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Plans Differ on Social Security Fix

Two major budget plans issued in recent weeks would affect Social Security along with other federal spending and revenues.  The President’s fiscal commission is weighing the draft recommendations of co-chairs Alan Simpson and Erskine Bowles; the panel convened by the Bipartisan Policy Center — led by Pete Domenici and Alice Rivlin — has issued its final report.  Though far from perfect, the Domenici-Rivlin plan’s Social Security proposals represent a much more balanced and better-targeted mix of benefit cuts and revenue increases. Both plans would achieve “sustainable solvency” in the program, according to the Social Security actuaries.  And some of the plans’ provisions overlap.  Both plans would:

  • gradually hike the maximum amount of earnings on which workers and their employers pay Social Security taxes (currently $106,800) until it covers 90 percent of all earnings;
  • use the so-called chained Consumer Price Index (rather than the Consumer Price Index for Urban Wage and Clerical Workers) for future cost-of-living adjustments in Social Security and other programs, as well as for indexing income-tax brackets;
  • trim benefits to reflect rising life expectancy;
  • enhance benefits for workers who received low wages through much or all of their long career; and
  • adjust benefits upward for recipients who have been on the rolls for a long time, such as 20 years.

Both plans would also gradually extend coverage to the roughly 30 percent of state and local government employees who don’t participate in Social Security. As CBPP has

, the Bowles-Simpson plan’s Social Security recommendations are highly lopsided.  Two-thirds of the Social Security savings over the first 75 years come from benefit reductions rather than revenue increases; by the 75th year, four-fifths of the savings come from benefit reductions.  As a result, the plan’s benefit reductions for people with modest incomes are much too deep. The Domenici-Rivlin plan contains extensive benefit reductions as well, but the reductions are not as deep.  That’s because the plan would significantly broaden the base for the Social Security payroll tax.
  • It would apply the payroll tax to the value of employer-sponsored health insurance benefits, phasing in that change between 2018 and 2028.  The growth of employer-sponsored fringe benefits has fueled cost pressures in the health-care system and eroded the Social Security tax base, as a rising share of workers’ total compensation has come in the form of untaxed benefits rather than taxed wages.  (This laudable proposal also appeared in Congressman Paul Ryan’s budget proposal, which otherwise is .)
  • It also would apply the payroll tax to voluntary salary-reduction plans (such as “cafeteria” plans).  The tax already applies to 401(k) plans that workers use to save for retirement.

Because of these revenue measures, the Domenici-Rivlin package doesn’t need to cut benefits as sharply as the Simpson-Bowles plan.  Domenici-Rivlin gets roughly half of its savings in Social Security from increased revenues and half from benefit reductions.