Bowles-Simpson deficit plan worse for future Social Security recipients than no action by Congress

May 25, 2012 | Alex Stone

Former Sen. Alan Simpson PHOTO: Politico

The beauty of Social Security is its simplicity. Social Security is a self-financing system that workers and employers pay into, and upon retirement (or in the case of disability or death), workers and their families receive benefits commensurate with average wages. Pretty simple, and critical for millions of Americans. So when someone tries to distort the facts about Social Security, it’s pretty easy to see. Here’s one example.

Deficit hawk and former Senator Alan Simpson, co-author of the Bowles-Simpson Deficit Reduction Plan and infamous for calling Social Security “a milk cow with 310 million tits” is making a bold claim: in order to “save” Social Security for the next generation, it must be cut – substantially.

But in a recent post, Ross Eisenbrey at the Economic Policy Institute points out that Alan Simpson’s plan would actually be more harmful to future generations than no changes what-so-ever. “Our children and grandchildren will lose critical benefits under Simpson’s plan, while [current] seniors like him are mostly protected.”

Here’s why: future benefits are already scheduled to fall to a replacement rate of about 36% for middle class earners thanks to an increase in the retirement age, and because of earlier cuts from the 1980s. But Simpson’s plan would make even deeper cuts for a worker retiring at 65, lowering the replacement rate to 28%.

Under the Bowles Simpson’s plan, if a middle class earner retires at age 65 in 2080, Social Security will replace only 28% of their pre-retirement earnings. By contrast, a 65-year old who retired in 1980 had 49% of pre-retirement earnings replaced by Social Security.

Of course, there’s an easy solution not explored by Alan Simpson that would put Social Security on sound financial footing for future generations – Scrap the Cap.

Under the Scrap the Cap plan, Social Security can pay 100% of benefits after 2033, and even modestly expand benefits today, if Congress makes one simple change: eliminate Social Security’s cap on taxable income (now set at $110,100) so high income earners pay the same tax rate as middle class workers.

The additional funding could boost benefits for low-income earners, add credits for individuals (often women) who take time from work to raise their family, and restore benefits for college students that were cut in the 1980’s.

Cutting benefits and increasing the retirement age are not the only options. Scrapping the cap – and asking everyone to pay the same rate for the same guarantee – would put the Social Security system on solid financial footing for the long-term, and allow us to keep our promises to future generations.

Learn more from Keeping Social Security Strong: Four steps we can take to preserve America’s promise for future generations

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Posted in Retirement Security, Social Security

Comments

  1. America needs tax reform badly and the Bowles-Simpson plan is the most sensible place to start.

    If Congress had implemented the Bowles-Simpson plan when it was first proposed then the tax code would already be simpler, fairer, and better suited to support economic growth. http://bit.ly/GVrWuY

    A Bowles-Simpson type “grand bargain,” which leaves no sacred cows untouched, is the best way to get our economy back on track. http://bit.ly/noTDPF

    • Alex Stone says:

      David,

      You’re talking about tax reform – this is about Social Security. The beauty of Social Security is it’s a self-financing system, which means it has no place in the debt/deficit/tax reform discussion. Social Security doesn’t contribute to the deficit – it’s paid for by workers and employers.

      The Bowles-Simpson plan would balance the federal budget by cutting Social Security benefits for people currently paying into the system. I agree that tax reform is necessary – although we may disagree on the specifics – but balancing the budget on the backs of retirees, widows, and their families is the wrong approach.

      Social Security does not contribute to the deficit, and should not be included in the deficit discussion.

  2. Alex: I agree that Social Security can and should be self-financing, but the congressionally mandated investement strategy is weak. The surpluses that have been accumulated for use of the retirees have been spent by successive Congresses and replaced by special issue Treasury bonds, which are nothing more than promises to redeem the notes with future tax receipts. At the present time, over 40% of federal spending is borrowed, with little hope of change except by a doubling of tax collections. Despite the attraction of taxing the upper 1-5%, there’s not quite enough money there to close the gap. Any other investment plan, and I’m thinking of CalPers and other state and municipal retirement systems, spreads the risk over a range of stocks, bonds, real estate and other assets. Why doesn’t Social Security do the same? Investing solely in special issue Treaury bonds is too risky.

    • Alex Stone says:

      Winslow,

      The portion of Social Security held in the Trust Fund – which will be spent down when the Baby Boomers retire – is held in the safest investment in the world: U.S. Treasury Bonds. U.S. Treasury Bonds are issued by the U.S. government to pay back investors, and the U.S. always pay our debts. That why when the market is volatile, investors always run to U.S. T-Bills.

      That’s also why Social Security is so secure. Even if the market crashes and half of the value of your 401(k) is lost, Social Security will be there. This might not be the case if Social Security made some of the same investments other retirement systems make. Even CalPERS, which is restricted to investment-grade purchasing, bought AAA-rated assets that ended up becoming toxic assets.

      Social Security provides certainty, and keeps administrative costs ~1% in part because there are no fund managers or brokers. Gambling our Social Security on risky Wall Street stocks is far too risky a proposition.

      • Winslow P. Kelpfroth says:

        Alex: I wish I had your confidence in US Treasury bonds. My investments include Treasuries, but I don’t put all the eggs in one basket and neither should anyone else. And I don’t particularly deal with Wall Street; I buy my stocks through a broker in Omaha, after studying the businesses I chose to invest in. I’m learning from my neighbor, 94 years old and rather new to investing herself, only having started when she retired 29 years ago with only social security and a modest pension. I’ve seen her portfolio, and she will never run out of money. Ever.

        • Alex Stone says:

          Winslow,

          My confidence in U.S. Treasury Bills comes from my confidence in my country and my government – as the two are intrinsically linked. But I’d like to make two points. First, the stock market is inherently more dangerous than Treasury Bonds. Too big to fail, the S&L crisis, auto bailouts, and other public bailouts of private sector corporations come to mind, as do outright failures like Enron and Lehman. The U.S. government has never defaulted, and always pays it’s debts. The same goes for Social Security. So why wouldn’t one have more confidence in U.S. Treasury Bonds than in Wall Street?

          Second, Social Security was never meant to supply 100% of income in retirement – but it is an absolutely critical piece of the retirement security pie. Part of the reason people can take risks with investments and 401(k)s is they have the backstop of Social Security – which is guaranteed. Many who thought they would be set in retirement learned a hard lesson in 2008 – the same lesson learned by people in 2001, 1991, and prior recessions. But Social Security is there for everyone, regardless of ups and downs in the stock market. Giving up that security in favor of the whims of the stock market is simply foolish.

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