The Diamond-Orszag plan for "reforming" Social Security calls for reducing benefits on youngsters to make up for people living long—and the younger you are now, the more the benefit reduction. Their plan is to make up half of the shortfall (a shortfall which may not even exist, we’ll come back to that) by reducing benefits, and half of it by increasing FICA taxes. They do intend to increase the amount of money that richer people pay, modestly, and they also intend to reduce benefits for wealthier folks by more than they reduce benefits for those who have more average earnings.

Diamond and Orszag claim that since wages are increasing, in real inflation adjusted terms, this will still mean that young folks wind up earning more:

An average earner who is twenty-five years old in 2004, for example, would still receive an annual inflation-adjusted benefit at retirement that is more than 25 percent higher than the benefit of an average earner who is fifty-five years old. The reason is that Social Security benefits increase when career earnings rise, and today’s twenty-five-year-olds are expected to have higher career earnings than today’s fifty-five-year-olds because of ongoing productivity gains in the economy. . . .

productivity-and-wages.thumbnail.jpgThis is simply not the case, as it assumes that productivity gains are passed onto median wage earners, which is not the case and has not been for some time (see the chart to the right). On an individual basis, hourly wage earners (the people who need SS the most) have only seen minor wage increases for 30 years (at best). Households have, but that is because more and more households are dual earner.

It is therefore unlikely that reducing the percentage of wages won’t lead to absolute benefit reductions, unless Diamond-Orszag are somehow convinced that the productivity-wage connection which hasn’t operated for thirty years is suddenly about to start up again. So the result of their reductions will be both an absolute and a relative decline in social security payments for most people.

Goods producing non-supervisory wages

Goods producing non-supervisory wages

Now the plan has some good parts, for example Diamond-Orszag want to increase benefits for people with low lifetime earnings and for widows and to shift disability payments so that workers who are disabled young get more money, which is appropriate, since they’ve lost more of their lifetime’s earnings (which tend to peak in late middle age, if your career goes well.)

I did find this little bit amusing:

Like our balanced approach, these modest reductions in benefits are in keeping with the tradition set in 1983. For example, the 1983 reform reduced benefits by about 10 percent for those who were twenty-five years old at the time of the reform, a slightly larger benefit reduction than under our plan for average earners age twenty-five in 2004.

Yes, well, just because workers got stiffed in 1982 by Greenspan et al doesn’t mean we should do it again.

All of this, though, is somewhat beside the point. Here are the bottom lines. According to the Social Security Trustees own projections (which are dubious, as are any multi-decade projections), Social Security will:

  • Take in more money than it is spending until 2017
  • Including interest on the SS trust fund, not be spending more money than its income till 2028
  • Not run out of money till 2041

Now Diamond-Orszag recognize there’s no crisis. Instead they say "there’s a minor problem and we can fix it with some tweaking." But even that minor "problem" is based on a long term projection which is dubious at best. We’ll have more on this later, but if you, say, just assume as part of your model a 1% more productivity increase per year, average, there is no shortfall. And yes, any long term estimate of productivity growth (or almost anything else) is just a guess.

The Diamond-Orszag proposal for fixing SS is hardly the only way to do it. You could simply remove the FICA cap and that would fix it. You could, since productivity is no longer properly going to wages as it did in the early post-war period, simply start taxing corporate profits to make up the difference. You could, as Diamond and Orszag themselves note, take estate tax money and use that to fund the shortfall.

There are plenty of ways to "fix" SS, even assuming it needs a fix (which is not clear) which don’t require benefit reductions or increasing FICA taxes on people earning median incomes. And there are ways to deal with the issue that are much more liberal. Perhaps we should push those? Or perhaps, instead, we should go back to "there is no crisis", because a problem that might, and only might, occur in 32 years, is hardly a pressing issue.

FDL will follow up on this issue some more. We’ll talk about why people want to reform SS (hint: it’s a money grab, even if individual accounts aren’t included) and we’ll talk about the problems with projections and better ways to fix SS. Because SS is too important to leave to people who think liberalism means reducing the benefits from a program like SS.

Footnotes:

1) Note that the Diamond-Orszag plan does not (as previously reported by Jane) propose to increase the age at which people qualify for Social Security.

2) I have used goods-producing workers, not because they are atypical (they aren’t), but because data on them goes back to 1947, so you can see the post-war rise, and how small the changes are after the rise stopped. A chart of non-supervisory, non-goods workers from 1964 on looks like this:

Wages from 1964, Real 1982 Dollars

Wages from 1964, Real 1982 Dollars