Just a Little Maintenance
The contributions of the 6 percent of earners who are paid more than the cutoff amount would go up. They would receive higher benefits, but the system would gain because benefits are weighted toward lower income earners.
This change would reduce the financing gap anticipated by the trustees by an estimated 0.61 percent of payroll. (Remember, we only need 1 or 2 percent of payroll to bring the system into balance.)
• Fix the cost of living adjustment. Social Security benefits are adjusted annually to maintain purchasing power. In determining the amount of the cost of living adjustment (COLA), Social Security uses a consumer price index (CPI) developed many years ago by the Bureau of Labor Statistics. That index measures changes in the price of a representative basket of goods and services. The Bureau, however, has developed a more accurate CPI that takes into account the effect of consumers substituting one type of purchase for another. (If the price of beef goes up, maybe you'll buy chicken.) Adopting this more accurate CPI would produce slightly lower COLA increases.
This would reduce the financing gap by another 0.3 percent of payroll -- bringing us to almost half the 2 percent goal.
• Dedicate a limited estate tax to Social Security. Under present law, the estate tax is being phased out; by 2010, only estates valued at $3.5 million or more will be taxed. If the tax is kept in place at the 2010 level (rather than being completely eliminated, as President Bush proposes), the revenues, if earmarked for Social Security, would reduce the Social Security financing gap by another 0.6 percent of payroll.
This would mark a departure from traditional Social Security financing. And with the nation facing record-breaking deficits, we can't count on general tax revenues to cover the Social Security shortfall. The only credible long-term solution is the addition of a dedicated tax.
You could earmark a lot of things, but this one makes sense. Social Security is saddled with what economists Peter Diamond and Peter Orszag have dubbed a "legacy debt" from paying substantial benefits to the first generations of covered workers, even though they and their employers had made very limited contributions. Paying those benefits was sound social policy; it helped lift millions of the elderly out of poverty, without raising payroll taxes to impossible levels or waiting for decades to make meaningful payments.
But now the legacy debt forms a big part of the projected 75-year deficit. There is no good reason why future earners should have to pay the entire legacy debt.
If the CBO's forecast is correct, these three changes would produce a surplus for Social Security. If the Social Security trustees' more pessimistic estimates are closer, we would still need to close a gap of about 0.5 percent of payroll.
• Create a failsafe mechanism. We can meet this residual gap, if it exists, by instituting a flexible payroll tax rate that would take effect later. Even before taking effect, it would be adjusted as forecasts change. This "balancing rate," as I call it, would quantify the shortfall and represent a commitment to filling it. This failsafe provision would be activated automatically if Congress neglected to adjust revenues and expenses to changes in the estimates.
I propose that the balancing rate become effective the year the trust fund would otherwise start to decline. To illustrate: After making the first three changes proposed above, the trust fund would continue to grow until about 2055. To avoid drawing it down at that point and to fund a full 75-year period from now, the program would need to schedule a balancing rate increase, effective in that year, of roughly 0.9 percentage points each on employers and employees. Of course, if the CBO estimate turned out to be accurate, the rate would never have to be increased -- in fact it could be reduced.
In the absence of the failsafe mechanism, the remaining gap in Social Security could be financed for the next 75 years by increasing the contribution rate today by 0.2 percentage points each on employees and employers. But if the program actually were to start collecting this amount now, it might collect more than necessary, overcharging today's workers. My approach -- making prudent adjustments now and providing for a balancing rate some 50 years from now -- reduces the likelihood of over financing while at the same time guarding against underfunding.
This strategy has the advantage of ending false alarms about Social Security's finances. As things stand, the trustees' annual release of their latest 75-year estimates becomes a sky-is-falling media circus. The middle-range estimates are reported as if they were meant to be exact and immutable rather than as one of many possibilities. What is really the trustees' tentative expectation of a possible distant shortfall is transformed into a looming "crisis," prompting millions of Americans to believe, wrongly, that Social Security is doomed unless it gets a radical overhaul.
Social Security doesn't require radical "reforms" because it hasn't failed. The system that has served so many so well for so long just needs some timely maintenance work. Let's get started.
Robert Ball was the commissioner of Social Security from 1962 to 1973 and chief Democratic negotiator on the 1983 commission whose recommendations led to the last major changes in the program. He is author of "Insuring the Essentials" (Century Foundation).
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