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April 26, 2005

Will Franklin has graded the AARP's suggested options for reforming Social Security to ensure its long-term solvency. Needless to say, none of the increasingly irrelevant lobbying group's nine alternatives are pretty, and Will does a good job in marking up their deficiencies.

Let's take a closer look at the AARP's preferred choices:

  1. Raise the payroll tax cap.
  2. As noted by Robert Robb in his commentary Lifting Wage Caps Dooms Real Reform, lifting the payroll tax cap on income that may be taxed for Social Security does not do much to make the system more solvent:

    According to Social Security actuaries, lifting the wage cap only delays the date at which current taxes are insufficient to pay current benefits, now projected at 2018, by six or seven years.

    It would do more to delay the point at which trust fund reserves are exhausted, currently projected to be 2042. But that's in large part because it would increase Social Security surpluses in the short run.

    That would increase the trust's reserves, held in the form of special treasury notes. But that exacerbates the already considerable problem of financing the redemption of those notes as they are needed to pay benefits.

  3. Raise the payroll tax rate.
  4. For more support of Will's argument pointing to the history of Social Security taxes, see this brief overview of their history.

  5. Raise taxes on benefits.
  6. Already, up to 85% of the income from Social Security retirement benefits that a beneficiary may receive from program is taxable. This taxation comes despite the fact that the typical individual earner has already paid income taxes on at least half of the contributions they made to the program over their working careers was drawn. In addition, these taxes go to the U.S. Treasury's general fund, and not toward Social Security, so they would have zero impact on the program's sustainability.

  7. Preserve tax on estates over $3.5 million.
  8. Like income taxes, the money collected by the government as estate taxes goes toward the U.S. Treasury's general fund and not toward Social Security. This suggestion is absolutely irrelevant to the Social Security program's long-term solvency.

  9. Extend coverage to newly hired state and local government employees.
  10. Don't you just love when a lobbying group advocates for two sets of rules for everyone? Why penalize new state and local government employees? Why bother when many have their own, much better plan?

  11. Invest a portion of the trust funds in indexed funds.
  12. Let's get this straight. The AARP is opposed to Personal Retirement Accounts (PRAs) for individuals, whose investment options would be limited to index funds, but it's okay for the government to invest money from taxes directly in the stock market? It's a good thing the AARP supports some kind of investing to provide for retirement, otherwise their Investment Program might seem somewhat cynical, although you might suspect they would prefer Uncle Sam run that program as well to satisfy their inner socialist.

  13. Adjust the COLA.
  14. No, they're not talking about putting a lime in the Coke(TM), you nut.... That's COLA as in "Cost Of Living Adjustment", or rather, the changes in benefit payments to account for increases in inflation. The AARP probably means adjusting the COLA downward, below the rate of inflation, making it more and more difficult to make ends meet as time goes by for those who solely rely upon Social Security for their income in retirement.

  15. Increase normal retirement age to 70.
  16. Increasing the normal retirement age at which one may receive full Social Security benefits is another way of cutting benefits, as individuals must wait longer to be able to receive their benefits. As noted by Herman Cain, the greatest cost of this suggestion would be borne disproportionately by ethnic minorities, whose life expectancy at retirement is shorter than average.

  17. Index benefits to prices, not wages.
  18. Will gave this option a B+, his highest grade for any of the AARP's suggested options. It has the advantage of being able to make the program wholly solvent, but the disadvantage of reducing the basic level of one's basic retirement benefit as the rate of inflation in wages has historically averaged slightly over 1% more than the rate of inflation in prices. [Side Note: The basic retirement benefit set this way has its future annual COLA increases set by the Consumer Price Index, which adjusts future benefit payments for price inflation.]

    Will notes that this option would be best if matched with a PRA option that would allow the individual to make up the difference, but since the AARP is opposed to such ideas, it deserves a lower score.

Finally, Will notes the:

AARP is engaging in a classic case of misdirection. They are throwing out a series of "vegetable" proposals they know people won't eat; meanwhile, they don't even mention dessert. Any good faith effort to reform Social Security will include an honest discussion on solvency issues, but it will also include ways to offset benefit government-paid reductions through personal accounts. Meanwhile, there is no good reason to raise taxes.

The AARP's effectiveness as a lobbying group has been declining in recent years, despite significant demographic growth in the number of elderly Americans. This decline has come about largely as the result of a change in focus of the group's leadership, as they have largely replaced the group's previous practice of advocating balanced positions that appeal across the political spectrum with hard-line lobbying efforts in support of policies dictated by left-wing partisans. The AARP's members would be much better served in ongoing public policy debates by encouraging its leadership to return to a much more effective moderate balance.

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