The Case for Fast and Broad Social Security Reform

As Treasury explained at our deep background meeting with center-left writers, the deficit commission established by the president should produce a package of Social Security reforms in November. What will the package include? Andrew Biggs, a AEI scholar who has worked closely with some members of the commission, said he expects three pillars of reform: a higher retirement age, more taxed wages, and reduced benefits for the wealthy.

On Sunday, the New York Times lassoed together some experts to brainstorm Social Security fixes on the occasion of its 75th birthday. Some call for higher revenues -- by raising the taxable income ceiling above $107,000 and liberalizing immigration laws to "steal" young workers from other countries -- while others called for spending cuts -- by raising the early retirement age from 62 and progressively indexing benefits so that the rich get smaller Social Security checks to supplement their IRAs.

The main thing to say about these ideas is that we can do almost all of them at once. We can raise the payroll ceiling by 2 percent every few years. We can raise the early retirement age, while expanding disability pay for seniors who are physically unable to continue arduous jobs into their 60s. We can progressively index rich seniors' benefits while preserving payouts to the lower 50 percent who rely on Social Security overwhelmingly as a main source of income. And so on.

The second thing to say is that we should do many of them at once. My top choice for reform is to progressively index benefits for the rich, who have savings to supplement their Social Security income. But most of these ideas are perfectly intuitive.* As Americans get richer, more income should be subject to Social Security taxes. As people live and work longer at less physically stressful jobs, some of them should wait longer before their pay day. If we do many changes at once, none of them has to be too dramatic. And if we act now rather than wait a decade or two on Social Security reform, we can phase in smaller changes rather than rush big cuts or tax increases.

*The only idea I don't see yet is giving seniors a payroll tax holiday to encourage them to work longer. If we make older workers cheaper to hire then younger workers, that might "increase national income, expand the tax base, ease the financial burden on Social Security," as Estelle James suggests. On the other hand, it might give employers financial incentive to be ageist against younger workers, who cost more in payroll taxes, and shrink the overall tax base by offering a needless tax break.

Update: Bruce Bartlett emails to offer a middle way: "If you want [seniors] to work more, don't give them a tax holiday, just get rid of the earnings test that reduces their benefits for working and drawing Social Security below the normal retirement age. Its only purpose is to keep seniors out of the labor force."