Robert Pozen’s Myth Creation on Social Security

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Monday, 13 December 2010 12:36
The Boston Globe helped to create some new myths on Social Security with a piece by Robert C. Pozen that ran under the headline “Myth Busters: The Truth About Social Security Reform.”

Pozen first told readers that Social Security is not progressive even though its payback structure is highly progressive. (A low-wage earner will get a payment equal to about 90 percent of their average wage income, while a maximum wage earner [$106,800 in 2010], will get a benefit equal to less than 30 percent of their taxable wage.) He argued that the differences in life expectancy (wealthy people live longer), offset the progressivity of the payback structure.

While this is partially true, the differences in life expectancy do not fully offset the progressivity of the payback structure. Also, Social Security includes survivor and disability benefits that disproportionately benefit low and moderate-income earners.

The second myth created by Pozen’s piece is his claim that the proposed increase in the Social Security retirement age is no big deal. He described as a myth the claim that:

The Budget Commission’s proposal raises retirement age too quickly, especially for physical laborers.”

First, the commission did not issue a proposal. The co-chairs, Erskine Bowles and Alan Simpson, issued a proposal that got the support of 9 other commission members, 3 short of the number needed to make it a formal proposal of the commission.

Pozen goes on to tell readers that the proposal increases the normal retirement age at a:

“much slower pace for increases in the retirement age than the projected increases in life expectancy. During the 48 years between 2027 and 2075, the normal retirement age will rise by only two years, but life expectancy in the United States will on average rise by more than 10 years.”

Actually, the Social Security Trustees project an increase in life expectancy of 6.4 years over this period. The bulk of gains in life expectancy in recent years have gone to high-end earners. If this pattern continues in coming decades, it is very likely that the gains in life expectancy for most workers will not exceed the increases in the normal retirement age proposed by Bowles and Simpson.

Pozen then assures readers:

“In their proposal to reform Social Security, the co-chairs would allow physical laborers to claim half of their benefits early and the other half at a later date. Moreover, the proposal directs the Social Security Administration to develop a new and more flexible method for delivering retirement benefits for those in “physical labor jobs.”

Actually, the suggestion by Bowles and Simpson that there would be different retirement schedules for different occupations is reversing a worldwide trend toward standardizing benefit schedules. The Bowles-Simpson proposal is precisely the policy for which Greece was widely ridiculed. Hairdressers were one of the occupations that qualified for early retirement based on the fact that they worked with dangerous chemicals. It is not clear that the government is well positioned to make this sort of assessment and that it can impose rules that prevent easy gaming.

The third myth created by Pozner’s when he labels as a myth the claim: “The proposal would constitute a large “cut’’ in Social Security benefits for American workers.

Before addressing the benefit schedule, it is worth noting Bowles-Simpson propose a change in the annual cost of living adjustment (COLA) that would amount to roughly a 3.0 percent cut in benefits for someone who lives 20 years after starting to collect benefits. Whether or not this is “large” can be debated. However, it is worth noting that this proposed cut would have more impact on the after-tax income of most beneficiaries than the ending of the Bush tax cuts would have on most of the people who earn more than $250,000 a year.

For example, those earning more than $300,000 a year would see their income about $250,000 taxed at a 36 percent rate instead of a 33 percent rate. Since this higher rate would apply to just one-sixth of their income, it would reduce their after-tax income by just 0.5 percent. Only the very wealthy would see their after-tax income fall by a larger percentage due to the expiration of the Bush tax cut than the 3.0 percent cut in Social Security proposed by Bowles-Simpson from changing the annual COLA.

The media and members of Congress have certainly acted as though this change in taxes is “large,” so the proportionately bigger cut in benefits proposed by Bowles and Simpson must also be “large.”

Pozen wrongly asserts that:

“The proposal would actually increase the current schedule of Social Security benefits for low-wage workers. It accomplishes this result by expanding the concept of minimum benefits available to any worker.”

In fact, most low-wage earners would not have enough years of earnings to qualify for the step up in benefits proposed by Bowles and Simpson.

Pozen then notes that, in addition to the cut in the COLA, scheduled benefits will be cut for “more affluent workers.”  It is worth noting that “more affluent workers” in this context means anyone with average earnings above $10,000 a year.

Pozen also claims that the schedule of benefits proposed by Bowles and Simpson must be compared to the payable benefit in years after 2037, since the program is not projected to have enough money to pay full benefits in years after 2037.

In fact, there are literally an infinite number of ways to fill the gap in funding. The idea that if Congress does not endorse the Bowles and Simpson plan that there would be no other way to close the projected shortfall in the next 27 years is absurd on its face.