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Saturday, November 23, 2013

Fixing Social Security

I am a progressive but I do not take a hard line about making changes in Social Security. I just object strongly to the changes that the President has proposed (Paul Krugman, Expanding Social Security. New York Times, November 22, 2013).).

Although Social Security does not contribute to the deficit, it is not yet on a firm financial basis.There are several ways to improve its finances but the one proposed: adopting the chained-CPI is the one that will harm the poorest recipients most. Chained-CPI does not reflect the reality of price changes that affect seniors. It severely underestimates them.
A better change, on the input side, would be to remove or raise the cap on Social Security earnings.

Paying out, we could change the tax treatment of Social Security earnings. Rich Americans only pay income tax on 85% of their Social Security income. One hundred percent of Social Security income should be included in gross income. The impact on low income seniors would be negligible; on rich Americans it would be a modest increase in taxes.

Paying out, we can also look at the payout rate. Despite being regressive at the paying in stage, Social Security is quite progressive when paying out.  Right now the Social Security formula for computing one's pension depends on Average Lifetime Earnings (ALE). Each year's earnings are converted into constant dollars and then a monthly average is calculated. Based on this, Social Security pays you:
- 90 percent of the first $767 of monthly ALE
- 32 percent of monthly ALE between $768 and $4,624,
- 15 percent of monthly  ALE above $4,625 to the cap of $9,475.
Changing the breakpoints, increasing the number of breakpoints (say new breakpoints at $3,000, at $6,000, and at $8000), or reducing the percentage payout at the highest level would maintain payouts for the poorest in our society, but reduce expenditures to those who can most afford it.

Both of these would affect higher income recipients while leaving the poorest unscathed.

Sent to New York Times

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