Some Social Security Tweaks

By Mar 14, 2013, 1:44 PM Author's Blog  

Social Security is back in the news this morning as the Senate Democrats have produced their 10-year spending plan, a counterpoint to the plan released by the House Republicans earlier this month. Here’s some language that caught my eye from today’s Washington Post article:

While Democratic leaders are offering quiet support for Obama’s renewed campaign to strike a grand bargain with Republicans that would include cuts to Social Security and Medicare, a significant number of Democratic lawmakers are digging in their heels and vowing to protest any reduction in promised benefits. [emphasis added]

The appropriate word is “scheduled,” not “promised.” I’ve been over this before. Apart from the ability of the government to change the law at any time, there is no legal authority for some portion of these benefits to be paid after the Trust Fund is exhausted. The judicial system recognizes this — beneficiaries have no legal standing to benefits other than what the law says at the time the benefits are payable. The press, and policy makers and analysts, would do well to choose their language accordingly. It’s an easy mistake to make — I used to do it myself.

The article then reports on an area of possible bipartisan compromise between the President and House Republicans. This alone should signal that it might be a bad idea:

Meanwhile, a growing number of Democrats have declared their opposition to a proposal that has emerged as Obama’s biggest selling point to Republicans: his offer to apply a less-generous measure of inflation to Social Security, resulting in slightly smaller annual cost-of-living increases.

I am in favor of using the most accurate measure of inflation possible to index the benefits of retirees for inflation. So yes, the change should be made, but the larger problem with Social Security benefits is that they do not rise in real terms at higher ages. The purpose of Social Security is to provide insurance against outliving one’s means of support in retirement. That risk increases, dramatically for some people, at higher ages. Other sources of support, like private saving, may not be annuitized and may thus run out at advanced ages. An increasing age profile to Social Security benefits in real terms helps to offset the decline in other sources of support.

The reductions in future Social Security benefits should come in the initial benefits, not the way those benefits change over time. That would also improve incentives for older workers to stay in the labor force. But, of course, that would require agreement on principles of design, which seems very far removed from the realm of possibility in the current climate.

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