In recent years, Social Security has become a major concern for both lawmakers and the general population. Because of population shifts, the US Government needs to implement policy to close the gap between costs and benefits in order to make promised payments. I evaluated policy alternatives using the criteria of Economic Impact on stakeholders, Effectiveness in closing the deficit, and Equity between economic groups. These alternatives consisted of indexing cost of living adjustments (COLAs) to the chained Consumer Price Index (CPI), removing the cap on taxable income, and raising the retirement age to 69. After evaluation, I recommend removing the cap on taxable income. Due to the time sensitive nature of this issue, it is critical for your administration to address this issue and ensure the economic security of the American people.
In 1935, President Franklin Roosevelt signed the Social Security Act as part of his efforts to alleviate the economic depression of the 1930s (Historical, n.d.). The intent of the act was to keep the elderly out of poverty after retirement (Historical, n.d.). The act required the government to provide benefits for retired workers, and later for disabled people and survivors of deceased workers (Historical, n.d.). These benefits are funded through current employer and employee taxes on wages, as well as taxes on self employed income (Understanding, 2018). When members of the workforce retire, they receive benefits based on how much they earned during their time in the workforce, as well as how old they were when they began receiving benefits (Understanding, 2018). Today, over 63 million Americans receive benefits totaling about one trillion dollars (Fact, n.d.).
Historically, the Social Security program has operated in a surplus, with tax revenues surpassing the cost of benefits (Munnell, 2016). However, according to a report by the Center for Retirement Research, demographic shifts in the working and retired population have caused payouts to surpass revenues in recent years (Munnell, 2016). With the Baby Boomer Generation beginning to retire and reduced fertility rates, the worker to retiree ratio has decreased from 3:1 to 2:1. This caused significant changes in the costs and revenue of the program (Morrell). This means that the program will have to begin using its previous surpluses to pay benefits by 2022, according to a press release from the Social Security Administration (No, 2017). Because of the Social Security program’s growing gap between revenue and scheduled benefits, the program will only be able to make 77% of payments by the year 2034 (No, 2017).
A number of factors keep the Social Security deficit unresolved. The complexity of the program means that policy change has the potential to significantly affect its stakeholders. In addition, Congressional gridlock on the issue has slowed reform efforts (Ohlemacher, 2015). It is important to consider the time sensitivity of the issue, because the longer we take to reform the program, the longer the deficit will have to grow (Ohlemacher, 2015). This is in opposition to the short term reelection goals of politicians discussed in the Budget Politics framework.
I evaluated policy options to address Social Security’s cost/revenue gap based on three main criteria:
Criteria 1: Economic Impact
The first criterion is the Economic Impact of the policy on its stakeholders. This criterion can be measured by the percentage change in payments for Social Security beneficiaries and the percentage change in taxes for workers and businesses. Ideally, a good policy option will have a low percentage in reduction of benefits as well as a low percentage in tax increases. This would reduce the negative externality of income loss for the stakeholders in Social Security. In this memo, I will utilize data from the Committee for a Responsible Federal Budget that predicts such changes over the next 50 years (The Reformer, 2018).
Criteria 2: Effectiveness
The second criterion is Effectiveness. This criterion can be measured by the percentage of the deficit that the policy will close. In a good policy, this percentage will be high, as it should be the most effective in closing the gap. In this memo, I will utilize data from the Committee for a Responsible Federal Budget that predicts the percentage based on the deficit over the next 75 years (The Reformer, 2018).
Criteria 3: Equity
The third criterion is Equity. This criterion accounts for the distributions and losses for different socio-economic groups. It reflects the original intent of the Social Security program – to keep disabled and retired members of the workforce out of poverty (Historical, n.d.). For this reason, it should be measured by determining extent of a negative or positive impact on the lower class. Ideally, a good policy will minimise negative impacts on the lower class.
Policy Option 1: Index Cost Of Living Adjustments by the Chained CPI
This policy option entails adjusting the standard by which benefits are increased. Benefits are adjusted each year to keep up with inflation through cost of living adjustments, or COLAs (Latest, n.d.). Currently, COLAs are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W (Boccia & Greszler, 2013). By adopting this policy option, the COLAs would reflect changes in the chained CPI instead, which according to the Heritage Foundation would slow the growth of benefits (Boccia & Greszler, 2013). This would in turn decrease program spending. According to the Committee for a Responsible Federal Budget, this change would have no impact on taxation and only reduce benefits by 4%, making it fairly economically sound (The Reformer, 2018). This option would also only close the 75 year gap by 22%, making it only somewhat effective (The Reformer, 2018). Finally, as a reduction in benefits across all economic groups, this option would have a negative impact on the lower class, making it less equitable (How, 2014). Because benefits are reduced and taxes and unchanged, beneficiaries will likely have a negative reaction while taxpayers will have a positive one.
Policy Option 2: Remove the Cap on Taxable Income
There is a cap on the amount of income that can be taxed for Social Security. Currently, this cap is $128,400 (Brandon, 2018). This policy option entails removing the cap and taxing upper earnings, thus increasing Social Security’s revenue. According to the Committee for a Responsible Federal Budget, removing this cap would close the 75 year deficit by 72% (The Reformer, 2018). It would also increase taxes by 18% in the next 50 years (The Reformer, 2018). This option promotes Equity as it has no impact on the taxation of the lower class. Wealthy taxpayers are anticipated to object to this option, though surveys indicate a general positive response from the American public according to the National Academy of Social Insurance (Public, n.d.).
Policy Option 3: Increase the Retirement Age to 69 and Index to Longevity
The current age to receive full Social Security benefits is 66 (Brandon, 2018). This policy option raises this age to 69, and accounts for increases in retiree life spans. This in turn reduces payments made by the program. According to the Committee for a Responsible Federal Budget, this policy would have no impact on taxation and reduce benefits by 8% (The Reformer, 2018). It will also close the 75 year gap by 41% (The Reformer, 2018). Finally, this option would have low Equity as it raises the retirement age for all economic groups. A study from the Brookings Institute indicates that life expectancy is higher among the upper class than the lower class, making this change detrimental to the lower class (Bosworth, Burtless, ; Zhang, n.d.). According to a National Academy of Social Insurance poll, a majority of stakeholders oppose this measure.
I recommend that your administration implement Policy Option 2, Removing the Cap on Taxable Income, because it has the greatest effectiveness in eliminating Social Security’s deficit and promotes equity to the greatest extent. Removing the tax cap will make the biggest difference in Social Security’s spending gap, and will give the program the most stability for the future. It also protects lower income workers by keeping their taxes and benefits stable, whereas the other alternatives would reduce much needed benefits. While this option has the greatest economic cost on taxpayers as a whole, these payments will in turn create more retirement benefits for those who pay them. In addition, this option has the greatest amount of public support according to the National Academy of Social Insurance (Public, n.d.). The implementation of this option should be gradual in order to allow taxpayers to adjust accordingly. Overall, eliminating the cap on taxable income reflects the original intent Franklin Roosevelt had in implementing the program – to provide a post-retirement income for those need it. By choosing this alternative, this intent may stay secure for years to come.