Economics, Entitlements

Using chained CPI is a bad idea, but we’re losing our bearings on Social Security

Photo Credit: Shutterstock

Photo Credit: Shutterstock

I don’t think cutting Social Security COLAs by using the chained CPI is a good idea. It undermines a key advantage of Social Security and targets benefit cuts on the oldest and poorest.

But some of the responses in defense of Social Security are getting downright wacky. We have James Kwak arguing that cutting Social Security benefits is the same as raising taxes. We have Josh Barro claiming that Social Security is our best retirement savings vehicle program and that we should expand it. And we have the New America Foundation obliging Josh, by proposing that we increase Social Security spending by 66%.

There are many points you could make in response — say, that Social Security’s social insurance protections for the poor are actually pretty weak — but since we’re talking big picture budgeting, let’s stick to the big picture.

A pay-as-you-go program like Social Security requires a strong economy if it is to continue paying benefits even as the ratio of workers to retirees declines. Yet in multiple ways, the current Social Security program works at cross-purposes with itself, weakening the economy that supports it.

Social Security taxes reduce labor supply. Raising the payroll tax from 12.4% to 15.0% — about what would be needed to restore 75-year solvency — would reduce annual hours worked by around 6% for middle-aged individuals and even more for near-retirees.

Social Security punishes long work lives. Social Security’s benefit formula punishes individuals who choose to delay retirement. A typical near-retiree receives only 2.5 cents in extra lifetime benefits for each dollar of additional taxes he pays into the program.

Social Security lowers personal saving. Research suggests that middle and high earners reduce their personal saving by about two-thirds the value of the Social Security benefits. Given that Social Security owes some $24 trillion in benefits that have been earned but not yet paid out, the capital stock is a lot smaller — and the economy weaker — due to these incentives.

Social Security reduces fertility. Social Security’s financing is massively sensitive to the birth rate. Roughly half the decline in birth rates in developed countries may be attributable to the increasing size and cost of pay-as-you-go pension plans. Other research finds that “an increase in government old-age pensions is strongly correlated with a reduction in fertility.”

These aren’t small effects and they’re not unimportant. They’re central to the economy’s ability to support Social Security, not to mention everything else. Protections for the poor aren’t the issue here. The issue is a program that induces even high income Americans to get a third of their retirement income from the government and spend a third of their adult lives in retirement. Reform doesn’t mean indiscriminate cuts like the chained CPI. But it doesn’t mean uninformed defenses of the current program, either.

2 thoughts on “Using chained CPI is a bad idea, but we’re losing our bearings on Social Security

  1. Good points here. Another problem for Social Security moving forward is that it’s not sufficient (as the only retirement mechanism with a paid home, for example) for current levels of local property taxes. What is becoming a problem for individuals is also becoming a problem for lots of community economic structures.

  2. Social Security needs to be fixed and the program needs to be self-sufficient from FICA taxes and never ever use general revenues but right now it has almost nothing to do with the budget issues that do need to be addressed right now and including it in the panoply right now dumbs down the prioritization of which things to deal with now and which to deal with next – as we cannot fix everything right now anyhow but forcing things to be fixed now that don’t need it right now is dumb.

    SS was never envisioned to be the primary retirement mechanism.

    It was only intended to provide “social insurance”, a safety net for those who had no other means and who would become wards of other taxpayers and so the less of the two evils was a mandatory individual mandate – to protect other taxpayers.

    We have many other excellent ways for people to layer on top of SS but how many actually do?

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