- Two candidates, Haley and Christy, support phased in increases in retirement age and other changes in benefits for younger workers
- Three candidates, Trump, DeSantis, Ramaswamy, do not support immediate actions.
- Proposals by Democrats involve substantial increase in taxes on Americans with relatively high income and include expansions in benefits.
- Republican proposals would not prevent automatic benefit cuts that are projected to occur under current law.
- Democrat proposals could lower economic growth, reduce fiscal discipline, and increase the dependence of the elderly on Social Security.
- There is a need for a compromise proposal that adjusts both benefits and revenues combined with improvements and expansions of private savings for retirement targeted towards households struggling to save.
The October 2024 Presidential debate helped clarify where Republican candidates now stand on entitlements – Social Security and Medicare.
Two candidates, Haley and Christie favor a higher retirement age for young adults now entering the workforce and for means testing Social Security benefits. Haley also called for adjusting the rules governing the Social Security cost of living adjustments.
Haley supports increased use of Medicare Advantage plans to address imbalances with the Medicare Trust fund.
Trump, DeSantis, Scott, and Ramaswamy all appear to oppose reductions in Social Security benefits.
Ron DeSantis has said on the campaign trail that he would not mess with entitlements, but he had previously voted for an increase in the retirement age while in Congress. DeSantis stated that part of his opposition to now raising the retirement age stems from recent declines in life expectancy.
Scott was concerned about the increase in the retirement age on people in jobs that required physical labor.
Both Scott and Ramaswamy argued that cuts to the discretionary budget and economic growth could alleviate pending problems with the Social Security trust fund.
The Biden Administration and Congress are grappling with the budget and there is very little active debate over ways to deal with the impending projected automatic benefit cuts to Social Security or long term reform proposals.
The Biden budget proposals includes higher taxes to fund Medicare but does not include a similar tax increase for Social Security. Haley is supportive of increased use of Medicare Advantage plans to reduce costs.
Most Democrats do not support reductions in benefits or increases in the retirement age. The approach preferred by many Democrats in Congress summarized here involves several substantial new taxes and more generous benefits.
The Congressional proposal includes three tax provisions. It would subject all wage income over $250,000 to the combined employer and employee Social Security tax. Apply a 12.4 percent tax on investment income for high earners as stipulated by the provisions of the Affordable Care Act. Apply a 16.2 percent net investment income tax on owners of S-corporations and limited partners.
The Congressional proposal includes several increases in benefits both for existing beneficiaries and future beneficiaries, increase the special minimum benefit, bases cost of living adjustments on a price index that reflects purchases by the elderly, and expands benefits for children of disabled and deceased workers until age 22.
The Republican Proposals:
One of the reasons why Social Security should be a high priority 2024 issue is that under current law and current revenue projections Social Security benefits will be automatically cut by 23 percent in 2033. None of the Republican proposals would prevent projected automatic benefit cuts.
The proposals for a higher retirement age applied to new entrants to the workforce offered by Haley and Christy would not prevent the automatic benefit cuts in 2034 because these future cuts would not be implemented until the new cohort of workers retires in 30 or 40 years.
Proposals to do nothing will not prevent the automatic benefit cuts if trust fund revenue projections are accurate. The idea that Republican policies that lead to higher economic growth will lead to increased trust fund revenues that will increase trust fund revenue is wishful thinking contradicted by the past relationship between Republican policies and economic growth.
The implementation of automatic benefit cuts to Social Security would be an economic disaster leading to a sharp decline in aggregate demand and a sharp increase in poverty among the elderly. The failure to implement meaningful changes to either Social Security benefits or taxes sooner rather than later will lead to a political and economic shock substantially more severe than the annual debt crisis or government closure disputes.
The proposal to increase the retirement age for younger workers is premised on the view that younger workers will be able to increase private retirement savings prior to retirement. However, younger workers are failing to save for retirement due to record levels of student debt and increased use of retirement funds prior to retirement.
It is very difficult to evaluate proposals for means testing of Social Security benefits without knowledge of the means testing formula. Specifically, how many high-wealth households will be ineligible for Social Security benefits under the proposal. Also, the proposal could reduce charitable gifts since many wealthy families give away most of their wealth.
The Democrat Proposals:
The Social Security Administration projects the Congressional reform package would lead to a balanced trust fund for a 75 year period. However, some of the revenue would likely be diverted to Medicare given that the current Biden budget includes a proposal to raise the high-earner tax on investment income from 3.8 percent to 5.0 percent for Medicare related expenses.
Revenue will invariably be lower than projected by forecasters. High earners will respond to the new taxes by increasing contributions to tax-deferred accounts, which reduce AGI and investment income. The tax increases in the Democrat proposal could reduce economic growth, which could reduce projected improvements in trust fund solvency.
The new Social Security taxes would likely motivate future congresses to spend more or reduce general taxes applied to the elderly since money is fungible and the new taxes reduce the amount of funds the Treasury must borrow from the public.
The Democrats claim that the new taxes only impact rich people but some people who have high income in one or a few years do not have high lifetime income. An analysis of lifetime earnings and lifetime tax payments could reveal that the Democrat tax proposals adversely impact some households with modest lifetime earnings.
From a perspective on inter-generational fairness, it is difficult to justify the use of taxes on the next generation to fund current increases in Social Security benefits, even current wealthy Social Security beneficiaries.
The proposal for linking cost of living adjustments to a price index geared towards a basket of goods consumed by the elderly does not account for the fact that due to differences in insurance coverage elderly American households have lower out-of-pocket health costs than working-age American households. Go herefor an explanation.
The expansion of Social Security benefits for children of disabled and deceased workers would affect a small slice of the population in need while ignoring the large number of young adults who are leaving college with substantial student debt. The proposal is not means tested, hence some of the beneficiaries would be quite wealthy and not in need of the additional funds.
In general, the Sanders Social Security reform package would increase the dependence of Americans on the Social Security system. They are likely motivated by previous efforts described here, which appear to primarily benefit the affluent. My view is that progressive changes to private retirement savings are an essential part of a Social Security reform package.
An Alternative Approach:
An alternative approach would include both relatively minor phased in adjustments to the retirement age, new revenue sources for both Medicare and Social Security, and new incentives designed to increase private retirement savings by younger workers who must prepare for a higher retirement age.
Relatively minor additional taxes are needed to prevent automatic cuts to the Social Security in 2034 and the adverse impact of these benefit cuts on the general economy and the elderly poverty rate.
The existence of new revenue will reduce the increase in the future retirement age and reduce pressure on future workers who due to health considerations cannot increase the length of their careers. This combination will reduce future demand for disability benefits relative to the Haley and Christy proposals.
A strong argument could be made that policies expanding private retirement savings among the portion of the population that is unable to save for retirement would be more effective than expansions of Social Security benefits. These reforms include:
- Savings incentives for new entrants to the workforce as early as high school.
- Incentives for automatic enrollment and contributions to Roth IRAS for workers without employer-based retirement plans.
- Changes to Flexible Savings Account and Health Savings Account plans to reduce loss of retirement income due to out-of-pocket health expenditures,
- Limited student debt relief households to facilitate increased retirement saving.
A first draft of an alternative approach to Social Security reform was published here.