The basic contours of Mitt Romney’s approach to Social Security reform are coming into focus, and the results aren’t pretty.
Because Romney insists that any change include no additional revenue, his strategy is forced to rely on excessive benefit cuts that would undermine financial security for future retirees. A much better approach would mix benefit reductions and revenue increases, as we have proposed in the past, and as polls show the public prefers.
For about two-thirds of elderly Social Security beneficiaries, the payments amount to more than half their overall income. These benefits are protected against financial-market fluctuations and inflation, and they last until death. So they are a crucial form of insurance, almost impossible to purchase, and they are particularly useful during and after periods of severe economic stress, like the one we have lived through these past few years.
Furthermore, Social Security isn’t the core of our long-term fiscal problem. From now until 2050, if all benefits are paid despite the projected exhaustion of the Trust Fund, its expenditures will rise from 5 percent of gross domestic product to 6 percent, according to the Congressional Budget Office. Over the same period, Medicare, Medicaid and other federal health expenditures are projected to rise from 5.5 percent of GDP to 12 percent.
Need for Reform
Nonetheless, Social Security does face a long-term deficit that needs to be addressed. Romney’s website identifies two steps he would take: “First, for future generations of seniors, Mitt believes that the retirement age should be slowly increased to account for increases in longevity. Second, for future generations of seniors, Mitt believes that benefits should continue to grow but that the growth rate should be lower for those with higher incomes.” The website adds: “Mitt’s proposals will not raise taxes and will not affect today’s seniors or those nearing retirement.”
Romney has not yet filled in the details, but his approach appears to match the “Social Security Solvency and Sustainability Act” proposed last year by Republican Senators Lindsey Graham of South Carolina, Rand Paul of Kentucky and Mike Lee of Utah. That plan would, by 2032, raise the normal retirement age under Social Security from 67 to 70, and it would adopt “progressive price indexing,” which would reduce the future growth rate of benefits for the top 60 percent of earners. (Their initial retirement benefits would partly reflect inflation but not overall wage growth during their careers.)
Lower earners would be affected by the increase in the normal retirement age but not the progressive price-indexing component. Middle earners would be affected by both components, but the progressive price indexing would be less severe for them than for the highest earners.
These two steps would eliminate the long-term deficit in Social Security, according to the official analysis of the plan done by the Office of the Chief Actuary at Social Security. But they would do so by substantially reducing benefits, even for middle earners. According to the analysis, a medium earner (someone bringing in about $45,000 a year today) retiring in 2050 at age 65 would receive 32 percent less in annual benefits than under the current formula. By 2080, the reduction would amount to almost 40 percent.
A high earner (someone with income of about $70,000 currently) retiring in 2050 would get 40 percent less and, by 2080, almost 50 percent.
A Balanced Solution
These benefit cuts are so large because the Romney strategy forgoes any additional revenue. Plenty of other Social Security reform plans take a more balanced approach, combining gradual, and less severe, benefit reductions with revenue proposals such as raising the wage level above which Social Security payroll taxes no longer apply.
We put forward one such plan in a 2005 book. Updating our plan for the intervening period, the medium earner retiring in 2050 would experience a reduction in benefits of less than 10 percent -- compared with more than 30 percent under a Romney-type approach.
The medium earner’s annual benefit in 2050 is currently projected to amount to $25,000 a year in inflation-adjusted terms. The Romney-type approach would reduce that by about $7,500 a year. Under our plan, it would be only about $2,500 lower. That $5,000 difference is substantial, especially for someone whose retirement income is mainly from Social Security.
We are not alone in recognizing the importance of limiting future benefit cuts by raising additional revenue for Social Security. As long ago as 1983, a commission appointed by President Ronald Reagan and led by Alan Greenspan designed Social Security reform that combined revenue increases with benefit cuts.
The need for such balance in Social Security reform is a reflection of the broader struggle over the nation’s fiscal gap. To restore long-term sustainability to the budget as a whole, we need to combine spending cuts and revenue increases -- both of which should be delayed, for the present, to avoid harming a weak economy.
(Peter Diamond is a professor emeritus of economics at the Massachusetts Institute of Technology and winner of the 2010 Nobel Prize in economics. Peter Orszag, vice chairman of global banking at Citigroup Inc. and a former director of the Office of Management and Budget in the Obama administration, is a Bloomberg View columnist. They are coauthors of “Saving Social Security: A Balanced Approach.” The opinions expressed are their own.)
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