I give the plan a “D”.

Given that the proposal has some positive economics attached to it I think that something along these lines is what me might see if Congress ever got around to doing its business of passing legislation and fixing problems. I believe that if this plan were pushed to a vote it would get support from some Democrats and actually has a chance of passage sometime in 2012. The reason that there might be some Dems who cross the aisle to vote for something like this is that the structure of the proposal is very much a “Kick the Can Down the Road” approach. All politicians love that way of thinking.

The issues at Social Security are easy to define. It’s the Boomers that are the problem. The solutions are also relatively easy. Benefits can be cut, or taxes can be increased. A very convenient way to cut expenses is to just increase the age for eligibility by a few years. The critical questions are (1) when do these changes take place and (2) what age group is going to get screwed as a result.

Some details of the proposal:

A) Gradually increase Social Security’s full-benefit age starting in 2017, from today’s age 66 to age 70 for Americans born on or after 1970.

B) The legislation would increase the early-benefit age starting in 2021, from today’s age 62 to age 64 for taxpayers born on or after 1966.

C) Gradually change the benefit formula starting in 2017 so that upper-income Americans would start to receive smaller benefits while benefits for those with lower incomes would remain the same. These changes would become fully effective in 2055.

The financial health of SS is measured actuarially. This science looks at projected income and expense streams over a 75-year period and draws some conclusions. I don’t see a better way to evaluate this mess. But I’m convinced that it is a flawed analysis. No one has the slightest idea what the world will look like in 50 years. And more importantly, the problems for both the broad economy and society that SS is bringing us have a window of only the next 15-years or so. It’s my opinion that if the USA does not address the imbalances that are currently impacting SS we will not make it to 2025. The system will sink from the weight of these UNFUNDED liabilities.

Clearly Senators Graham, Paul and Lee don’t see it that way. The vast majority of those who do pick apart the numbers would agree with them. So I’m a bit out in left field calling for a blowup. I will say that if one did adopt the 75-year measure of financial health, the proposals put forward in S. 804. would, in fact, move the needle in the right direction.

The plan does not include any increase in taxes on worker’s or their employers. To me, this is essential. SS is already sucking up 12.4% of worker’s income. That’s too much. If anything the program should be scaled back so that the contributions are lowered. Under no circumstances should they be increased.

The Senator’s proposal increases the socialization of the system. I think that is essential. Workers with high lifetime earnings will be subsidizing those who had low lifetime earnings. Call this a tax on the rich. I don’t see anyway around this.

Increasing the age limit is something that significantly improves the financial profile of SS. It looks like an easy way to push the numbers around. That’s true, but it’s not without consequence. I would point to the riots in France just two years ago when the retirement age was increased. Who were the protesters? A coalition of younger and older workers. The older ones had obvious reasons. The younger ones were brought to the streets because they desperately wanted the old folks to retire. Why? Because they wanted the jobs that would become vacant. Youth unemployment in France is north of 20%. That is exactly where it is headed in the USA. So raising the retirement age “fixes” SS but it also closes some doors for younger people all the way down to their early 20’s.

For these reasons I give that favorable “B” grade (there is no “A”). But now consider who is getting screwed.

The Baby Boomers will reach age 65 in 2011. This population bulge will continue to hit the SS system until 2029. Note this. We are on the very first rung of a very tall (and shaky) ladder.

The problem for SS over the next 20 years (and a Medicare in a bigger way) is the Baby Boomers. When you look at the age group that is causing the problems and overlay the proposed changes you see that the Boomer contribution to the “fix” is not very much at all.

(a) Increasing the age limit to 70 after 2017 only impact those born after 1970. So the Boomers get a free ride.

(b) Increasing the early retirement age is limited to only those born after 1966. Another miss.

(c) Changing the benefit formula starting in 2017 would hit the boomers (At least it would on paper). But the phase in of this takes place over 40 years. The Boomers will be dead and buried before the actual hit takes place.

So who are the losers in the Graham, Paul, Lee plan? The answer is that anyone born after 1966. If you’re younger than 47 today, bend over. The Boomers are going to screw you. You’re going to pay more than you should and you’re going to get less than the boomers got.

How could that possibly happen? Easy. It’s the demographics. Those who will “win” this age war out vote those who will lose. There are some very powerful lobbies at work as well. The AARP has a very big stick; they use their weapons on the Pols very effectively.

I will be sad if this comes about. This would be the greatest “Pass the Trash” for any generation in history. While the proposed changes would take SS off the discussion table for another decade or so it will come back into the headlines in a very big way at some point. There is absolutely no fairness in a plan that protects Boomers at the cost of the rest of society.

I think that in their hearts, Senators Graham, Paul and Lee don’t really believe in SS and would like to see it go away. It is, fundamentally, a socialist approach and it does suck up a huge amount of current tax revenue. But even these powerful Senators can’t kill SS. If their proposals are adopted it would destroy Social Security. Ten/Fifteen years from today public support for SS will have completely evaporated. It will just take that long for those younger generations to realize how badly they got set up.

I’m a cynical guy. I think that Graham, Paul, Lee (and all the others) understand that they are lighting a slow burning fuse on a very big bomb with plans like this. But they want to keep their jobs, power and influence, so they don’t do the right thing. They propose to kick the can to another few generations.

Color me disappointed. Especially with Rand Paul.

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