The fact that no one’s spending much time discussing Social Security reform in the current presidential election is not necessarily a bad thing; campaigns can be terrible places to have serious discussions. Nevertheless, a few candidates and their advisers have put out vague plans: Senator Bernie Sanders has embraced raising taxes to fund the system’s shortfall, either by removing the cap on payroll taxes or by imposing a higher payroll tax rate. The Republican ideas put forth thus far are either politically unworkable or don’t come close to actually coping with the extent of the shortfall. For instance, Governor Chris Christie’s means-testing plan—which would cut benefits for those with a retirement income above $80,000—would not come close to ending the shortfall and has no chance of getting sufficient support from either liberals or conservatives.
New York Times columnist Josh Barro, who seems inexplicably excited about the debate thus far, praised the Jeb Bush campaign recently for floating a plan that would reduce benefit growth via changes in the price indexation of current benefits, something that was actually on the table in the 2011 budget discussions before Republicans snatched defeat from the jaws of victory. The price index now being used to adjust existing benefits for inflation, which economists believe slightly overstates the true inflation rate, would be replaced with a more accurate measure.
The more important indexation issue, though, has to do with initial benefits. Since the Social Security Administration bases a retiree’s initial benefits on the worker’s highest 35 years of earnings, it has to adjust these wages for inflation. However, for this adjustment, it doesn’t use the Consumer Price Index or any other measure of price inflation—instead, it uses wage inflation. Wage inflation has historically exceeded price inflation by about 1 percentage point. The result is that someone who retires in 2015 receives benefits about 10 percent higher, in inflation-adjusted dollars, than someone with the same real earnings history who retired a decade ago.
There’s no good justification for using wage inflation, but a total change to price inflation—which would completely fix the program’s shortfall—is politically impossible, history has shown. However, a decade ago Republicans proposed altering the benefit formula so that upper-income earners would have their initial benefits indexed to price inflation, benefits for the bottom 30 percent of workers would remain indexed to wage inflation, and those in between would have their benefits adjusted by a combination of the two. Such a reform, phased in over time and supplemented with indexing the retirement age to longevity and adjusting the indexation of current benefits, would come close to eliminating the long-term Social Security shortfall.
The problem with raising payroll taxes—besides imposing rates on small businesses that would exceed 60 percent—is that in the short run, revenue gains would greatly exceed the increase in obligations, and the government isn’t good at saving. The additional revenues up front from a change in the payroll tax can’t get deposited in a lockbox in West Virginia. They will be duly included in the budget numbers, which gives Congress the incentive to spend that money. That’s precisely what happened with the tax increases that resulted from the Social Security reform of the early 1980s, and it’s clearly what Democrats like Elizabeth Warren, who have been agitating for an increase in benefits for some time, have in mind.
Len Burman, the director of the Urban-Brookings Tax Policy Center, has suggested that a tax increase can avoid that pitfall with the implementation of a value-added tax that has its rate geared to the entitlement revenue shortfall in a given year. No candidate has dared embrace that idea, since matching tax increases with entitlement funding shortfalls leaves nothing left over for political goodies, while still angering a large swath of voters.
At the moment, the debate (such as it is) over such measures seems almost academic: Republicans couldn’t pass a Social Security reform in 2005 when they had a healthy majority in the Senate and a largely compliant House. It’s difficult to fathom how any Republican administration would have the political juice to get something this controversial done in 2017. And it’s hard to see Democrats winning the White House and getting a large enough majority in the Senate to increase payroll taxes.
A potential path for a sensible reform does exist, however. The Republican nominee could mark his territory on the issue by simply spelling out the obvious political constraints on any Social Security change, which is that the top 20 percent of all earners will end up bearing nearly all of the costs of fixing this and that any fix would leave almost everyone else alone. By acknowledging that reality, a winning candidate could conceivably obtain enough political capital to pass a reform that focuses on arresting benefit growth without giving the left something to demagogue.
Social Security reform is worth expending political capital. A successful reform that didn’t blow up the republic could potentially give Congress the fortitude to proceed with a wholesale tax reform and maybe even set the stage for Medicare reform, which is an order of magnitude more complicated—and more in the red—than Social Security.
The Bush administration was incompetent in its pursuit of Social Security reform in 2005, and its failure should have no bearing on the prospects for future reform, although it may have irreparably damaged the prospects for carve-out individual accounts. A future administration should learn from its mistakes and not count on creating a groundswell of grassroots support to compel Congress to act to reform entitlements. In these hyperpartisan days it’s going to take more sophisticated political maneuverings to pull this one off.
Ike Brannon is president of Capital Policy Analytics, a consulting firm in Washington.
