Hank Aaron’s Chinese menu: Fixing Social Security at the NASI

The National Academy of Social Insurance hosted a decidedly unusual trio of luncheon speakers at its annual conference last week. Henry J. Aaron of the Brookings Institution, keynote, was there to unveil a new plan he’s devised to solidify Social Security’s funding for the next 75 years, if not beyond. Nancy J. Altman, president of Social Security Works, and Jason Fichtner, a senior research fellow at the Mercatus Center at George Mason University, were on hand to respond to and discuss Aaron’s proposal.

Aaron has perhaps the deepest knowledge of the Social Security system – and social insurance in general – of anyone alive today. Altman is also a leading expert and a longtime, passionate defender of the program against right-wing attempts to dismantle it. Fichtner served in the Social Security Administration under George W. Bush and is a critic of the program who has argued that it crowds out private savings and offers negative incentives to work and who advocates stabilizing its finances by cutting benefits while cutting payroll taxes.

Aaron and Altman have never been friendly to such ideas. Normally, that would place them on one side of the Social Security discussion and Fichtner on the other. That wasn’t so last week.

“The first thing I thought when Hank sent this to me was, ‘Somebody’s trying to spoof me,’” Fichtner said when his turn came to reply. Details aside, he welcomed a long-time defender of Social Security allowing that Washington needs to put aside its bickering, each side sacrificing a bit of its political purity to keep the system going. The time has come, in other words, to revive a bipartisan conversation about the future of Social Security that has been largely dormant since the Bowles-Simpson Commission of 2010. The rising federal deficit and the “entitlement crisis” are starting to have an effect on public perception, Fichtner warned. Confidence in the system is eroding. “It’s our challenge, not our children’s” to solve it.

This was essentially the same message Aaron delivered when he laid out his plan to restructure Social Security’s finances. The SSA’s actuaries show the trust funds that backstop the Old Age and Survivors and the Disability Insurance programs running dry in 2034 – “maybe a bit earlier or later, but come it will,” Aaron noted.

That’s the wrong way to look at the issue, Altman replied, disagreeing forcefully. With no changes in its funding arrangements, Social Security will only cost 1% more of GDP at the end of this century than it does today, she pointed out. “Other industrialized countries today spend more on their [retirement] programs than that.” The Social Security discussion “is about values, not affordability,” and “though solvency is important, it is simply a means to an end”: to provide security to working people.

Aaron, Altman, and Fichtner were worthy representatives of a mating dance that has been performed, off and on, in Washington ever since the Clinton administration. On the right are Republicans aiming to whittle down Social Security’s benefits package, ultimately turning it into a means-tested and politically vulnerable “welfare” program. On the left are progressives who want Social Security expanded and updated to address the needs of a changing employment structure and the disappearance of traditional defined-benefit pension plans. In the middle, but leaning distinctly to the right, are Democratic deficit hawks who would love to make a deal with Republicans on Social Security but have never found a formula the progressives couldn’t attack.

Aaron, although he has disagreed with progressives over the years, has never been regarded as part of the center-right grouping. Does his new proposal change that? Let’s look at the details.

One thing jumps out right away: Aaron, like every centrist Social Security reformer since the 1983-83 Greenspan Commission, is addressing the way the system itself is funded, not whether it is affordable in a larger economic sense. So he’s addressing the issue through the same framework as Fichtner, but not Altman. Overall, he estimates his plan would flip the trust finds from a shortfall of 2.83% to a positive balance of .10% over the next 75 years, and from a 4.50% deficit in the 75th year to no balance, positive or negative. He says nothing about the impact of his proposal on the economy or on workers and retirees. There are 12 elements to Aaron’s plan (some of the details are not fully worked out):

  • Gradually raise the limit on earnings subject to payroll tax until the cap covers 90% of earnings.
  • Gradually incorporate employer contributions to health insurance and voluntary salary reduction plans to the taxable wage base. (This is the biggest revenue-raiser in the proposal.)
  • Gradually change the current benefit formula to provide more generous benefits at the lower bendpoints and more at the higher ones – effectively, reducing the economic value of Social Security for the affluent.
  • Updating the special minimum benefit to provide payments at least equal to the federal poverty threshold.
  • Add all newly hired state and local government employees to Social Security.
  • Allow one parent of children to drop out for up to three years from the computation of average life-time earnings for children under 5 – eliminating the penalty they would otherwise suffer for taking time off from work to raise children.
  • Gradually reduce the spousal benefit from half to one-third of the benefit of the higher-earning spouse and cap the benefit equal to the spousal benefit for an average worker at the 50th percentile over his or her career. (Yes, this gets a bit complicated.)
  • Increase benefits for retired or disabled workers and survivors who have reached a certain age – generally, older individuals – by increasing cost-of-living adjustments or adding a flat dollar amount.
  • Counting children of survivors and disabled workers in determining family benefits until they reach 18, and retain eligibility until they reach 22 if they continue their education.
  • Tax Social Security benefits in the same manner as private pensions (including in gross income all benefits in excess of contributions from income previously subject to tax).
  • Dedicate estate and gift tax revenues to Social Security after revoking the cuts made in the new Republican tax law.
  • Raise payroll taxes equally on employer and employees by 0.5 percentage points in 2060 and 0.85 in 2090 (the far end of the 75-year period).

After Aaron made his presentation, Altman and Fichtner offered strikingly different comments – comments that typified the politics of Social Security “reform” for as long as I’ve been following it (which amounts to decades). Altman analyzed it point by point, noting the impact on the people the system is supposed to serve. Fichtner addressed hardly a single concrete item in Aaron’s “Chinese menu” of options, instead hammering home the argument that something needs to be done to stave off insolvency and that for political reasons, the solution can’t be tax cuts-only or benefits cuts-only. “Any plan must be bipartisan, based on compromise,” he said.

Washington loves bipartisanship – in swampland, it’s generally considered a synonym for courage – but much of the time, it means running roughshod over vulnerable or defenseless populations, either at home or abroad, all in the cause of maintaining the political equilibrium. Aaron’s proposal contains some very welcome fiscal changes, such as raising the earnings cap, taxing health insurance and other employee benefits, adding all state and local workers into Social Security, raising benefits for the old-old (although retirees at all age levels could use a boost), devoting a revived estate tax to Social Security, and ending (or at least reducing) the caregiver penalty. I was especially glad to see that he wants to revoke the Reagan-era reduction in the maximum age for survivor coverage from 22 to 18.

However, Aaron also proposes reducing benefits for more affluent workers – making Social Security more like a classic means-tested program – and reducing spousal benefits. This, he says, would affect very few people, which suggests it’s more a bargaining chip than a core proposal.

Which is what makes me uneasy about the Aaron plan as a whole. Afterward, I asked him if he saw his package more as an endpoint or an opening gambit for negotiations with the likes of Fichtner. He said it was the latter, implying that if anything, the final result of a legislative process that began with his 12-item menu would be significantly more conservative.

How much more? Fichtner argued that Republican and (center-right) Democrats would have to meet somewhere in the middle because a plan that leaned too heavily on either tax cuts or benefit reductions wouldn’t fly. What might fly in Washington may be a lot less than tolerable if it’s presented honestly to working America, however – indeed, it often seems cut off from their concerns.

Progressives don’t oppose benefit cuts just because benefit cuts are against their principles. Social Security today replaces less and less income than it did 35 years ago – in part because of the changes enacted with the Social Security Amendments of 1983, one of Washington’s proudest bipartisan moments. More and more of each retiree’s monthly benefit goes toward health care, in one form or another – not what the architects of the system intended.

Altman put her finger on what was missing from last week’s discussion when she noted that women reap relatively less than men from Social Security not just because the current rules penalize them for taking time off from the workforce, but because of stubbornly persistent wage discrimination. Likewise, workers are entering retirement with little or no resources to support them, thanks to economic upheavals, the cratering of manufacturing sector, and the decline of “traditional” lifetime employment. None of these problems has anything directly to do with the structure of Social Security, but they affect both the system and the people who depend on it (as do other issues, such as immigration and education).

Early in his presentation, Aaron noted that he was speaking “as an analyst and a political advocate.” He’s right that updating Social Security is as much a political as a technical problem. But there’s more than one kind of politics. One is the politics practiced in Washington, which seeks to balance interests, only one of which is the needs and desires of working people. (There’s also the Pentagon, of course, and the fossil fuels industry and the pharmaceutical industry and so on.) The other is the politics that emerges from those needs and desires themselves.

Think-tank Washington is averse to that kind of politics, which can be hateful (viz., the alt-right) as well as hopeful, and so it tries hard to turn every issue into a technical puzzle or an opportunity to satisfy a group of donors or the lawmakers’ “base,” to the point of ignoring the impulses behind it. The recently passed Tax Cuts & Jobs Act is one example, and various failed bipartisan proposals to restructure Social Security over the past three decades provide others.

Aaron acknowledged early in his presentation that despite their doubts about the government’s ability to keep its promises through Social Security, the public love the system and would be happy, according to numerous polls, to see their taxes raised to support it. That tells us something about how vital those monthly payments are, and how little margin households have to sustain a reduction.

Social Security reform is reaping what it sowed. The (effective) benefit cuts that resulted from the 1983 Amendments, along with the decline in the payroll tax revenue base that resulted from decades of ignoring wage stagnation and the shift from cash compensation to benefits, planted the seeds of a retirement crisis. It’s too late to have a realistic discussion (realistic from the perspective of working households) about “reforming” Social Security in isolation from the other issues facing present and future retirees.

While many of Aaron’s proposals would improve the system, even beyond the objective of balancing its books (and some would not), the first conversation we need to have about Social Security’s future is not about solvency. It’s about the structure of retirement and old age support itself, and the conditions and programs that help define working people’s lives in the years leading up to retirement. Can we have a fiscally robust Social Security system if wages continue to stagnate in most years? If women’s and non-white workers’ pay continues to lag? Even if Congress ordered everything on Aaron’s menu?

Social Security was set up as an income support, not as a full-fledged pension system. If the employment and compensation structure for working people that’s been put in place over the past 40 years doesn’t change, this will have to be rethought. This discussion was just beginning, by way of proposal by Sen. Bernie Sanders and others to expand Social Security, before the 2016 election silenced them. But that outcome doesn’t change the fact that the context within which Social Security exists and functions must be considered before we think about operating on the system itself.

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