Two Social Security reform plans. With identical effects on Social Security's solvency. But one reduces the debt/GDP ratio by twice as much as the other. littleknownfacts.substack.co…

I've long argued that Social Security is so big that it can affect the economy as whole. And so Social Security reform needs to think beyond solvency alone. A new study from @BudgetModel adds much-needed detail. Penn Wharton analyzed 7 reform packages, with different allocations to tax increases or benefit cuts. They all fixed Social Security's 75-year deficit. But with very different economic effects. I looked at the two extremes: a tax-increase only plan and a benefit-reduction only plan. They each make Social Security solvent, which in term reduces the federal debt. With the tax-increase plan, that's all it does. But the benefit-reduction plan also spurs economic growth. Why? Because if you reduce future Social Security benefits, especially for middle- and high-earners, they'll work and save more to make up the difference. That extra work and savings increases income and other tax revenues. So the benefit-reduction plans reduces the debt more than the tax-increase plan, even though they have the same effect on Social Security's finances. Even more so, the benefit-reduction package increases GDP. As a result, the debt/GDP ratio declines by TWICE as much with benefit-reduction Social Security reform package than with the tax-increase package. This reduces the need for other spending cuts (say, to Medicare) or tax increases to stabilize the debt and prevent a fiscal crisis. This doesn't mean we can't have a strong safety net for poor retirees. But it would be crazy to pass Social Security reforms without first looking closely at how they'll affect the economy. I'll like to the Penn Wharton study here, and to my own write-up in the reply. budgetmodel.wharton.upenn.ed…

This is probably the best-case scenario for Social Security: policymakers behind closed doors agree to split the difference on tax increases and benefit cuts. But this also shows how far we've strayed from doing actual public policy--that is, programs that fulfil essential public needs, at costs that are lower than the benefits they provide--versus simply trying to prop up a framework that's approaching a century old. For instance, raising the Social Security retirement age to 69 seemingly makes sense, given longer lives. But this also means a 13% benefit cut to low-income seniors who aren't actually living longer--in effect, making them pay for a problem they didn't cause. Or raising the salary on which the 12.4% Social Security tax is levied, from the current $184,500 to to $250-$300k. What do we think those households are currently doing with that money? Saving for college. Saving for retirement. Does it make sense for them to pay that into Social Security, and then get even higher benefits later? And here's the kicker: the three reforms described would fix less than half of Social Security's funding gap! (As described, I'd guess around 40%.) I'm not blaming @JessicaBRiedl; everyone cites this "get them all in a room and split the difference" approach, and I've done it myself. And maybe this approach would have worked 25 years ago, when Social Security's deficit was less than half the current size. But now that Social Security's funding gap is so much bigger, policymakers need to think bigger as well. Or, not so much bigger as deeper. Meaning, don't just take the usual menu of options and multiply by 2, but think hard about why we have Social Security, what we want it to do, what functions we thought government had to do in 1935 that it doesn't need to do in 2035, and so on. Those questions, rather than a focus singularly on solvency, are actually the key to Social Security solvency.

Earned, but not (fully) paid for: according to the CBO, the average American retiring in the 2030s is promised 33% more in benefits than they paid in lifetime taxes + interest.