In Time for Christmas: A Social Security Plan Only Scrooge Could Love

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Economic Policy Institute

In Time for Christmas: A Social Security Plan Only Scrooge Could Love

Actor George C. Scott playing Ebenezer Scrooge in the 1984 film based on Charles Dickens famous Christmas story. (Photo: Entertainment Partners Ltd.)

Donald Trump ran a campaign that rejected Republican orthodoxy on a variety of issues. He consistently and emphatically rejected the party line on slashing social insurance programs like Medicare and Social Security. And yet, Congressional Republicans are ploughing ahead with plans to gut these benefits. The latest proposal, from House Social Security Subcommittee Chairman Sam Johnson (R-Texas), actually slashes benefits even more than would be sufficient to close Social Security’s projected shortfall. The extra savings generated by these cuts is used to reduce taxes on higher-income households.

Johnson attempts to camouflage the draconian nature of his plan with targeted benefit increases for low earners. Despite this window dressing, as many low earners will see cuts as will see increases, according to the Social Security Actuary’s analysis of the plan. This hasn’t stopped budget hawks from touting its supposed progressivity, pointing to a benefit formula more tilted in favor of low earners and an increase in the special minimum benefit going to those with steady work histories. However, for most workers, including many low earners, these provisions are more than offset by benefit cuts.

The first major plank of the Johnson plan revises the overall benefit formula for retirees. By itself, this provision would increase benefits for roughly half of workers (the 51 percent with earnings below 90 percent of the average wage index) while reducing them by a greater amount for the other half. Johnson also introduces a revised special minimum benefit that would increase benefits for around 37 percent of workers. However, other provisions increase the normal retirement age (equivalent to an across-the-board cut) and enact a range of other cuts. On net, only one in four workers (26 percent) would come out ahead from Johnson’s plan, while 70 percent would see benefit cuts, with some workers seeing cuts of up to 74 percent based on the examples modeled in the Chief Actuary’s analysis.

On average, workers will see a 19 percent reduction in benefits over the 75-year projection period based on the Chief Actuary’s analysis. This is curious, because even if Congress did nothing to extend the system’s solvency, current revenues would be sufficient to pay for 84 percent of promised benefits over that time period. In other words, a plan being sold as a way to “permanently save” Social Security is worse for beneficiaries than doing nothing at all. The cuts get deeper over time, averaging 33 percent by the end of the projection period (74 percent for high-income long-career beneficiaries).

Some of the harshest cuts would fall on very low-income workers with short work histories. This is because Johnson and other would-be benefit cutters have found a new way to disguise a cut as a technical fix: the “mini-PIA.” The mini-PIA isn’t a reference to a certain vertically-challenged 1980s starlet, but a way of calculating benefits on an annualized basis rather than based on career-average earnings (the acronym derives from “Primary Insurance Amount,” the benefit received by workers who retire at the normal retirement age).

Proponents of a mini-PIA, including embattled former trustee Charles Blahous, point to well-off homemakers, people who immigrated to the United States in the middle of their careers, and others with employment gaps or shorter careers but enough of a work history to qualify for retirement benefits. These workers’ earnings averaged over 35 years may appear low even if their annual earnings are high in a given set of years. But a mini-PIA wouldn’t just affect people who had fewer quarters of covered earnings because they had other sources of income. It would also reduce the benefits of struggling workers with employment gaps due to caregiving responsibilities and unemployment as well as anyone who worked steadily but had uneven earnings. The former are disproportionately women and low-income workers while the latter are more likely to be self-employed.

Mini-PIA proponents argue that someone who earns $100,000 annually over a 15-year career shouldn’t receive the same benefits as someone who earns $50,000 annually over a 30-year career. Though both workers contribute the same amount to Social Security, the benefit structure is supposed to be progressive, replacing a somewhat higher share of earnings for lower-income workers. In this case, their lifetime incomes are the same, yet if benefits were calculated on an annualized basis, as the mini-PIA proponents prefer, rather than based on a 35-year average, the 15-year/$100,000 worker would receive benefits equal to half the benefits received by a 30-year/$100,000 worker rather than the somewhat higher benefits received by a 30-year/$50,000 worker.

People with other sources of income aside, mini-PIA advocates can’t explain why someone whose earnings fluctuate between $20,000 and $80,000 each year should receive lower benefits than someone who earns a steady $50,000 annually, which is what would happen under their proposal, which in Johnson’s plan only has the effect of reducing—never raising—benefits. Self-employed people and others with up-and-down earnings are no more “rich” because they have flush years than a wealthy homemaker is “poor” because she has zero-covered-earnings years. In short, the supposed problem that mini-PIA advocates claim they want to fix is less serious than the problem they create by reducing the benefits of workers with uneven earnings, which includes most of us.

The impact of the mini-PIA provision is relatively small—a 2 percent average benefit cut over the projection period—compared with the proposed changes to the benefit formula (5 percent), the reduction and gradual elimination of the cost-of-living adjustment (8 percent), and an increase in the normal retirement age (14 percent). But it illustrates the way would-be benefit cutters come up with new ways to disguise cuts as corrective measures even as they continue to recycle old and discredited ones (in support of basing the cost-of-living adjustment on a lower “chained” consumer price index for example). Moreover, the mini-PIA is likely to be regressive, since less educated workers and other disadvantaged groups tend to have shorter work histories and probably more uneven earnings.

Perhaps the oddest part of Johnson’s plan is that despite claiming to be motivated by a desire to extend the program’s solvency and make it more progressive, it would eliminate the income taxation of benefits on high earners—taxes that are earmarked for Social Security. In addition to contributing to Social Security’s revenues in a progressive fashion, taxing benefits helps address the problem mini-PIA advocates claim they want to correct—namely, the fact that a few high-income people benefit from Social Security’s progressive benefit structure because their average earnings appear low.

Incoherence and hypocrisy are also evident in the way the plan deals with inflation. Among the small benefit increases included in the plan is a bump in benefits after 20 years for lower-income beneficiaries, which offsets some or all of the lower cost-of-living adjustment (COLA). This is akin to an employer gradually reducing workers’ real pay but telling them they’ll be eligible for bonuses in 20+ years that will help offset their lower pay from then on.

Generally speaking, COLA cuts exacerbate the problem that the current COLA, based on an index tracking the spending patterns of active workers (the CPI-W), has historically not kept up with rising costs faced by seniors and other beneficiaries who spend a greater share of their income on out-of-pocket health costs. The Johnson plan uses a lower “chained” consumer price index (the chained CPI-U) to calculate the COLA for most beneficiaries, which would reduce benefits by over 5 percent after 20 years if, as the Chief Actuary assumes, the chained CPI grows 0.3 percentage points more slowly each year than the current index.

The benefit bump provided in Johnson’s plan, meanwhile, takes effect gradually 20-24 years after initial eligibility. When fully implemented, the bump will equal 5 percent of the primary insurance amount for an average earner. This means it will offset most or all of the COLA cut for lower earners around 24 years after eligibility, though few will live long enough to take advantage of it for any length of time. In addition, fewer beneficiaries will be eligible for the bump over time because the eligibility threshold is indexed to consumer prices (the chained CPI-U) rather than wages, and does not keep up with economic growth. And while benefit bumps like this are intended to help the very elderly, the lower chained CPI COLA will continue to erode beneficiaries’ standard of living after they become eligible for the bump.

Beneficiaries with modified adjusted gross incomes between $25,000–$85,000 for singles and $50,000–$170,000 for couples will feel the full effects of the chained CPI COLA because they are ineligible for the bump. Meanwhile, the plan eliminates COLAs entirely for higher-income beneficiaries, resulting in benefits that could decline by more than half in inflation-adjusted terms for long-lived beneficiaries. Combined with the other changes, high-income beneficiaries who live long enough may receive benefits that are only a quarter of what they would get under the current system. Eventually, all beneficiaries will be ineligible for COLAs since the threshold is indexed to consumer prices rather than wages.

Though initially only high-income beneficiaries would lose their COLA entirely under the Johnson plan, cutting benefits for wealthy beneficiaries does more to erode support for the system than save money because there are relatively few high-income beneficiaries and their benefits are already capped along with their taxable earnings. In contrast, raising payroll taxes on high earners by lifting the cap on taxable earnings would go a long way toward closing Social Security’s projected shortfall. Legislation introduced by Rep. Linda Sanchez (D-Calif.), for example, would close 80 percent of the projected shortfall by gradually lifting the cap on taxable earnings and applying a lower benefit multiplier to earnings above the current cap. Though Sanchez would apply some of these revenues to increasing benefits, her bill would nevertheless extend the system’s solvency.

Rep. Johnson, who was reelected to his 14th term this year at the age of 86, evidently believes he is setting an example to the rest of us on the importance of staying in the workforce. To this end, he repeats irrelevant statistics about the increase in life expectancy at birth since 1935, when only mortality improvements for seniors and disabled beneficiaries matter and the far bigger challenge we face is slow and unequal wage growth. He also suggests that the growth in two-earner households has had a negative effect on the system’s finances, which is nonsensical.

Johnson’s solution to what he believes is a demographic problem is a 14 percent across-the-board benefit cut presented as an increase in the normal retirement age from 67 to 69 in the mistaken belief that this will make it more palatable. The normal retirement age is currently 66 but scheduled to rise to 67. Johnson disguises the depth of this cut by combining it with a benefit increase for workers who are able to work well beyond the normal retirement age—disproportionately, like Johnson, upper-income males with relatively cushy jobs (Congress was in session for about 110 days out of the last year).

President-elect Donald Trump, who ran on the promise that he wouldn’t cut benefits and specifically opposed raising the retirement age, has so far not commented on Johnson’s plan. Not even a tweet.

Monique Morrissey

Monique Morrissey is a staff economist at the Economic Policy Institute, where she focuses on retirement security, executive compensation, the Federal Reserve, and financial markets.

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