A progressive way to cut Social Security

Henry J. Aaron for The Atlantic, on why Medicare and Social Security need to be cut at all:

But while reports of a crisis are overblown, and conservative proposals to solve it are draconian, progressives do need to think about how best to reform the entitlement programs. The simple fact is that Social Security, Medicare, and Medicaid form a very large and growing part of the federal budget — currently 50 percent of noninterest spending. Furthermore, the phrase “entitlement crisis” has been repeated so often and so earnestly that denying its reality is more likely to damage one’s own credibility than to dislodge what is actually profound confusion. Cuts in Social Security, Medicare, and Medicaid benefits are neither necessary nor desirable and should be resisted, even as reform of the whole health-care delivery system proceeds. But political and economic realities — the need to secure majority support for measures to lower deficits once economic recovery is well advanced — make some cuts highly likely. It behooves supporters of social insurance to have in reserve program cuts that would do the least harm and might advance other meritorious objectives.

He also describes the problem with plans put forward by Paul Ryan and friends:

Fiscal Jeremiahs warn that the only way to deal effectively with current deficits is to cut back Social Security, Medicare, and Medicaid years in the future. The full House of Representatives has twice passed budget plans, crafted by Budget Committee Chairman Paul Ryan, that would replace Medicare with a voucher that beneficiaries could use to buy either private insurance or a plan like traditional Medicare. The Ryan plan would also convert Medicaid into a block grant at spending levels well below what is projected under current law. The grants would not increase during recessions when Medicaid enrollments tend to spike. States, pinched by falling revenues and rising service demands, would have to cut benefits just when they are most needed.

After giving a history of what changes to Social Security have been made, he describes how to fix it with only revenue increases:

Since pension benefits are low compared to those of other countries and are falling relative to earnings, exclusive reliance on increased revenues is where discussions of how to close the projected long-term deficit should begin. Those revenues could come from increases in the current payroll-tax rate, from raising the cap on earnings subject to tax, or from extending the tax to currently exempt compensation. The payroll tax is now 4.2 percent for workers (though the rate is expected to go up to 6.2 percent in 2013 at this writing) and 6.2 percent for their employers. Earnings above $110,100 in 2012 are exempt, as is compensation channeled into the increasingly popular medical savings accounts, dependent care accounts, and transportation reimbursement plans. Gradually raising the fraction of earnings subject to tax from the current 84 percent of earnings to the historical target of 90 percent of earnings, boosting the payroll-tax rate from 6.2 to 7 percent, and taxing currently exempt cash compensation would fully close Social Security’s projected long-term financing gap.

Of course, that would never fly. Even with an entirely Democratic Congress, some representatives would demand spending cuts. That can still be done in a progressive manner:

Reducing benefits only for comparatively high earners who claim them early — say, those with earnings in the upper 30 percent of the Social Security earnings distribution, which means those with lifetime average earnings in 2011 above $57,066 — would maintain benefits for lower earners who are least likely to have the financial means to support themselves if continued work becomes burdensome or impossible. Depending on the size of the reduction, this change could cut Social Security’s long-term funding gap by up to one-half.

Overall, it seems like a balance of these two could satisfy the realities of our long-term budget and the demands of progressives. Unfortunately, the Tea Party has managed to convince many Republicans that two conflicting ideas are true: that the United States has become an overbearing nanny state because of our generous safety net, and that any attempts by liberals to actually fix our social insurance programs is an attack on the elderly.

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