Self-styled libertarian Scott Sumner is dismayed by two of three proposals put forward by House Minority Leader John A. Boehner (Republican, Ohio) to cut spending on contributory public pensions (known as “Social Security” in the USA).
Besides raising the retirement age for full Social Security benefits to 70 for people now 50 or younger, Mr. Boehner suggested curbing benefit growth by tying cost-of-living increases to the consumer price index rather than growth in wages, and providing benefits only to those who need them.
Patrice Hill, “Both parties mull raising retirement age”, Washington Times, 13 July 2010.
On the first point, Sumner concedes “there are good arguments on both sides … , although it seems a bit unfair to make coal miners work until 70″. But Mr Boehner does not propose that anyone be forced to retire at age 70, only that full benefits be given only at that advanced age. Workers would presumably continue to have the option of retiring earlier. At present, workers in the US can retire as early as age 62, but benefits are reduced actuarially if they choose to retire before their official retirement age (currently age 66, moving gradually to age 67). Mr Boehner’s proposal to move the official retirement to age 70 amounts, in effect, to a reduction in pension benefits, regardless of one’s actual age of retirement.
On the second point, Sumner prefers to use wages rather than prices as an index for benefits, since “people judge how they are doing relative to their neighbors, not relative to those who lived 100 years ago in log cabins”. Good point. But I would add that although initial benefits are indexed to wages, the index currently becomes consumer prices once retirement benefits commence. This is not necessarily bad, since it does penalise early retirement.
But it is the third point that “really bugs” Scott Sumner. It bugs me as well.
This is penny wise and pound foolish policy-making. We are already getting all sorts of subtle and not-so-subtle increases in marginal tax rates (MTRs), why would the Republicans want to raise the implicit MTR on people who save for retirement?
Scott Sumner, “With Republicans like these”, The Money Illusion, 14 July 2010.
Kudos to Scott Sumner for this post. I am thrilled whenever anyone publicises the fact that means-tests are a form of taxation. Republicans like Mr Boehner may not know it, but, when they advocate means-tests, they are actually advocating an increase in taxes. In the case of retirement benefits, these implicit taxes fall largely on the wealthy, discouraging them from saving for their own retirement. More often, the implicit taxes fall heaviest on the poor, discouraging them from working. It is ironic that Republicans want means-tests for pensions, which leads me to conclude that they know not what they do.
Scott Sumner teaches economics at Bentley University, a business school located in Waltham, Massachusetts.
Update: From a comment by “Don” at The Money Illusion: “The Republicans want to institute means-testing so they can start to claim that SS [Social Security] is really welfare and begin the process to dismantle it.”
Ah! The Republicans do have a logical plan. But what will they put in its place? Forced contributions to private accounts?
Tags: targeting
From Andrew Biggs:
Congressman Boehner may or may not understand the incentive effects of an explicit means-test on Social Security benefits, but the other Congressmen (and their staffs) who have actually designed Social Security legislation do. As far as I know there isn’t a single reform proposal that relies on an explicit means test, meaning the government examines your income/assets in retirement and reduces your Social Security benefits if they rise above a given level. (See here < http://www.ssa.gov/OACT/solvency/index.html> for a list of proposals.)
Rather, all reform plans that reduce benefits for high earners do so on a prospective basis based on lifetime earnings, not income in retirement. For instance, President Bush’s proposal would simply have made the program more progressive, by paying current law replacement rates to individuals with lower lifetime earnings but lower replacement rates to those with higher lifetime earnings. While the effect on benefits may be the same, the incentives are focused more as a negative income effect than a substitution effect. In contrast to an explicit means test, you could expect that many middle/high earners would increase personal saving to make up for the difference in their Social Security benefits.
Andrew G. Biggs
Resident Scholar
The American Enterprise Institute