Social Security's repair options laid side by side in one table

Let me tell you about the most reliable sentence in American politics. It goes: "I have a plan to save Social Security, and it won't cost you a dime." Folks, I'd love to meet the person who wrote that plan, because arithmetic has been looking for him for decades. Social Security is a machine that takes in money from working people and pays it out to retired and disabled people, and when the machine is going to pay out more than it takes in, somebody has to take in more, somebody has to be paid less, or somebody has to wait longer. That is the whole menu. There is no secret fourth column.

So let's do something unfashionable. Let's put every serious option on one table, say what each one does, give its best defense and its best objection, and name the person who pays. No fog, no "shared sacrifice" slogans that never say whose sacrifice. You can decide for yourself, and you will at least know what you are deciding.

The problem in one paragraph

Social Security is mostly pay-as-you-go. The payroll tax that comes out of your check this month is, in the main, paid out this month to a retiree. The payroll tax is 12.4 percent of wages up to a yearly cap, split evenly: 6.2 percent from the worker and 6.2 percent from the employer. A worker with $50,000 in covered wages sees $3,100 withheld (that is $50,000 times 0.062) and the employer sends in another $3,100, for $6,200 in all. That money pays current benefits, and any surplus goes into the trust funds, which hold special Treasury securities.

The trouble is demographic and it is not a mystery. People live longer than the designers of 1935 expected, and the number of workers behind each retiree has fallen. When benefits promised exceed revenue coming in, the trust fund is drawn down, and when it is empty the law pays only what current payroll taxes cover, which means an across-the-board cut. I am not going to quote you the exact date or percentage, because the Social Security Trustees publish a new report every year and the number moves. Read the current one at ssa.gov. The point that never moves is this: there is a gap, and every option below is a way of closing it. If you want the history of how the program was built, start with How Social Security works and the promise built into its 1935 design.

The table

Here are the six families of options. Notice that each row has a winner and a loser. That is not a flaw in the table. That is the lesson of the table.

Now let's walk the table one row at a time, because the best answer is in the details.

Row one: raise the payroll tax rate

This is the cleanest of the options and the one liberals reach for first, because it asks nothing of the benefit side. Raise 12.4 percent to a higher number and the gap narrows.

The strongest argument is that it is transparent. Everyone can see the rate. Nobody has to be told that their benefit formula changed. A rate increase also spreads the cost over every covered worker, which means a smaller increase for each person than a targeted change would impose on a few.

Here is the objection, and it is a serious one. A payroll tax is a tax on work. It is paid from the first dollar of wages, with no deduction and no exemption, which makes it more burdensome for low-wage workers than the income tax, which has a standard deduction. Take a hypothetical worker earning $30,000. One extra point on each side of the payroll tax costs her 1 percent of her wages, which is $300 a year, and her employer pays another $300 that would otherwise have gone to her pay or to hiring. Economists across the spectrum generally agree that the employer's half is borne in the long run by workers in the form of lower wages than they would have had. So the statement "the employer pays half" is a legal fact and not an economic one. This is worth remembering any time somebody tells you a fix is "free to workers" because the boss pays part. For a closer look at what comes out of your pay, see a paycheck worksheet that shows where every dollar of your pay goes and why your raise feels smaller than the number your boss pays out.

Row two: lift the taxable maximum

Each year Social Security taxes wages only up to a cap, and wages above it escape the 12.4 percent. Proposals range from eliminating the cap altogether to lifting it only for very high earnings above a threshold. I will not quote the current dollar amount, since it rises every year with average wages. You can find it on the Social Security Administration's website.

The best argument is a fairness one that many Republicans feel in their gut: the system leans on a ceiling, so a person earning ten times the average pays the same dollar amount as a person earning slightly more than the cap. Lifting it asks the most from those who can most afford it.

The objection has three parts. First, it is a tax rise on the people who start businesses, hire workers and invest, and a lot of small-business owners report their income on their personal returns, so a payroll tax on high earnings reaches them directly. Second, it hands Congress a huge new source of revenue with no built-in discipline on spending, which is how programs grow. Third, there is a design problem. The benefit formula is built so that the money you pay in is tied to the benefit you get, up to the cap. If you tax above the cap but pay no extra benefit, Social Security stops looking like an earned-benefit program and starts looking like welfare funded by a surtax on success, which is a politically fragile thing for a program whose strength is that people feel they earned it. If you do pay extra benefits, you have eaten much of the revenue you raised. A conservative can reasonably decline this one or accept it only as part of a package that also reforms the benefit side.

Row three: raise the retirement age

The retirement age is not a law of nature. The 1983 amendments, which followed the Greenspan Commission and were signed by President Reagan on April 20, 1983, phased in a higher full retirement age. For people born in 1960 or later the full retirement age is 67. You can still claim as early as 62, at a permanent reduction, and delay up to 70 for a permanent increase.

The argument for going higher is plain. Life expectancy at birth is far above what it was in 1935, and the program was meant to provide insurance against old age, not a third of adult life in retirement. If the age had been indexed to life expectancy from the start, it would be higher now and the gap would be smaller.

The objection is that life expectancy is not distributed evenly. The roofer, the line cook and the warehouse worker with bad knees often cannot work to 68 or 69, and averages hide that. Raising the full retirement age is mathematically a benefit cut for everyone, since you receive a smaller percentage of your full benefit if you claim at the same calendar age as before. A fair version leaves early claiming possible for people in demanding jobs and leaves disability insurance able to catch those who truly cannot work. The people most hurt are those who can least adapt, which is why this reform lives or dies on the details.

Row four: change the benefit formula or indexing

This is the least understood row and the one with the most leverage. Your monthly benefit starts with your average indexed monthly earnings, over your highest 35 years, run through a formula with three brackets. The formula pays 90 percent of the first slice of average earnings, 32 percent of the next slice, and 15 percent of earnings above that. The dollar thresholds between slices are called bend points and they are adjusted each year. That tilt is why the program replaces a larger share of pay for lower earners.

The key word is indexing. Since the 1977 amendments the earnings used in the formula have been indexed to the growth of average wages, which means each new generation of retirees starts with a benefit that rises along with the economy's real growth. Switch to price indexing and each new cohort's starting benefit grows only with inflation. Because wages normally grow faster than prices over the long run, the difference compounds, and the savings get large over decades without any single announcement of a "cut." Progressive price indexing, which was floated in the 2005 debate, would have kept the formula for lower earners and applied the slower indexing to higher ones.

The strongest argument: it tackles the real cost driver, which is that initial benefits are rising faster than the prices of what a retiree buys, and it can protect the poorest. The objection: it is a benefit cut, and calling it by another name does not change the arithmetic. A voter who understands the word "indexing" is a voter who understands exactly what it does. That honesty is the test. A reform that cannot be explained to a retiree at a kitchen table without evasion is a reform that will not survive the next election.

Row five: change the cost-of-living adjustment

Since 1975 benefits have risen automatically each year by an adjustment tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers, the CPI-W. The proposal here is to switch to a measure that grows more slowly, usually the chained CPI, which assumes that when beef gets expensive shoppers buy chicken. For how the CPI is built, see How the CPI is built and why it never matches your grocery receipt.

The argument for it is that the standard index overstates what a household really needs to spend to keep its standard of living, because households substitute. The argument against has two parts. A senior who is 85 has lived on an adjustment that is a little lower every year for two decades, so her benefit has quietly lost ground at the very age when her medical costs are climbing. And seniors' spending leans on health care and housing, which have not fallen when beef rose, so the substitution argument is weaker for them than for the average shopper.

A conservative can accept the logic of accurate measurement and still insist on a protection for the very old. The principle I would defend is this: do not keep a promise to people at 66 by breaking it to people at 86.

Row six: personal accounts

In his 2005 State of the Union address on February 2, President George W. Bush proposed that younger workers be allowed to direct part of their payroll taxes into voluntary personal accounts, with the traditional benefit reduced to offset what the account would add. It never came to a vote in either chamber, and I would argue that how it failed is the most valuable thing about it.

The argument for accounts is ownership. A personal account is yours, it can be left to your children, it earns a return that is not set by a committee, and it gives a twenty-five-year-old a reason to care about a program that otherwise looks like a tax with a distant payoff. Other countries have built funded systems, and the principle that a worker should own part of his retirement is a conservative one.

The objections are real and you should hear them at their best. Because the payroll tax pays today's retirees, diverting a slice into accounts leaves a hole that must be filled by borrowing, by cuts or by other taxes during the transition. That is a very large cost to name up front. Markets also go down, and an account tied to a bad stretch near retirement leaves a worker short. Defenders respond that the traditional benefit was reduced by design to take that into account, and that over a working lifetime the history of broad stock and bond returns is favorable. But a plan that asks the public to carry a transition cost today for a benefit that arrives in forty years is a hard sale, and in 2005 it did not sell. If it comes back, the version that has a chance is one that is voluntary, adds to the traditional benefit and does not cut the benefit that near-retirees are counting on.

The strongest objection to the whole exercise

A thoughtful liberal will say: "You treat every option as a cost. But Social Security is the single most effective anti-poverty program for the elderly America has ever built, and the gap is modest compared with the size of the economy. Close it with revenue and move on."

That is a fair case, and here is where I part ways with it. One, the gap is modest only if you look at it as a share of the whole economy and not as a share of the budget that Congress controls. Two, the program is already one of the largest items in federal spending, and it competes with Medicare, defense, interest on the debt and everything else. Three, a revenue-only fix asks a shrinking base of workers to support an expanding base of retirees, each year, with no end to it. Four, delay is the most expensive option of all, because the longer Congress waits, the larger the share of the burden that falls on people close to retirement who have no time to adjust. The 1983 reform worked precisely because it phased in changes over decades and gave people notice. For the larger fiscal picture, see twelve questions about the national debt, answered straight. For Medicare, the other half of this problem, see Medicare part by part, what A, B, C and D cover and who pays.

A package, not a pick

Here is the verdict. Nobody gets to choose one row. The 1983 law was a package: it raised payroll taxes on a schedule, taxed part of benefits for higher-income retirees, raised the retirement age gradually and brought in federal employees. It was negotiated between a Republican President and a Democratic Speaker, Tip O'Neill, and both sides had to eat something. That is the model. An honest package spreads the burden and gives those closest to retirement a guarantee. Conservatives should insist on three principles: keep the promise to current retirees and those near retirement, make changes gradual and announced decades ahead, and offer younger workers a path to ownership instead of just a bigger tax bill.

The bottom line

• Every Social Security fix is a mix of more revenue, smaller or later benefits, or a transition cost. If someone says their plan has none of these, they are not telling you the whole plan.
• Ask any politician which row of the table he is choosing and who pays. If you get a slogan, you have your answer.
• Protect the promise for people now retired and near retirement, and push for gradual, announced changes for everyone else.
• Read the Social Security Trustees' latest report at ssa.gov yourself. The figures change every year and you should not rely on anyone, including us, to summarize them for you.
• Tell your representative that you want a bipartisan package like 1983's, passed early, and not a crisis deal in the last year.