But such cuts might be the price for conservative support for a broader plan that includes tax increases. If liberals decide deficit reduction is so urgent that cuts in Social Security are necessary, and House Majority Leader Steny Hoyer, D-Maryland, is among those who supports raising the retirement age, there are better ways than what amounts to across-the-board reductions in benefits. Across-the-board reductions would disproportionately burden the majority of retirees, low and moderate earners for whom Social Security is the principal source of retirement income but would not encourage people to work significantly longer. It is important not to be misled by euphemistic terminology into accepting a poorly designed change.
Other proposals that would cut Social Security spending or otherwise help reduce deficits deserve consideration. The first is adoption of an improved price index to adjust benefits after they have been claimed by Social Security recipients and to index the tax system. The current CPI overstates true inflation. An improved version is available, which would more accurately insulate beneficiaries from the effects of inflation. Applying it to the tax system would better assure that personal exemptions, the standard deduction, and tax brackets remain constant in real terms, unless Congress decides explicitly to change them. A second possibility would be to extend Social Security coverage to those state and local workers who are now outside the system. This would improve pension equity and their contributions would lower the budget deficit for many years. A third change, raising the age of initial eligibility for Social Security, would not cut Social Security spending in the long run, but it would lower the budget deficit. It would encourage workers to remain economically active and increase the labor force, thereby boosting national income and revenues and, possibly, lowering spending on other government programs such as Medicare and Medicaid.
These proposals illustrate a longer menu of policies that would either lower Social Security spending or boost revenues. None is painless. All have been and will be controversial. Some may, in the end, be judged unwise. But each targets a real problem. Each can contribute to deficit reduction. Each also differs from the across-the-board cuts in benefits misleadingly described as “raising the retirement age,” that would lower all benefits indiscriminately and contribute little to reducing budget deficits in a timely way.
Click here to read the previous Capital Exchange post.
Henry J. Aaron is the Bruce and Virginia MacLaury Senior Fellow at The Brookings Institution. The views expressed are his own.