The US Social Security arrangements need reform, according to the National Commission on Fiscal Responsibility and Reform (NCFRR). Its report (of December 2010) made nine recommendations that both increased coverage and reduced benefits. The key suggestions were to gradually increase the ‘earnings base’, reduce benefits for higher earners, reduce the rate of benefit increases, increase the pension ages in payment, improve benefits for ‘low-wage’ workers and force all new state and local authority workers to join from 2020. The ‘slope’ of the overall benefits was to be changed in favour of lower-paid workers.
This 2012 report looks at the overall impact of the recommendations.
“The availability of high-quality projections from microsimulation models, several of them developed by SSA [Social Security Administration], now provides an opportunity to assess OASDI reform on broader grounds than simple actuarial balance. As with most policy analysis, no single outcome measure is sufficient by itself, so it is useful to present several. Also, because Social Security affects multiple generations, it is crucial to examine results over time, not just at one single time point.”
The report suggests that reform-analysis should be more than about identifying winners and losers:
“We suggest that Social Security measures should include effects on poverty or adequacy, progressivity, horizontal equity, and work incentives.”
In other words, what are the likely outcomes for proposed reforms?
The report’s analysis suggests, in summary, that “[F]or lifetime poverty and cross-sectional poverty, poverty gap, and poverty intensity, the NCFRR proposal leads to poverty increases relative to current law scheduled, but they are smaller increases than under current law feasible (and certainly current law payable).”
Lower earners can expect to receive a greater share of ‘auxiliary benefits’ but outcomes are less certain for couples with different splits of income between the spouses but ‘fairness’ might be lessened in some cases.
“On work incentives, the NCFRR approach compares less favorably for many workers than current law scheduled and payable, but generally does better than proposals…that include universal increases in tax rates (as opposed to NCFRR’s tax base expansions that only affect higher earners).”
PensionReforms thinks that this approach to considering reforms to the US Social Security is a step forward. It highlights an institutional difficulty caused by the structure of the benefit system that sees Social Security as a separate, stand-alone institution with its own trustees, administrators and advisers. This framework was originally created to ‘protect’ workers’ contributions and benefits from political interference but it doesn’t and cannot do that. In the US, Social Security is just as much a part of the public policy framework as defence, infrastructure and the justice system.
Some of the benefit design difficulties are made worse by the ‘separateness’ of Social Security and the principle that, by paying ‘Social Security contributions’, employees have secured a promised level of future benefits.
In the meantime, Pension Reforms welcomes the report’s recommended change in emphasis from the so-called expected ‘insolvency’ of Social Security:
“By making use of these types of outcome measures, we believe policy makers can design future proposals in ways that advance important equity and efficiency objectives. They will also have available a consistent way by which to compare proposals and their adherence to basic principles of public finance.”
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