IT'S EMBARRASSINGLY EASY TO FIX:

Safer Social Security (PETER ORSZAG, 11/15/10, NY Times)

The proposal put forward last week by Alan Simpson, the former Senate Republican leader, and Erskine Bowles, who was a White House chief of staff under President Bill Clinton, has four main elements.

First, it would make the payroll tax more progressive by increasing the maximum earnings level to which it applies. Over the past several decades, as higher earners have enjoyed particularly rapid wage gains, a growing share of their wages has escaped the tax because they have been above the maximum taxable level. Today, about 15 percent of total wages are not taxed. The chairmen recommend gradually raising the maximum threshold so that, by 2050, only 10 percent of total wages wouldn’t be taxed — decreasing the 75-year Social Security deficit by more than a third.

Second, Mr. Simpson and Mr. Bowles recommend indexing the age at which full Social Security benefits can be received to increases in life expectancy. This age is already increasing to 67, and under the proposal the gradual rise would continue, to 68 by 2050. A better approach would be to leave the full benefit age alone and instead directly reduce the monthly benefits as life expectancy rises, to keep average lifetime benefits roughly constant. But the chairmen’s approach would by itself narrow the Social Security gap by about a fifth.

The third suggested change is to make the formula for determining Social Security benefits more progressive, by reducing future payments to high earners while increasing them for people at the bottom. These adjustments would close at least another third of the projected deficit. And they would also help offset a little-noticed trend: affluent Americans are increasingly living longer than others. This pushes the Social Security system toward being less progressive, as higher earners collect benefits for more years.

Finally, Mr. Bowles and Mr. Simpson would have Congress adjust the cost-of-living index that’s used to determine annual increases in Social Security benefits so that it would measure inflation more accurately. Making this switch would fill in more than a quarter of the long-term deficit, because the new index would grow more slowly.