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A Bona Fide Social Security Fix

[Guest post by Noam Scheiber:]

I'm of the view that it's a bit futile to worry about Social Security's long-term actuarial balance before you've figured out what to do about Medicare and Medicaid, whose contributions to our deficits over the next several decades are far, far bigger. (Though given that they had to enact some tricky Medicare cuts to help pay for health care-reform, I see why administration officials prefer to brainstorm about Social Security these days.) I'm also skeptical of the politics of Social Security reform, given that conservatives love urging Democrats to make fixes that would strengthen the program's trust fund, then turn around and deny that such a trust fund exists.

Still, if we're having a conversation about how to shore up Social Security over the long-term--and Obama's deficit commisison may thrust that conversation on us--Jed Graham of Investor's Business Daily has a pretty smart proposal. The basic idea, which he calls "Old-Age Risk-Sharing," would be a series of cuts that hit young, affluent retirees hardest, then phase out completely over 20 years, so that older retirees receive all the benefits they'd get under the current system. (Graham elaborated on this in a recent book called A Well-Tailored Safety Net.) The beauty of the approach is that low-income workers--typically the people least able to work beyond their early 60s because their jobs are physically grueling--would see little in the way of cuts, while more affluent workers would have an incentive to keep working, something many are capable of. To borrow Graham's example:

[A] career-average earner ($42,000 in 2009) retiring after 2032 would face an upfront benefit cut of 20%, which would gradually unwind over 20 years to keep the safety net intact. However, thanks to enhanced incentives for delayed retirement, that worker could fully overcome this upfront cut and attain an extra measure of income security in very old age by working two years past the official retirement age.
A lower earner would face a 10% upfront cut that could be overcome with one extra year of work, while a high earner would need to work three extra years to overcome a 30% upfront benefit cut.

In general, Graham shows how this is a much more nimble approach than, say, raising the retirement age or early-retirement age, which hits people in those grueling jobs pretty hard. Though his proposal accomplishes something similar, it distributes the additional work years to people best able (and most willing) to shoulder them, while ensuring that no one will be destitute in very old age.

I might like to see the cuts phase out for low-income workers a little sooner than 20 years (since they're actuarially less likely to live that long), but it's a pretty reasonable place to start the discussion--assuming we have to have it.

Update: Graham e-mails about that last point:

Old-Age Risk-Sharing is only a part – though the most critical one – of a broader proposal, which includes a more generous minimum benefit tied to the poverty level (adjusted for wage growth). Even factoring in upfront reductions under Old-Age Risk-Sharing, the lowest earners would see a net increase in benefits vs. promised levels. Initially that increase would be modest, but would grow over time as Old-Age Risk-Sharing reductions phase out.