Now that the recommendations of George W. Bush’s Social Security task force have been quietly shelved, it’s time to recall that there are simple and equitable solutions available to deal with Social Security’s potential future problems resulting from the retirement of millions of baby boomers.
Five years ago, four former senators–Alan Simpson of Wyoming, John Danforth of Missouri, David Pryor of Arkansas and I (two Democrats and two Republicans)–met on the campus of Southern Illinois University with the deputy chief actuary for Social Security. After looking at many possibilities, we recommended two changes:
First, all income should be taxed for payments into the Social Security Retirement Trust Fund. Today income up to only $84,900 is taxed. While the benefit payments are mildly progressive, the taxes are regressive. Most Americans pay more into Social Security than to the IRS. Covering all income would not only help Social Security, it would reduce the growing gap between those more fortunate and those less fortunate. If you earn $1 million a year, your increased tax would be less than $57,000. You could afford that. And you would pay it knowing that you are helping insure a more secure old age for your children and grandchildren.
Second, the Consumer Price Index, which is used to measure inflation for the purpose of determining cost-of-living increases in Social Security benefits, should be corrected. If the price of beef goes up, more people buy chicken, but the cost of food in the index reflects the price of beef–substitution is not considered. Similarly, although drug costs have shot up, boosting the inflation rate, the index does not reflect that generic drugs can be substituted, lowering the cost of prescriptions slightly. If adjustments in the CPI are made, Social Security benefits could continue to rise with inflation, but the rate of increase would be slightly reduced.
Adopting just the first of our proposals would bring in most of the funds needed to meet increased Social Security costs. Adopting both of them, according to the actuaries, would keep the retirement fund solvent for seventy-five years, barring an economic disaster. Neither of these proposals is popular. Political parties don’t like to do unpopular things, but a bipartisan Congressional commission could reverse this. It should be created. The longer we wait, the more difficult it will become.
The alternative advocated by George W. Bush and his carefully rigged commission–that a portion of Social Security payments be designated for investments in the stock market–should be a nonstarter. It would be a bonanza for stockbrokers but could hurt most retirees. Has anyone tabulated the cost of auditing millions of private accounts? Does the performance of the stock market during the past two years argue for subjecting people already living on the margin to greater risk? And not simply the experience of the past two years. From December 31, 1964, to December 31, 1981, the Dow Jones average went up less than 1 percent for all those seventeen years. The inflation increase for that period was 95 percent. Interest on government bonds looks good compared with that performance.
The wildest scenario came from a former Reagan Administration economist, Martin Feldstein, who suggested that the federal government should guarantee these investments. I would love to have the government guarantee my investments, but the S&L bailout would look tiny compared with what that idea could cost.
Social Security has a problem. Let’s face up to it and deal with it in a way that makes our tax system slightly more progressive.