Tackle Social Security Reform in Small Steps
In 1984, Boston College quarterback Doug Flutie won a football game with a last-second desperation pass called a Hail Mary. It was a miraculous event that sports fans will never forget. But the next day not one football coach in America changed his playbook. Why? Because a coachs game plan is never about last-second gambles. It is about executing smart, achievable plays to advance the ball, make first downs and eventually score.
The Social Security trustees have issued their 2008 report on the financial soundness of the Social Security Trust Fund. The primary conclusion to be drawn from this report is that the federal government has made promises it cannot keep expected payroll taxes are insufficient to pay for promised benefits. What politicians and voters need to appreciate is that the longer we delay formulating a game plan, the more likely a Hail Mary will become our only choice.
This year, as in the past, a few brave Members of Congress along with experts from the Washington think tank community and some academics will offer solutions to the Social Security systems projected deficits. These solutions will all claim to eliminate the projected funding shortfall and return the system to fiscal soundness by employing one of three techniques: a reduction in the growth of benefits, an increase in payroll tax collections or a bet on stock market returns by investing payroll tax collections in the market. The two common traits among these proposals are that they will all be heralded as complete solutions and that none will be enacted.
While the debate over how to reduce the growth of benefits and/or increase the payroll tax will continue unabated for years, the best next step forward is to reorient the objective of the debate toward incremental change rather than a wholesale fix. Years have been wasted while valiant advocates for fiscal soundness have proposed radical change. In 2001, President Bush convened a Social Security Reform Commission to study the problem and in 2005 he urged Congress to fix Social Security permanently. Yet the system has not been changed.
Lawmakers should focus on achievable reform that shrinks, rather than eliminates, the funding gap in Social Security. As in the debate over permanent solutions, there will be controversy about how to define honest partial success verses gimmicks to mask the problem. We would argue that the best, while imperfect, metric would be to measure the difference between projected payroll collections and projected benefits in the 75th year. Narrowing that gap is progress toward a sustainable solution. While policymakers seeking to take a bite out of the problem face the same basic options as those seeking a total solution, the options will be more politically palatable because the changes will be smaller.
There is an additional reason beyond politics for stepping, not leaping, toward a solution: While it cannot be denied that there is a problem, the precise size of the problem is uncertain. Total-solution proposals risk both over-solving the problem and conversely, solutions that are expected to create long-run solvency may turn out to be insufficient, as was the case with the changes made in 1977. Incremental reforms allow us to learn the precise impact of policy changes and fine-tune future changes.
What precisely should be on the table to get us toward a solution? Changes such as adjusting the hiatus in the rise in retirement age and moving toward longevity indexing of benefits would help. Another step would be to peel back benefits for those workers with the very highest lifetime incomes.
And, along with any change in Social Security, Congress must continue to strengthen ordinary retirement savings by simplifying and expanding retirement accounts and encouraging participation in retirement savings plans, through means such as expanded auto-enrollment policies in 401(k) plans and employer- provided IRAs (auto-IRAs). Retirement security strengthening Social Security while also encouraging individuals to start saving sooner, to save more and to be adequately diversified in their retirement portfolio is the comprehensive approach that will best assist future retirees.
Right now that old saw, We should not let the perfect be the enemy of the good, should be our guide, and we should accept that even small steps forward toward a reasonable restructuring of Social Security would be progress. Only then will lawmakers be free to sit down and hammer out a plan that moves the system toward sustainability. The alternative is to sit on the sidelines, wait down the clock and hope to complete a Hail Mary pass.
Former Rep. Bill Thomas (R-Calif.) was chairman of the Ways and Means Committee. Alex Brill served as senior adviser and chief economist to the committee. They are now a visiting fellow and research fellow, respectively, at the American Enterprise Institute and are consultants to Buchanan Ingersoll & Rooney PC.