If Republican Congressman Samuel Johnson, Chairman of the House Social Security Subcommittee, has his way, many American workers will end up with far lower Social Security benefits when they retire. On the other hand, some low earners will end up with more. Johnson’s bill, introduced on December 8th, produces these changes by radically modifying the way Social Security calculates benefits.
Social Security, with its hundreds of thousands of rules, is arguably the most complex institution yet devised by man. It’s basic benefit formula, if you express it mathematically, depends on 10 highly non-linear functions, one of which is in four dimensions. I’ll spare you the details. This complexity provides great cover for Congress to gradually, subtlety, and substantially cut benefits. Moreover, by tossing low earners some bones, Congress can claim to be making the system more progressive. This is the Republicans’, or at least Johnson’s, tactic. It’s intended not just to split the Democrats, but also public opposition.
Not that the Democrats are such staunch defenders of Social Security. November, a year ago, Democrats, led by the White House, used the same populist card to slash spousal and divorced spousal benefits for younger households. They claimed, with no fact checking, that these benefits were letting the rich game the system. My experience (my software company markets a Social Security benefit maximization tool) suggests otherwise — that the big losers from last year’s Social Security amendments were, by far, the poor and middle class.
Congressman Johnson deserves high praise for publicly recognizing that Social Security is broke and trying to fix it. That’s more than can be said of either the President-elect or his former opponent, Secretary Clinton. Neither said boo about Social Security’s insolvency during the campaign. Congressman Johnson’s Social Security reform plan is big and bold. He’s not just touching the third rail of politics (Social Security’s nickname). He’s grabbing the rail with both hands and squeezing tight. His goal is eliminating Social Security’s fiscal insolvency as measured over the next 75 years. Unfortunately, as shown in table VI F1 of this year’s Social Security Trustees Report, Social Security’s 75-year red ink is only 36 percent of its $32 trillion infinite horizon long-term fiscal gap. This is the amount of money the system is short, not in 75 or 100 years, but today — this minute.
The infinite-horizon fiscal gap considers all of the system’s future net obligations but is expressed as a present value meaning that commitments in the future are discounted (as in made less of) in figuring out what’s really owed in today’s terms. Unlike the 75-year fiscal gap, Social Security’s infinite horizon fiscal gap includes, for example, the benefit obligations to today’s children, most of whom will be alive in 75 years. There is no law of economics nor principle of morality that justifies ignoring benefit obligations to today’s and tomorrow’s children.
Looking out only 75 years into the future was the choice made by the 1983 Greenspan Commission. Today, 33 years after Greenspan and company “fixed” the system, Social Security is in far worse long-term financial shape. Indeed, today’s 75-year Social Security unfunded liability includes 33 years of cash flow deficits that the Greenspan Commission saw coming, but intentionally chose to ignore.
By analogy, Greenspan and now Johnson represents surgeons who remove only part of a patient’s tumor (They have to make their tee times!) knowing full well that when they next examine their patient’s tumor it will be larger and potentially inoperable. So Johnson is touching the wrong rail. For everything he’s proposing, which is considerable, it’s too little to truly fix Social Security’s finances.
Now what exactly does Johnson have in mind? First the good news. He’d eliminate the earnings test, which is likely inducing millions of older workers to stop working. Second he’s replacing the Windfall Elimination Provision with a much fairer way of treating workers who spend part of their career working for employers (including many school systems) that aren’t part of Social Security. Third, he’s eliminating federal income taxation of Social Security benefits, which will eventually tax 85 percent of every Social Security recipient’s benefits. Fourth, his new benefit formula will provide most older workers better incentives to work. Fifth, Johnson provides a minimum benefit that will help very low-wage earners.
Now for the bad news, which will be phased in to the detriment of younger workers. First, Johnson wants to further raise the normal retirement age from 67, where it’s heading for anyone born after 1960, to 69, for anyone born after 1970. Second, he’d eliminate cost of living increases (COLAs) for single household with incomes over $85,000 and married households with incomes over $170,000. (These thresholds will rise with inflation after 2018.) This means that if inflation is 10 percent for four years in a row, someone in this boat will experience, with compounding, close to a one third reduction in the real value of their benefit. Anyone old enough to recall the 70′s knows this can happen. Indeed, if we were to return to the monetary conditions of 2007 (with a far higher money multiplier and velocity), we’d see prices rise by 300 percent and real benefits of the non-COLA’d drop by 75 percent.
Johnson’s plan also means that family A, with the same benefits as family B, but a dollar more in modified adjusted gross income, which puts it just over the threshold, will experience a permanent benefit cut compared with family B based on something not directly under the government’s or anyone else’s direct control, namely the rate of inflation. Having the inflation rate determine peoples’ real Social Security benefits is a simply terrible policy. It, like the rise in the full retirement age, undermines what Congressman Johnson ostensibly is trying to achieve, namely giving workers more back in benefits for the extra dollars they contribute so they have more incentive to work.
Third, Johnson cuts spousal and divorce spousal benefits for spouses and ex-spouses with “high” income. This will wreak havoc on the finances of divorcees who reached divorce agreements based on their projected divorcee spousal benefits. Fourth, for those who do receive a COLA, a less generous chain-weighted, rather than a regular CPI COLA will be used. The chain-weighted COLA provides a better measure of overall inflation, but not of the inflation actually experienced by the elderly. Fifth, retirees with low incomes would receive a benefit boost, but would lose it if they earned too much. But why should I work and save as much as I had planned if it will cost me my Social Security benefit subsidy or my minimum benefit or put me in an income threshold such that I’ll experience real and, potentially, massive benefit cuts depending on the unpredictable future rate of inflation.
Here’s my bottom lines on Congressman Johnson’s largely well intended reform plan. First, we should not foist the majority of the bill for paying for Social Security’s Ponzi Scheme on younger workers. But this is Johnson’s plan — lower the future benefits of today’s workers, but leave today’s elderly and those close to retirement entirely off the hook. Second, no responsible government leader should let something uncontrollable, in this case the inflation rate, determine government fiscal policy.
Second, “You can’t make a purse out of a sow’s ear.” Social Security is such a convoluted, intertwined web of provisions that pulling on particular strings, which make some things better, will make other things worse. As an example, I spoke today with a 65 year-old Floridian, named Jacob, who is driving a limo having lost his job as a software engineer. Jacob is in debt and can barely make ends meet. He was badly counting on the spousal benefit available to his wife under the old law. But, as of last November, she’s two year’s too young to collect those benefits.
Congressman Johnson’s plan is, unfortunately, not good enough even for government work. What’s really needed to fix Social Security is to freeze the existing system, pay off, over time, all of its accrued benefits to current and future retirees and set up a modern Social Security system that operates in parallel with the old system as it phases out and that has simple rules that can fit on a postcard. To see such a plan, which a broad spectrum of economists strongly endorse, please read Your Hired! A Trump Playbook for Fixing America’s Economy. Once you’ve read it, please forward it to Congressman Johnson and every other politician in Washington.