January 07, 2005

How to Slash Social Security Benefits

Matt has a typically sharp post about the interplay between health care and Social Security. I wrote on this a while back, covering more or less similar points, and just want to add that there's one good way to make this all concrete. At the current growth rate of health care spending, Medicare premiums and out-of-pocket health expenses will eventually (20-30 years down the line) start gobbling up about half of all retirement income. That's if no changes are made to the health care/Medicare boondoggle. Now, if Bush passes his Social Security phase-out plan and benefits are slashed by indexing them to wages, seniors could start realistically seeing their entire guaranteed benefit going towards health care. That means that for all other expenses, they have to rely entirely on the returns in their (risky) private account. Effectively, that means no guaranteed safety net whatsoever.

Another thing to keep in mind is the rising incidence of debt among seniors, which also decreases the functional value of Social Security benefits. Some of this debt stems from the fact that seniors tend to gamble more than the general population (Bingo is very popular), but that's not all. We also have misguided housing policies in the U.S. that tend to increase and extend mortgage debt long into retirement. Meanwhile, predatory lending practices often hurt seniors the most. Not all of this is fixable, but some of it is. Simple things like better credit counseling—and more importantly, figuring out how to induce seniors to actually seek out credit counseling—would help. On the other hand, policies that try to reduce gambling among seniors might be too paternalistic for some, but it should at least be explored.

The larger point is this. I tend to think we can probably reduce Social Security benefits for seniors in the future in order to make the program solvent. Ideally, benefits should be higher in real terms than they are today, because standards of living rise, and as the U.S. becomes richer as a nation, the pie gets bigger and there's more wealth to share with those who worked all their lives to make this country prosperous.

But we don't necessarily need to reach the extremely generous benefits that are promised by Social Security today. As promised by the program, seniors retiring in 2050 will have benefits that are 40 percent higher in real terms than they are today. Under the do-nothing plan, where the program eventually needs to cut benefits because the Trust Fund runs out, those benefits can be 20 percent higher. That seems okay. But at the same time, we should be working on things to increase the functional value of those benefits, which means finding ways to scale down senior debtedness, lowering health care costs, etc. etc. There are ways to make eventual benefit cuts in Social Security less painful and something we can live with.
-- Brad Plumer 3:06 PM || ||