The Social Security Double Standard

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By Evan Soltas

The political conversation around Social Security is filled with double standards. Its trust fund is a national asset one minute and debt by another name the next. The 12.4 percent payroll tax on incomes of as much as $113,700 in 2013 is a dedicated source of funding -- until, when politically convenient, the money becomes fungible for economic stimulus.

And yet, the most potent double standard may be how parties define the purpose of the program itself. Is it a publicly run, universal, national retirement-savings program? Or is it a safety net for the elderly and disabled who need it?

When you ask them in the abstract, Republicans generally think of Social Security as welfare. Democrats see it, contrastingly, as a savings program that represents an integral part of the postwar U.S. social contract. But the actual policies of both Republicans and Democrats draw inconsistent pictures of how they view Social Security.

Republicans are particularly fond of increasing the full-benefits retirement age and applying more aggressive means-testing of benefits. They also want to adopt the chained consumer price index, an alternate measure of prices, which Democrats appear to have signed on to already. Democrats would prefer to raise or eliminate the wage-base cap on income that incurs Social Security taxes. Republicans oppose lifting the wage cap, and Democrats have mounted objections to increasing the retirement age or increasing means-testing.

Raising retirement ages is something you would do if you thought of Social Security as a universal retirement-savings program rather than a safety-net program. Reducing the number of years the average person could draw benefits would be a relatively straightforward way to reduce the program's outlays.

The problem with raising the retirement age is that it is deeply regressive. The rich live longer than the poor and the gap between rich and poor in terms of life expectancy has expanded sharply over the last three decades, so raising the retirement age takes a much larger fraction of benefits away from poor retirees than rich retirees. Since it would strip benefits from the program's intended beneficiaries, regressive cuts run completely contrary to the philosophy of Social Security as welfare. If Republicans want to make Social Security into a more narrowly defined, needs-based aid program, then raising the retirement age misses the point.

Means-testing, on the other hand, would reduce benefit outlays to retirees with higher lifetime incomes. Social Security already holds down the size of checks to rich retirees through two "bend points" in the benefits formula. Retirees get 90 percent of the first $791 in their average monthly earnings over their career in retirement benefits, 32 percent of the next $3,977, and 15 percent of earnings up to the wage-base maximum. Republican proposals to means-test the program "bend" the benefits formula curve into negative territory -- which means Social Security benefits would be scaled back beyond a certain level of income.

Means-testing is a proposal you should like if you see Social Security as a safety net -- and one you should oppose if you see Social Security as a retirement-savings program. If it's a safety net, means-testing protects the poor by curtailing benefits for retirees who can pay their own way. If Social Security is a retirement-savings program, however, aggressive means-testing will end all sense of proportionality between what you pay in and what you get out.

Democrats are no more consistent than Republicans as to whether Social Security is a welfare program or a savings program.

One of their proposals, increasing or eliminating the $113,700 wage base, would be exclusively a levy on higher earners. It would make the Social Security tax much more progressive than it is today. It would also make Social Security into a welfare program and not one for retirement savings. Welfare programs aren't funded by their recipients: There is a redistributive transfer. A retirement-savings program isn't a retirement-savings program when the contributions end up transferred to others. Nobody thinks of Medicare or Medicaid as health-savings programs for this reason.

Democratic resistance to means-testing, however, contradicts this implied view of a Social Security safety net. Means-testing would eliminate benefits to high earners who meet no standard welfare measures of need. Republicans who want to make Social Security into a welfare program, likewise, should recognize that the poor can't fund their own program.

Neither party's approach consistently treats Social Security as a retirement-savings program or a welfare program, but the road ahead will require committing to one of these two visions. Yes, the finances of Social Security are much less dire -- and easier to fix -- than federal health programs. But doing so will require policy choices that reflect what we think Social Security is meant to be.

Evan Soltas is a contributor to the Ticker. (Follow him on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.

-0- Dec/19/2012 18:08 GMT