The first thing you need to know about Rep. Jan Schakowsky’s plan to strengthen Social Security is what it does not do.
It does not claim to cut benefits in order to “prevent them from being cut” in the future. It does not “fix” Social Security with 70% benefit cuts and 30% revenue increases and then turn around and call itself a compromise.
It does not shove middle class retirees and their families into poverty by cutting their benefits as much as 35%.
It does not pretend that we need to rob middle and low income earners out of house and home to offer the very poorest a more decent living.
It does not stick it to the overwhelmingly black and Latino workers in physically demanding jobs by making them work till age 69. It does not pretend that because richer Americans are living longer, regular Americans should work till they drop.
It does not presume that the elderly and disabled can swap long-term care and prescription medicines for cheaper versions when their COLAs get slashed.
In short, it does not assume that America’s senior citizens are greedy geezers “driving their cadillacs to get their AARP discount at the Perkins,” or sucking on the teat of an extremely large cow.
No, we already know all about a plan that does those things. It’s called the Simpson-Bowles plan. Conceived by a Wall Street banker and governor’s son, for Wall Street bankers and governors’ sons. But the way the media has reported on it, you would think the cruel blow it strikes to the lives of American retirees, veterans, disabled workers–and yes, children–is somehow brave, as if they were facing up to the inevitable.
Today, Rep. Schakowsky proved them all wrong. And for that we owe her a debt of gratitude. Her plan puts Social Security on a sound footing for the next 75 years without cutting a single benefit. Here’s how she did it, in three quick steps:
Lift the cap on taxable payroll back up to 90% on the employee side, and eliminate it on the employer side. This move alone erases 74% of Social Security’s long-term shortfall. Poof! Doesn’t that feel good? That means millionaire bankers and corporate executives will have to pay their fair share for the workers they employ–and a fairer share of their own income.
Simpson and Bowles lifted the cap up to only 90% on the employer side. That would deliver half as much revenue for the program as Schakowsky’s plan, but the good ole boys made it seem like a big tax increase–a compromise aimed at wooing progressives like Schakowsky. In fact, lifting the cap to 90% would just restore it to where it was intended to be when President Reagan signed it into law in 1983. It was a cap based on average wage growth, meant to avoid a situation where we would pay the richest in this country benefits proportionate to their millions and billions. But because the vast majority of income growth has taken place “above the cap” since 1983–don’t forget, the rich have been the ones getting richer all that time–the same average wage growth formula only covers 83% of the country’s present day earnings. Schakowsky merely takes it a step further by making the Social Security tax more progressive, without levying a major tax increase on employees in the $106,800-250,000 range of income.
Treat flexible spending accounts like 401(k)s. Like so much of recent Social Security policy, this change boils down to perfecting reforms that were made in 1983 (when Social Security actually did face a financial crisis). Back then, Congress decided that 401(k)s and other employer-sponsored retirement accounts should be considered taxable payroll for Social Security. We call it taxable payroll, but we should call it Social Security’s benefit base.
If an individual does not contribute to Social Security from a particular set of earnings, those earnings will not be counted toward their Social Security benefits later on. Treating 401(k)s as taxable payroll prevents employers from contributing to employees’ pension plans in order to lower the payroll taxes they would have to pay on normal salaries, and thereby depriving their employees of Social Security protection for the earnings they accrue in their private retirement accounts.
Expanding Social Security’s benefit base to include the flexible spending accounts often granted by employers to cover out-of-pocket transportation, parking or child care expenses, in the same way we do for 401(k)s, would erase another 13% of the Social Security’s shortfall. And it is a pretty good deal for workers. Unlike expense accounts, Social Security benefits are adjusted for inflation and costs of living, and insure workers and their families against lost income in the event of death or disability.
Issue a 3-4% legacy tax on all earnings “above the cap.” Still feeling blue about the free ride the rich are getting by not having to pay Social Security taxes on all of their income? This option moves us just a little bit closer to fairness, and wipes away 26% of the Social Security shortfall in the process.
A 3% tax on the top 10% of the country’s income would be split evenly between the country’s wealthiest employers and employees for a total of 1.5% each. For some perspective on how such a tax compares to other popular proposals, every year that the retirement age is raised cuts benefits for everyone by 7%, and disproportionately affects the lower half of earners. Merely by raising the retirement age two years, the Simpson-Bowles plan cuts benefits by 14%.
Not only that. There is a good historical reason for us to pay a little extra into the system, beyond the money that we already contribute. We’ve been running on a deficit since the beginning. You might say its our legacy. Well, better put, it’s the legacy of the generation that fought in World War I, survived the Depression, and sacrificed during World War II. That was the first generation of Social Security recipients. You see, President Roosevelt insisted that Social Security begin paying benefits to Americans aged 65 and older in 1940, even though the program had only been collecting contributions since 1937.
Roosevelt believed that since the Americans of that generation had served their country in the hardest of times, the public owed them a degree of security in old age, even if the program’s revenues were not yet adequate. We were supposed to make up the unfunded benefits through increasing workers’ contributions to the program. But now years have passed, and we never did. Requiring our wealthiest citizens to do so now is not only right for the program, it is the responsibility we carry for the legacy costs of that first generation of beneficiaries.
Regardless of what people say, this proposal is among the least controversial ways to shore up Social Security’s finances. It is neither a new idea, nor a left-wing one. In fact, the centrist budget hawks Peter Orszag and Peter Diamond proposed it way back in 2003.
There. That’s it. Rep. Schakowsky’s entire plan. Fair and painless, without all of the technical mumbo-jumbo. And we still have room to create a minimum benefit for the poorest workers, give the oldest beneficiaries a 5% increase, reinstate the student benefit and increase benefits in other ways.
So the next time someone looks at you condescendingly with that you-just-don’t-get-the-deficit look and demands to know “what your plan is,” you know what to tell ‘em: You support the Schakowsky plan. But when they ask you, “If her plan is so good, why didn’t Obama have her chair the Commission,” do not be afraid to admit your ignorance. Because that is a really good question.