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Debate focuses attention on what Social Security 'tweak' might mean for workers

Until Wednesday night’s debate, the 2012 campaign had focused almost exclusively on one entitlement program -- Medicare.

But debate moderator Jim Lehrer steered the conversation back to Social Security by prompting President Barack Obama and Republican presidential nominee Mitt Romney to discuss the future of the program on which 55 million Americans rely for monthly payments.

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President Barack Obama and Republican challenger Mitt Romney participate in their first debate at the University of Denver in Denver, Colorado, October 3, 2012.

It’s a bit odd that Social Security hasn’t played a bigger part so far in the campaign: after all, the federal government spends more on it than on any other program.

And the $2.7 trillion in Treasury bonds which Social Security holds as assets are also future taxpayers’ liabilities. In the coming decades those bonds will need to be paid off by taxpayers, placing a strain on the entire budget since every dollar which goes to redeeming the bonds is a dollar which cannot go to national parks or Pell grants to needy students – or to Big Bird (public broadcasting).

“Social Security is structurally sound,” Obama told Lehrer. “It's going to have to be tweaked the way it was by Ronald Reagan and Speaker -- Democratic Speaker Tip O'Neill. But it is -- the basic structure is sound.”

Previously Social Security got fleeting attention in the campaign for a comment Vice President Joe Biden made to a man in a Virginia coffee shop in August when he said, “I guarantee you, flat guarantee you, there will be no changes in Social Security." It wasn’t clear whether Biden meant no changes for anyone at all -- or simply no changes for those currently getting benefit payments.

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Jason Fichtner, the former chief economist for the Social Security Administration who now teaches at the Georgetown University Public Policy Institute and is a research fellow at the conservative Mercatus Center at George Mason University, said Obama’s statement in Wednesday’s debate “is a huge departure from Vice President Biden's recent statement that Social Security is fine and that the Obama Administration would not support any changes to Social Security. It's refreshing to see the president recognize the need for some reform to Social Security in order to maintain the solvency of program for future generations.”

He added, “And now I'm really eager to see how Vice President Biden answers a Social Security reform question when he debates Congressman Ryan next week.”

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Since Obama cited the 1983 deal between Reagan and O’Neill as a model, it’s worth examining the “tweak” that those two men agreed to 30 years ago.

The 1983 accord extended the solvency of the Social Security program – which was at that point only six months away from default— by cutting benefits for future retirees and by raising taxes.

The 1983 law:

  • Gradually raised the eligibility age for full retirement benefits from 65 to 67 for people born in 1938 and after. This had the effect of cutting expected benefits for workers born after 1937.
  • Accelerated an already scheduled Social Security payroll tax increase.
  • Raised the payroll tax rate on self-employed people from 8.05 percent to 11.4 percent. For someone making $50,000, that worked out to a $1,675 tax increase.
  • Imposed the income tax on up to one-half of the Social Security benefits received by higher income beneficiaries.
  • Reduced benefits by delaying a cost-of-living increase for six months.

According to Social Security historians John Shoven and Sylvester Schieber, “In patching things together for the 1980s, the (1983) plan offered roughly thirty years of smooth sailing.”

That 30-year period is now coming to an end and another “tweak” or overhaul is needed to keep the system fiscally viable.

In their most recent annual report, the Social Security Trustees said that the Disability Insurance fund will run dry in 2016 and that the retirement and survivors’ fund will be exhausted in 2035. At those exhaustion dates, each fund will be able to pay only about 75 cents of every dollar in promised benefits.

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Fichtner sees the 1983 model as a mixture of good and bad policies. “On the one hand, the 1983 reforms brought together Democrats and Republicans in order to pass bi-partisan reform. That's good,” he said. “On the other hand, the deal resulted in payroll tax increases. That's bad. I fundamentally think that payroll taxes are too high and don't need to be raised.”

Fichtner said Congress can adjust the program by raising the retirement benefits eligibility age for workers who are now under age 50 and by changing the formula used to determine cost-of-living increases in benefits.

In Wednesday night’s debate, the focus on Social Security lasted only a minute and then switched back to Medicare, so Romney never did address Social Security.

But his position during the campaign has been, as he said in a speech in February, "When it comes to Social Security, we will slowly raise the retirement age. We will slow the growth in benefits for higher-income retirees." He also said, “Tax hikes are off the table, and there will be no change for those at or near retirement.”

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Obama has said he would get new revenue to pay benefits by increasing Social Security taxes on upper-income people.

The current formula pegs the benefits that will be paid out upon retirement to the taxes a worker has paid during his or her career. Only earnings up to a maximum annual amount ($110,100 in 2012) are subject to the payroll tax. But there’s also a maximum retirement benefit: for a worker retiring at age 66 in 2012, the annual amount is $30,156.

If Congress adopts Obama’s proposal and raises the amount of earnings that can be taxed, then it would also need to decide whether to keep pegging benefits to taxes paid: would upper-income earners get higher retirement benefits in return for their higher Social Security tax payments? Or would the tax increase be used simply to keep the system fiscally solvent?

Lehrer’s refocusing the candidates on Social Security was a useful reminder than the great tax debate of 2013 may need to consider not only the income tax burden but the Social Security tax as well.