US Politics: A Beginner's Guide to Reform of Social Security

Social Security and reform. Mention the two together, throw in references to "looming fiscal crisis" or deficit reduction, and just sit back and watch the hackles rise on various concerned parties. And understandably so; Social Security is the bedrock principle of a society that does not abandon the disadvantaged, the unlucky, and, yes, the profligate or irresponsible to an old age of absolute deprivation. Reform, especially when uttered by Republicans, conjures visions of soup kitchens for the retired, a fate that should await no citizen of a civilised society.

Especially when those retirees have paid a tax all their working life to fund their Social Security checks. And here's the rub: defenders of the status quo argue that reform is another word for robbing the Social Security fund to pay for tax cuts for the wealthy. They maintain that the program is solvent, until at least 2037, and that it does not add to the deficit. Current benefits, as a consequence, and the future increases in those payments, should continue to be paid as planned.

The counter argument is that while Social Security might not add to the deficit now, if it is not restructured immediately, it will soon start adding to the nation's debt. And if Social Security is revamped now, it will negate the possibility of more drastic changes in the future.

Defences for both positions are vigorously mounted and propounded --- of all the debates that will take place this summer over the debt, it is the issue of Social Security that will see the most acrimony. On reform of the tax code and control of the rapid rise of health care costs, there is broad agreement, but on Social Security, there is no ground for compromise. It provokes the passions of ideologues from both the progressive and conservative camps because it brings out the question: when you can no longer work to provide for yourself, to what extent are your fellow citizens obliged to provide for your welfare?

The simple fact beyond the question is that many people do not pay enough in taxes to fund their expected benefits, especially as the population as a whole lives longer. So other taxpayers receive proportionately less in benefits to cover the shortfall. A critical report, published by the liberal Center on Budget and Policy Priorities think tank, take latest proposals to task because they contribute to a flatter benefit structure, reducing the incentive to work and to pay taxes.

The recommendations of the President's Deficit Reduction Commission (the Bowles-Simpson Comission) on Social Security reform are not designed to contribute a cent to deficit reduction. Instead, they are recommendations to ensure the long-term sustainability of the program. Under current projections, benefits would be cut by around 22% in 2037: Bowles-Simpson smoothes out that drastic prospect by instituting gradual changes.

The report does not include any proposals to reduce Supplemental Security Income. This program provides payments, roughly 70% of the poverty level, for those who do not qualify for the regular Social Security benefits. Bowles-Simpson also advocates the continuation of present food stamps and unemployment compensation rates.

Instead, to control costs, the Commission proposes gradually moving to a more progressive benefit formula that slows future benefit growth, particularly for higher earners. This involves a complicated restructuring process of replacing the present three-bracket bend points with a four-bracket formula. Put simply: the more you earn, the less you get back proportionately in benefits. When the programme takes full effect in 2050, retirees would receive a payment of 90% on incomes up to $15,000, but would only get back 5% of income from $102,000 up to the maximum taxable amount of $173,000.

The report also contains a provision to ensure Social Security “can continue to meet its basic mission: to prevent people who can no longer work from falling into poverty.” it creates a “new special minimum benefit. This provides full-career (30-year) minimum wage workers with a benefit equivalent to 125% of the poverty line in 2017 and wage-indexed thereafter.” This sounds generous in theory, but the Center on Budget and Policy Priorities report contends it is “clumsily designed,” with few workers in practice qualifying for the new benefit. As a result most low-income workers would actually see their payments reduced.

The CBPP argues that the fundamental flaw in the Bowles-Simpson plan is that it concentrates too much on benefit cuts; which it demonstrates forcefully in an explanation of "The Moment of Truth's" recommendations for raising the retirement age. Present law mandates a retirement age of 67 in 2027. Bowles-Simpson would increase it to 68 by about 2050, and 69 by about 2075.

One of the proposed changes in Bowles-Simpson would have an almost immediate impact. Cost of Living Adjustments to payments are linked to the Consumer Price Index rate of inflation, but the Commission argues this headline figure does not accurately reflect the effect of rising prices on a person's standard of living. The example they use is that if the cost of apples rises, then customers will buy oranges instead. This re-consideration of the Index would reduce benefit payments by 0.3%.

Social Security raises emotions on both sides, and is quite rightly designated as the “third rail” of American politics. President Obama, perhaps wisely, has decided not to respond to the growing clamour for discussing Social Security reform, but is now falling prey to the "damned if you do, damned if you don't" conundrum. Even some Democrats, including Sen, Joe Manchin (D-West Virginia) on the floor of the Senate last week, are beginning to question the President's lack of leadership on the topic of entitlement spending. But as he positions himself as a moderate in readiness for the 2012 Presidential campaign, it is hard to see where Obama will find the compromise on Social Security that buttresses that image.