We propose gradually raising the age for eligibility for Social Security. We support using the chain index of inflation to more accurately adjust Social Security benefits for inflation. We support retaining the Earned Income Tax Credit to offset the effect of Social Security taxes on low income families. To the extent that the above changes do not return the system to actuarial soundness, we support raising the income limit on the Social Security Tax.
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Social Security was developed in an era when few people lived beyond 65 years of age. The program now faces a demographic tsunami caused by the intersection of extended life expectancies and the baby boom. Despite that, the problems with the actuarial soundness of the program can be fixed with relatively little difficulty, if we start now.
First, we believe that those at or near retirement (those currently older than 58) should receive the benefits that were promised to them. This does not mean, however, that they should get more than what was promised to them. Most, if not all, economists would agree that the current system for indexing Social Security for inflation has resulted in an unintended wealth transfer to the recipients. We support moving the system to a “chain index” for adjusting benefits for inflation. This approach is both reasonable and modest in its impact.
Second, the age for full retirement eligibility under the system should be raised gradually from 66 currently (gradually rising to 67 for those born after 1960) to 70 years of age. We would suggest that those currently between 54 and 58 would have full eligibility at 67 years of age. Those currently between 50 and 54 years of age would have full eligibility at 68 years of age. Those currently between 46 and 50 would have full eligibility at 69 years of age. Those currently less than 46 would receive full eligibility at 70 years of age. The minimum age should also rise to 64 from 62 and the maximum age should rise to 72 from 70. We expect that with these changes the Social Security system will be actuarially sound. If reform is delayed for a number of years, the magnitude of the required changes to accomplish this objective will be much more severe.
We support maintaining the Earned Income Tax Credit, which is designed to offset the regressivity of payroll taxes, such as the Social Security tax. We also oppose increasing the income limit on Social Security taxes by any more than that necessary to make the system actuarially sound.
In thinking about the relative regressivity of Social Security taxes it should be kept in mind that the method for calculating benefits is already progressive, offering proportionately larger benefits to low income recipients relative to their contributions. In addition, the fact that above a relatively low limit, Social Security benefits are taxable through the existing progressive tax system, increases the net after-tax progressivity of the program.
Philosophically the intent of these changes is to do what is necessary so that, over the long term, Social Security remains actuarially sound and does not add to the deficit. We would be opposed to changes in Social Security that attempted to cut the deficit through changes in eligibility, benefits, or social security taxes.