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Retirement Planning > Social Security

How to Protect Social Security in the Long Term

By Ramesh Ponnuru

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A technical change in the Republican tax bills adds up to a significant tax increase over time. The legislation would change the way tax brackets are adjusted for inflation each year. The new measure of inflation, called the chained CPI, would be less generous than the old one. As a result, each year slightly more people would move into higher tax brackets than under the current measure.

(Related: The Consumer Price Index Starts a New Chapter)

The Tax Policy Center estimates that this shift would bring in $125 billion in extra revenue over the next decade — which helps Republicans reach their goal of cutting taxes by no more than $1.5 trillion.

President Barack Obama suggested that he might be willing to use the chained CPI to calculate the annual cost-of-living adjustments for Social Security, too. Over time that would lead to lower spending on the program.

Many economists believe that the current Consumer Price Index overstates inflation and that the chained CPI is a more accurate measure. (Conservative scholar Scott Winship wrote about the gory details a few years ago.) Opponents of moving to the chained CPI for Social Security say that it understates inflation among the elderly, but it is not clear that they are right — and even less clear that a better measure exists.

If Social Security checks and tax brackets should be adjusted each year for inflation, they ought to be adjusted by the best measure we have. That’s the best argument for what Republicans are doing on taxes and what Obama suggested doing on Social Security.

Pricetags (Image: Thinkstock)

Pricetags (Image: Thinkstock)

But maybe inflation is not a sufficiently generous index in either case. It might be better to let tax brackets and Social Security payments rise with wages instead.

When tax brackets are indexed only to inflation, it leads to “real income bracket creep.” Because wage gains move people into higher brackets, average tax rates increase and the federal government gets a disproportionate share of any economic growth — and both effects occur without a deliberate vote for them.

If brackets rose at the same rate as average wages, on the other hand, neither effect would occur. People who made higher-than-average wage gains would move closer to the next-higher tax bracket, and people who made lower-than-average gains would move further away from it.

Letting cost-of-living adjustments for Social Security rise faster than inflation each year, meanwhile, would have the beneficial effect of causing people to get benefits with a higher real value as they age. When they are 85, that is, they will have more financial support than when they are 70.

More generous indexing for taxes and Social Security would, of course, make future deficits worse. Ideally, we should implement these changes anyway and make up for them in other ways. Rather than having stealthy tax increases on auto-pilot, we should legislate tax increases, spending cuts, or some combination of the two.

And while we should let retirees’ Social Security checks rise in real value each year they are getting them, we should also freeze the real value of initial benefit levels. The way Social Security now works, tomorrow’s retirees will get bigger checks, even accounting for inflation, than today’s retirees, and they in turn get higher benefits than yesterday’s.

Stopping this generational escalation, at least for people with high lifetime earnings, would make the program solvent. A 75-year-old who retired 10 years ago should get a higher benefit, in real terms, than he got last year. But the 75-year-old of 10 years from now should not get a higher benefit than today’s 75-year-old.

The net effect of these changes to Social Security would be to give more assistance to the very elderly while keeping benefits the same in real terms for each age cohort. It would also ameliorate one drawback of the current system: An ever-larger initial benefit level is an ever-larger incentive for people to retire earlier.

What I’m advocating here, for both Social Security and taxes, amounts to short-term pain for long-term gain. Taxes might have to be set a little higher up front, but then they would grow at a slower rate. Initial Social Security benefit levels for the person who retires in 2030 would be lower than they are scheduled to be, but over time the checks would grow.

It’s the kind of trade-off that I think makes sense — more sense than what the Republicans are doing in their tax bill. But it’s also the kind of trade-off our society seems to be getting worse at making.

— For more columns from Bloomberg View, visit http://www.bloomberg.com/view.

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