January 25, 2014


Thoughts on a Center-Left Entitlements Strategy : How we might shape Social Security and Medicare for the future (William Galston, The American Prospect)

 The principles that should guide reform are reasonably clear and uncontroversial (I hope): the measures we adopt should preserve and enhance the program's universality, progressivity, and intergenerational equity while minimizing the negative consequences for growth and employment.

The following are some steps consistent with these principles:

When Social Security began, it did not include any state and local government workers.  Today, despite legal changes, some remain outside the system.  As state and local pension systems come under increasing pressure, these workers are vulnerable.  Including all new state and local public employees in Social Security and would give them greater long-term security and would modestly bolster the system's finances during the next few decades.

Since 1977, the financial structure of Social Security has rested on the assumption that wages subject to the payroll tax would represent about 90 percent of the kinds of earnings covered under the law.  For various reasons, including the explosion of wages at the very top, taxable wages now amount to only 83 percent of covered earnings.  Over time, we should increase the cap on taxable wages to bring 90 percent of such earnings back under the cap.

Two measures would increase the progressivity of Social Security while reducing financial pressures on the system.  For low-income beneficiaries, we should institute a minimum benefit such that no one qualifying for benefits would receive annual payments amounting to less than 125 percent of the poverty line.  And for beneficiaries above the median of earnings, we should change the current formula for calculating initial benefits to reflect, on a sliding scale, consumer prices as well as wages.  This would mean that initial benefits for workers in the 30th percentile would continue to be based entirely on wage inflation; for workers in the 60th percentile, mainly on wage inflation; for those in the 90th percentile, mainly on price inflation.  Formula parameters would be set to ensure that (a) progressive indexation amounts to no more than half the package needed to restore the system's 75-year actuarial balance; and (b) workers at the top continue to receive higher benefits than those in lower earnings percentiles. 

Because employers make hiring decisions at the margin on the basis of total compensation rather than wages and salaries, steep increases in the payroll tax are likely to depress employment growth.  While the system needs more revenue, raising the payroll tax rate is not the best way to go.  Along with many others, I favor a broad-based carbon tax yielding a revenue stream sufficient at least to keep the payroll tax rate where it is now, and preferably to roll it back.  I do not favor eliminating the payroll tax altogether, however, because the link between individual contributions and individual benefits strengthens the moral basis of Social Security--and the program's political support.

Means-testing and transitioning from income taxes to consumption taxes are good initial steps, but maximizing growth requires personal accounts.

Posted by at January 25, 2014 7:57 AM

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