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April 27, 2023 Top Stories No comments
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‘THIRD RAIL’ HEATS UP AS SOCIAL SECURITY REFORM TALK INCREASES


‘Third rail’ heats up as Social Security reform talk increases.

By Steven A. Morelli



A senator working on a plan to save Social Security says Social Security reform
does not have to be the proverbial third rail of politics, but he is touching on
a proposal that has zapped a few policymakers, chiefly the idea of investing
some of the trust fund in the private sector.

Sen. Bill Cassidy, R-La., said that Tuesday during a Bipartisan Policy Center
“fireside chat” on fixing Social Security. Cassidy, who is on the Subcommittee
on Social Security, Pensions and Family Policy, has partnered with Sen. Angus
King, an independent from Maine who caucuses with Democrats, on an effort to
save Social Security.



During Tuesday’s chat, Cassidy said approaching the issue of reforming Social
Security is not the deadly third rail of politics but rather it is ignoring the
issue that is dangerous.



“The third rail according to our leading presidential candidates is pretending
there’s nothing wrong with Social Security,” Cassidy said. “If the 24% cut in
Social Security benefits under current law goes into effect, it will double the
rate of poverty among the elderly. That should be the third rail. The
conversation has to change.”

Groups like the National Committee to Preserve Social Security and Medicare
might agree the conversation needs to change, but they don’t like where Cassidy
and King are taking it.

“The Cassidy-King plan attempts to address the projected shortfall in the Social
Security trust fund by borrowing $1.5 trillion to invest on Wall Street (modeled
on the concept of a “sovereign wealth fund”) — in hopes it would yield
sufficient returns to pay back the loans and still have enough money left over
to cover any future gap in Social Security funding,” the committee said last
month. “This funding scheme really is a trojan horse for benefit cuts that
reportedly are at the core of the Cassidy-King proposal.”


SOCIAL SECURITY REFORM: RECKONING & REASONING

Whatever the solution, it is clear that there is a problem. The Congressional
Budget Office recently said the Social Security Trust Fund is expected to run
dry by 2032 – the second adjustment down in the past half year. CBO Director
Phillip Swagel said if no changes were made to the system, beneficiaries would
lose more than 20% of their benefit.





Last year’s historically large 8.7% cost of living adjustment helped hasten the
trust fund’s expected insolvency. That was a negative aspect of inflation, but
Swagel added that wage inflation was a positive because it boosts contributions
into the system, although not enough.
“On net, it led to a deterioration in the system,” Swagel said of inflation,
“and that moves our exhaustion date just forward one year but into the budget
window [of 10 years].”




SOCIAL SECURITY SPENDING EXPECTED TO DOUBLE

Social Security spending is expected to nearly double from $1.2 trillion in 2022
to $2.4 trillion by 2033, according to the CBO, expanding it to 6% of the GDP,
up from 4.8%.

The last time Republicans seriously proposed privatizing at least some of Social
Security was 2005 when President George W. Bush pushed personal Social Security
accounts and the option for taxpayers to divert some of their payroll tax into
“secured investments.” Bush floated the idea in that year’s State of the Union
address, but the public generally was not enthusiastic about the idea.
Democrats, who opposed the plan, gained a majority in both the House and Senate
in 2006.

President Barack Obama took a crack at it in 2011, when his National Committee
on Fiscal Responsibility and Reform released the Bowles-Simpson proposal to
increase the payroll tax and trim benefits for upper-income people – insuring
that neither Republicans nor Democrats liked the plan.

Although President Joe Biden has not made any proposals on Social Security
reform, Democrats have suggested raising the cap on income that is subject to
the payroll tax, which is currently $160,200.


ALTERNATIVES FOR RAISING PAYROLL TAX WAGE CAP

The CBO looked into two alternatives in raising the payroll tax wage cap. One is
raising the cap to cover 90% of wages, which translates to raising the taxable
cap to about $300,000. That option would reduce the deficit by $693 billion
between 2023 and 2032.

Another alternative is applying the 12.4 percent payroll tax to earnings over
$250,000, but skipping income between $160,200 and $250,000. The tax would
eventually apply to all income because the maximum cap (that is now $160,200)
would continue to rise but the $250,000 threshold would remain, and eventually
the gap would close. That would decrease the deficit by $1.2 trillion from 2023
through 2032. Both estimates take into account the likelihood that employers
would change compensation to nontaxable benefits, such as health insurance.

Republicans have said that raising the payroll tax would be a disincentive to
work, which the CBO acknowledged.

“Changing the share of earnings subject to Social Security payroll taxes would
also affect people's incentive to work,” according to the CBO. “The decline in
after-tax earnings would have opposing effects. On the one hand, people would
tend to work fewer hours because lower earnings would make other uses of their
time relatively more attractive. On the other hand, because their after-tax
income would decline, they would also tend to work more hours to maintain the
same standard of living. On balance, CBO estimates, the first effect would be
greater than the second effect, and thus people in those earnings ranges would
work less.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more
than 25 years of experience as a reporter and editor for newspapers and
magazines. He was also vice president of communications for an insurance agents’
association. Steve can be reached at stevenamorelli@gmail.com.

© Entire contents copyright 2023 by InsuranceNewsNet. All rights reserved. No
part of this article may be reprinted without the expressed written consent from
InsuranceNewsNet.


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