Peter Orszag supports social security reform. Millions of elderly American citizens rely on Social Security to avoid poverty, but the program is in danger of a long-term deficit. However, the deficit is small enough to be eliminated by progressive reform that combines increased revenue with benefit reductions.
Eliminating the Social Security deficit can only be done through tax increases or benefit reductions, neither of which is an easy decision. Some assume that money can be transferred from the federal budget to Social Security, but this ignores the deficits projected in the budget. Others assume Social Security can borrow trillions of dollars to finance stock investments, but this does not take risk into account.
Orszag’s proposed plan focuses on three areas that contribute to actuarial imbalance:
- Improvements in life expectancy
- Increases in earnings inequality
- The burden of the legacy debt
Life expectancy is on an upward trend and is expected to continue rising. Since 1940, life expectancy at age 65 has increased five years for women and four years for men. More years of life means more years of Social Security payments. In order to offset the costs, Orszag proposes tax increases in conjunction with benefit reductions. Orszag’s plan would reduce the actuarial deficit by 0.55% of taxable payroll. This is a little less than a third of the current deficit.
Social Security financing is affected by an increase in untaxable earnings and the widening difference in life expectancy between low earners and high earners. Orszag’s proposal raises the taxable maximum and reduces the highest tier of benefit earners. These changes would reduce the actuarial deficit by 0.43% of taxable payroll.
The legacy debt is the difference between what the first generation of Social Security beneficiaries paid into the system and the benefits they received. Paying off the debt remains a burden for current and future generations. The main issue is financing the legacy debt across several generations. Orszag proposes three changes:
- Mandating Social Security coverage for state and local government workers
- Creating a tax on all earnings above the maximum taxable earnings base
- Creating a universal charge, which will appear as benefit reduction and an increased payroll tax
Through this plan, Orszag hopes to prevent an even larger Social Security deficit.