Sunday, March 31, 2013

There are Still Reasonable People

The NY Times has an excellent editorial this morning about Social Security. The best take-away paragraphs:
Social Security reforms should be decided separately because the program is not driving the deficit. That distinction goes to chronic revenue shortfalls and rising health costs that propel spending on Medicare and Medicaid. Social Security did not cause today’s deficits, because the payroll taxes that support it have been more than adequate; and it will not contribute to future debt, because it is barred from spending more than it takes in.
The reason Social Security is wrapped up in the political budget debate is that government deficit projections assume Social Security will always pay promised benefits in full, even though the system is expected to run short in 20 years. That shortfall is reflected in deficit projections, so reducing it would improve the budget outlook.  [My emphasis.]
HOW SHOULD SOCIAL SECURITY BE REFORMED? The drive to cut the COLA [Cost of Living Adjustment] is based on the premise that the inflation gauge used to compute the adjustment overstates the rising cost of living. That is a flawed premise. A good case can be made that the gauge is an inaccurate way to track inflation for working-age people, but there is no empirical evidence that it overstates inflation among retirees, who tend to spend more on health care and other necessities for which there are few, if any, cheaper substitutes.
To ensure that the system is paying proper COLAs, Congress should instruct the Bureau of Labor Statistics to develop a statistically rigorous index of inflation among retirees. Until that is done, cutting the COLA on grounds that it is too large would be unjustified and disingenuous.
The editorial also proposes raising the payroll tax rate by 1%, phased in over the next 20 years, and raising the taxable income base from the current $113,700 to $200,000.

I have been a supporter of changing the COLA computation method (referred to by the Times as "reducing the COLA" because that is what it would probably do), but only because of arguments that it actually overstated inflation for retirees. The Times' suggestion that the Bureau of Labor Statistics develop a new computation method specifically for retirees is the best way to address this issue.

I am not so sanguine about the Times' other proposals. Raising the payroll tax by 1% will hurt low-income workers, even if the pain is eased in over 20 years.

And why stop at $200,000 when raising the taxable income base? Very wealthy people have options for reporting their income that protects it from the payroll tax (See: Romney, Mitt). Raising the taxable income base will send more of them scurrying for their tax shelters. But this is an issue for tax reform.

But for what's worth, I applaud the Times for being reasonable – i.e., governed by or being in accordance with reason – a quality not often found in this discussion.

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