Social Security

It Depends On What the Meaning of "Cut" Is

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The conversation about entitlement reform in Washington usually revolves around two rhetorical poles: tax hikes and benefit cuts. The tax hikes are, well, tax hikes. But as often as not, the so-called benefit "cuts" are actually reductions in the projected growth of benefits.

That's an important distinction to keep in mind as we enter the coming deficit-reduction plan season. A lot of the proposals we'll see between now and the end of the year will include significant changes to Social Security. And a lot of those changes will be referred to as cuts, but will actually be reductions to the growth of benefits.

Ahnuld ponders the meaning of the word "cut."

Take yesterday's Simpson-Bowles draft proposal. Read through this morning's headlines, and you'll see quite a few uses of the word cut. And as progressives are always keen to remind us, the American public really doesn't like the idea of cuts to Social Security, especially when the alternative is tax cuts on the rich.

That's why it's worth looking into the actual details of the plan. Charles Blahaus, one of Social Security's two public trustees, has a great explainer on how the proposal would work. Here's a rundown of the major changes that it calls for:

  • An increase in the Social Security payroll tax cap so that it would affect 90 percent of all wages. Right now, the cap is set at about $106,000 a year, so income over that figure doesn't get taxed. Bowles-Simpson would raise the cap to somewhere in the neighborhood of $175,000 a year.
  • A change in the benefit formula so that high earners would get significantly less and middle income earners would get slightly less. This is where the biggest savings come from.
  • A change in the way cost of living increases are calculated so that they would rise with the consumer price index.
  • A change in the retirement age that indexes it to life expectancy. The result is a rather slow change; according to Blahaus it would rise by about one month every two years.

In addition, the plan also increases the minimum benefit and provides added benefits for anyone who has been eligible for 20 years.

The result, as Blahaus shows, is actually a fairly progressive proposal. The tax cap rises, capturing more income from workers making six figures. Benefits still rise faster than inflation for median-wage workers. Indeed, according to Blahaus, thanks to extra benefits for the needy, the bottom fifth of the income distribution would actually see benefits rise more rapidly under this plan than if you left the current plan in place and financed it entirely through tax hikes. 

So sure, it's true that some people would see reduced benefits versus a situation in which there were no changes to the plan. But the biggest reductions come out of benefits that would have gone to high earners. And the poorest Americans would get more. Yet progressives and liberal defenders of Social Security still aren't pleased.

That's despite the fact that the Bowles-Simpson plan is a step toward ensuring that the program is fiscally sound, meaning that Americans could more reasonably count on these benefits being around (though obviously they'd still be subject to political manipulation down the road). That's not the case with the program we have today. One of the progressive mantras used to defend the program is "hands off Social Security," which implies doing nothing to the program. But that's obviously not a realistic option, at least not unless you're also for big tax hikes. As Blauhaus shows fairly convincingly, the program's fiscal outlook just isn't sustainable. If the current benefit formula is kept in place, costs skyrocket: In 2008, the program ate up about 11.6 percent of each worker's dollar earned. In 2035, without changes, that figure is projected to be about 16.7 percent. "You're either for changes to the benefit formula, or you're for big tax increases on the next generation," he writes. "If you oppose benefit formula changes on the grounds that they are 'cuts,' then you are for big tax increases. Period."

Like Blahaus, I would prefer to see a plan that does not include any tax hikes. But the Simpson-Bowles proposal has quite a bit going for it, at least in comparison with the broken program we have today.