A Must-Read on Social Security
By Arnold Kling
A Well-Tailored Safety Net should be read by every policy wonk or would-be wonk who is focused on the long term fiscal outlook in general and on Social Security in particular. There are two reasons to read it.
1. Author Jed Graham has one original idea that is quite interesting.
2. He offers clear, fair analysis of many of the alternatives for dealing with Social Security.
He calls his idea “old-age risk-sharing.” I would call it “age-related retirement benefits.” In math geek terms, I would call it a “continuous retirement-age function.”
Currently, your retirement benefits are a crude step function of your age. You can get a benefit of $X if you wait until the Normal Retirement Age, or you can get some set fraction of $X if you retire early. Under Graham’s approach, you would get $X when you hit, say, 85, but up until then your benefits would start below $X and increase gradually.
Politically, this means that Congress does not have to raise the retirement age, with all the psychological drama that involves. Instead, they cut benefits for younger retirees, so that if you want to maintain a better lifestyle after age 67 or whatever you have to either save more early or work longer. Graham would point out that working when you are 70 is an easier option than working when you are 85, so this pattern of age-related retirement benefits is more reasonable than an all-out benefit cut.
It also has some advantages over a drastic increase in the retirement age. For one thing, you could inflict some of the benefit cuts in the near term (say, 2013) without causing as much of a ruckus as raising the retirement age on such short notice. For another, you make the boundary between “not retired” and “retired” fuzzier, which I think is appropriate, given that for many people these days, sitting on a rocking chair in Florida is not their idea of how to spend their late 60’s and early 70’s.
More of my comments follow.On p. 15:
Think of the Social Security Trust Fund as a cookie jar where a couple tries to save for retirement by tucking away a $100 bill every week. But every weekend, they give that $100 to their kids to spend on movies, pizza, new clothes, and video games. Still, the couple doesn’t worry about their inability to save, because each time they remove a $100 bill from the cookie jar, they replace it with a piece of paper that says “You kids owe us $100 plus interest to be paid out in an annuity upon our retirement.”
Of course, most of us have long understood this, but you would be amazed to see who writes as if the trust fund actually exists.
For those who claim Social Security at 62–as more than half of all workers now do–the monthly benefit checks they get for the rest of their lives will be 25 percent smaller than if they had waited until they turned 66–the so-called Normal Retirement Age…
Don’t you think these people need to nudged into waiting until their Normal Retirement Age? Why doesn’t a life insurance company offer a “bridge” loan of four years of income now, to be paid back out of your higher Social Security benefits later?
p. 78, he offers a succinct argument for age-related retirement benefits:
Only by scaling back Social Security’s promise of an early retirement, can we avoid the need for benefit cuts in very old age, when people can least afford them.
The book also does a nice job of laying out the pros and cons of other well-known reform proposals, from Diamond-Orszag to Paul Ryan. Those chapters are what make this a book for policy wonks, not just an article on Graham’s own proposal. Overall, Graham strikes me as fair to both sides, not out to please either the left or the right.
I wish him good luck in getting “old-age risk sharing” or what I am calling “age-related retirement benefits” into the policy discussion. In any case, we need a grown-up discussion of Social Security, and this book can contribute to that.