Is compromise on Social Security reform possible? That was the underlying question that a panel at the American Enterprise Institute (AEI) tried to answer last week. Unfortunately, at this point it seems that the answer is “no.”
At issue was a plan crafted by Jeffrey Liebman, a professor at Harvard and a former coordinator of President Clinton’s Social Security reform technical working group, Maya MacGuineas, president of the Committee for a Responsible Federal Budget and a self-described independent, and Andrew Samwick, a professor at Dartmouth College and a former chief economist of the President’s Council of Economic Advisors under the current President Bush. The Liebman-MacGuineas-Samwick (LMS) plan isn’t a bad starting point for compromise, although it certainly is as far as I could go (and probably too far for many others on the right) in actually compromising. Here are the details:
1. Raising the Retirement Age. The LMS plan would gradually raise the eligibility age to 68 (at present, it will rise to 67 by the year 2022.) The early eligibility age would also rise, from 62 to 65, although that change will have little impact on Social Security’s finances since those extra earning years will be calculated into the benefits paid out. It would, however, improve the labor market.
2. Cutting Benefits. Social Security benefits are determined using a three-tiered progressive formula, with 90 percent of lower earnings, 32 percent of middle earnings, and 15 percent of upper earnings contributing to the benefit. (Go here for a more detailed explanation). Those are gradually cut to 67.6 percent, 16 percent, and 7.5 percent, respectively.
3. Increasing Taxes. The payroll tax rate of 12.4 percent stays the same, but the earnings cap is lifted gradually so that by 2017 ninety percent of earnings are subject to the payroll tax. All of this tax increase goes toward the creation of personal retirement accounts.
4. Personal Retirement Account. The LMS plan establishes a personal retirement account (PRA) equivalent to 3 percent of payroll. Half of it is carved out from the 12.4 percent payroll tax, and the other half is an add-on. The account is also mandatory in order to minimize administrative confusion.
The LMS plan works out so that what most Social Security recipients will receive under it will be about the same as what they are promised under the current system. Furthermore, it manages to do this without any transition costs — i.e., no additional debt. Finally, near the end of the 75-year actuarial period that is used to analyze Social Security, the LMS plan returns the system to surpluses.
While the LMS plan does an admirable job of incorporating some components of reform favored by different sides of the aisle, it still raises the ire of the political left. Panelist Kent Smetters, of AEI, noted that the left was sure to attack the carve out portion of the personal account as “privatization.” As if on cue, David Certner of the AARP, who followed Smetters, denounced the carve-out as unnecessary.
Since the LMS plan is a sincere effort at compromise, and since much of the left would still oppose it were Congress to seriously consider it, it would be worthwhile for those of us on the political right to contemplate just how much we would be willing to give up to achieve reform. Of most concern would be the increase in the earnings cap, a tax increase that would fall hard on small businessmen and women, some of conservatives’ biggest supporters. Could we, say, accept a plan with only an add-on personal account in exchange for only a minimal rise in the earnings cap and the rest funded via debt? Or should we demand a carve-out in exchange for any increase in taxes?
On the other hand, such an exercise may be entirely academic. I couldn’t help but get the sense from the AEI discussion that both sides are still too far apart to reach any agreement. Panelist Jason Furman, of the Center for Budget and Policy Priorities, began his presentation by stating that such panels were useful because they gave us a lot to discuss “between now and when we take up reform again in 2039.” His remark elicited the intended laughter, but one wonders if it was as prophetic as it was humorous.
David Hogberg is an analyst at the National Center for Public Policy Research. He also hosts his own website, Hog Haven.
