<html> <head><style type ="text/css">body { font-family: "Bloomberg Prop Unicode I", Verdana, sans-serif; font-size:125%; letter-spacing: -0.3pt; color: #FF9F0F; background-color: #000000; text-align: left; } p {line-height: 1.25em; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" );} h1, h2, h3 { text-align: left; font-weight: normal; color: #FFFFFF; } h1 { font-size: 130%; } h2 { font-size: 115%; } h3 { font-size: 100%; } #bb-style { font-size: 90%; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" ); } b, strong { font-weight: bold; } i, em { color: #FEC54A; } pre { font-family: "Andale Mono", "Monaco", "Lucida Console"; letter-spacing: -0.3pt; line-height: 1.25em; } table { border: 0; font-size: 90%; width: 100%; margin-left: auto; margin-right: auto; } td, tr { text-align: left; } td.numeric { text-align: right; } a:link { color:#53B2F5; text-decoration: none; } a:visited {color:#53B2F5} a:active {color:#53B2F5} a:hover {color:#53B2F5} </style> </head> <body> <p>By Deborah Solomon</p> <p>Mitt Romney's <a href="http://m.washingtonpost.com/politics/romney-focuses-on-economy-medicare-social-security-with-new-debate-ad/2012/10/17/e0daea0c-18a6-11e2-a346-f24efc680b8d_story.html">new ad</a> in Ohio slams President Barack Obama for failing to protect Social Security. The most interesting thing about the ad is that he's airing it at all: Clearly, Romney thinks this third rail of U.S. politics has lost its charge in an era of trillion-dollar deficits.</p> <p>Obama hasn't made Social Security much of an issue in the campaign, but Romney has gone on offense, providing more specifics about how he would adjust Social Security benefits than possibly any other candidate in history.</p> <p>So it's worth understanding what Romney has <a href="http://m.mittromney.com/issues/social-security">proposed</a>. A close look reveals just how difficult it will be to close Social Security’s ballooning trust fund shortfall without new taxes, which he promises to avoid. It also shows that Romney’s approach will hit middle-income workers harder than the wealthiest, which may come as a surprise given his oft-repeated comment that he'll slow the growth rate of Social Security benefits for those with "higher incomes."</p> <p>As outlined, Romney’s plan closely resembles one proposed in 2006 by another Republican, former Utah Senator Robert Bennett. Both exempt people 55 and up, raise the retirement age to keep up with longevity gains (about one month every two years) and adopt some form of progressive price indexing that has benefits for the top grow only with inflation, while benefits for the lowest earners continue to reflect real wage gains.</p> <p>While Romney’s campaign hasn’t specified details when it comes to progressive price indexing, there isn’t much room for flexibility.</p> <p>Social Security Administration breakdowns of <a href="http://ssa.gov/oact/solvency/provisions/index.html">reform elements</a> show that even with the toughest version of progressive price indexing impacting the top 70 percent of wage earners -- the one also adopted by Bennett as well as Paul Ryan in his 2010 <a href="http://ssa.gov/OACT/solvency/PRyan_20100427.pdf">Road Map</a> -- Romney's plan would erase less than 60 percent of Social Security’s shortfall. (It would have closed two-thirds if the trust fund gap hadn’t grown much larger over the past year.)</p> <p>Social Security Administration <a href="http://ssa.gov/OACT/solvency/RBennett_20060316.pdf">actuaries found</a> that Bennett’s plan would cut promised benefits for a 22-year-old average earner -- someone making about $45,000 per year today -- by about 24 percent and a maximum-earner (making $110,000 and above) by about 35 percent.</p> <p>That seems progressive. But looks can be deceiving.</p> <p>As Jed Graham noted in his 2010 book "A Well-Tailored Safety Net," Social Security <a href="http://ssa.gov/OACT/solvency/Liebman_20051117.pdf">actuaries</a> have previously indicated just how much workers at various income levels would have to save as a percentage of their incomes over the course of a career to offset benefit cuts. (Disclosure: Graham is my husband.)</p> <p>For an average earner, saving 1 percent of wages a year, investing it in Treasuries and cashing it in for an annuity would offset a 10.3 percent benefit cut. That means a $45,000 earner would have to save 2.3 percent of income, or $1,000 a year, to offset the 24 percent cut under the Bennett plan.</p> <p>Meanwhile, someone earning $110,000 would have to save 2.1 percent of pay to offset a 35 percent benefit cut (each 1 percent of pay saved can replace 16.8 percent of benefits for top earners). That means a $1 million earner, who pays Social Security taxes on only $1 of every $9 earned, would have to save just 0.23 percent of income to offset benefit cuts.</p> <p>Because middle-income workers may not be able to do with less income in retirement without suffering a decline in living standards, the percentage of pay that must be saved to offset benefit cuts can be thought of as an implicit tax hike. Surely no candidate would advise workers that this extra saving is unnecessary.</p> <p>In that sense, although the presidential debate has focused on explicit tax bills, it is likely that both Obama, who has only ruled out severe cuts, and Romney would implicitly raise taxes on the middle class.</p> <p>This helps explain why Bloomberg View <a href="http://www.bloomberg.com/news/2011-09-03/social-security-is-no-ponzi-scheme-note-to-rick-perry-view.html">supports</a> raising taxes on income over the $110,000 ceiling on wages subject to Social Security’s 12.4 percent payroll tax as part of a plan that closes more than half of the financing gap with new taxes.</p> <p>For an average earner making $45,000 a year who retires at age 65, Social Security will replace about 37 percent of his or her <a href="http://ssa.gov/oact/TR/2012/lr5c7.html">pre-retirement income</a> once the official retirement age rises to 67, according to the Social Security Administration. That is about half of what financial planners recommend -- even before benefit cuts.</p> <p>With trust fund reserves forecast to run out in 2033, there’s wide agreement that Social Security’s growth rate must slow. Yet it’s important to recognize that the retirement safety net isn’t becoming any less essential; increasing life spans mean that non-Social Security savings may be more apt to run dry and rising Medicare premiums will continue to take a bigger bite out of seniors’ benefit checks.</p> <p>As the Center on Budget and Policy Priorities <a href="http://www.cbpp.org/cms/index.cfm?fa=view&amp;id=3368">notes</a>, Social Security represents about three-fourths of income for beneficiaries 80 and older.</p> <p>If workers don’t save more to offset benefit changes, they will pay a price later. It is possible that some of that saving can be done by extending careers -- saving a year of retirement income for each extra year of work -- and that is something policymakers should encourage. But as we’ve seen recently, recessions can raise hurdles to longer careers, as can health and other family crises.</p> <p>(<a href="http://topics.bloomberg.com/deborah-solomon/">Deborah Solomon</a> is a member of the Bloomberg View editorial board. <a href="https://twitter.com/#!/deborah_solomon">Follow</a> her on Twitter.)</p> <p>Read more breaking commentary from Bloomberg View at <a href="http://www.bloomberg.com/view/the-ticker/">the Ticker</a>.</p> <p> </p> <p> </p> </body> </html>