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Will 'Fiscal Cliff" Resolution Engulf Social Security?

Overlooked in the potential hit list of "fiscal cliff' budget pact targets is the Social Security program, something its biggest supporters say doesn't even belong in the discussion.

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Financial reform proposals for the entitlement program, however, are in two major deficit reduction packages, as well as on a number of mental lists, including the Simpson-Bowles Commission nd Republican House Speaker John Boehner.

All of these measures are meant to save money. But Social Security is technically not part of the federal budget or deficit, is solvent for at least the next two decades and is still undergoing time-lapse changes to the national retirement age nder a bipartisan package from the era of President Ronald Reagan and House Speaker Tip O'Neill.

At the same time, with Congress and President Barack Obama charged with forging a multitrillion dollar, 10-year package of spending cuts and tax hikes, including the big ticket item Medicare, some analysts say there may not be a better time to address a bigger problem than the entitlement program itself — the oncoming retirement time bomb in America.

"The biggest issue is the demographic problem: all these people retiring so early is now really working against the economy," said Eugene Steuerle of The Urban Institute. "We waited 40 years to deal with the retirement of the baby boomers. t will have a huge demographic impact from 2008 to 2025. It's a good time to make the argument."

Steuerle's position is about as practical and nonpartisan as the debate gets. Still, Social Security touches lots of nerves: income, race, taxes, big government and the safety net — all of which can draw ideological blood between Democrats and Republicans and rile any number of constituencies.

Further complicating the debate is that Social Security — somewhat like the budget package itself — has a lot of moving parts, many of which lend themselves to easy adjustment: the retirement age; the size of benefits; cost of living indexing; the amount of income or withholding level subject to taxation; FICA; and the level of the payroll tax itself.

Changes to any one of them will save money — though the individual savings vary widely — and that makes them vulnerable to political horse trading and their potential use as chips thrown into a pile to reach a numerical target.

Prime Cuts

That said, while some of these money-saving measures are subtle, several others are big ticket, headline-grabbing items, a situation that lends itself to speculation about what, if anything, will wind up in any fiscal cliff deal.

"My best bet is an increase in the retirement age, phased in very slowly (as the increase passed in 1983 was)," said Andrew Biggs of the American Enterprise Institute, who served as a deputy Social Security commissioner.

In addition to being a top item in the Simpson Bowles package, the idea of upping the retirement age was backed by GOP presidential candidate Mitt Romneyand has been mentioned as a possibility by Boehner. Obama endorsed the concept in 2010 — but like almost all things Social Security it is no longer part of his public statements.

Under the landmark 1983 legislation, full retirement age, which had been 65 for many years, was raised. Beginning with people born in 1938 or later, that age gradually increases until it reaches 67 for people born after 1959.

One option in Simpson Bowles would raise the retirement age to 69 and the earliest benefits eligibility age to 64.

Some analysts question the retirement age proposal, pointing to demographic data such as a 2007 Social Security Administration report that shows the bulk of increases in life expectancy have been limited to middle- to high-income groups and white-collar service workers.

One idea — with a fair amount of bipartisan support — is to change the index used for calculating annual cost of living adjustments. The current formula would be changed to a version that runs 0.3 percent lower a year.

"It's the easiest thing to get through and they are hoping to get it through and no one will really notice it," said Dean Baker, co-founder of the Center for Economic Policy and Research, whose 2011 report estimated the change would save about $90 billion over a decade.

Obama reportedly offered the switch in CPI indices as a concession in the summer of 2011 in negotiations with Boehner.

"It's probably the easiest of the difficult choices," said Robert Bixby, executive director of the Concord Coalition, an organization dedicated to fiscal responsibility. "I've always thought it's a good way to get started. Develop some good will; do a Social Security deal before taking on Medicare."

The Tax Factor

Other Social Security reform proposals focus on program revenue rather than expenditures.

Though the FICA tax has been raised frequently over the years, it has stood at 6.2 percent for employees and employers since 1990. (Its temporary one-year reduction to 4.2 percent expires on Jan. 1, which will affect 88 percent of all taxpayers.)

At this point, there's little if any indication that any of the major players in the debate supports an increase.

Not that there aren't ideas floating around.

Virginia Reno, vice president at the National Academy of Social Insurance, estimates that if the 6.2 percent rate is raised 0.05 percent over a 20-year period to reach 7.2 percent, the increased revenue would eliminate 53 percent of the program's future shortfall. (By 2033, payroll taxes will only cover 75 percent of promised benefits.)

Any battle over taxes would most likely be fought over the so-called withholding rate on income subject to FICA. Currently, FICA is applied to wages and salaries up to $110,100. (There's a separate component for Medicare.) The withholding ceiling rises to $113,700 in 2013, which represents one of its smallest annual increases in history.

According to the Social Security Administration, of the estimated 163 million workers who will pay Social Security FICA taxes in 2013, nearly 10 million will pay higher taxes as a result of the change.

The most aggressive reform proposals in Washington would eliminate any ceiling, making all working income taxable, while others call for gradual increases.

Simpson-Bowles, for instance, called for increasing the wage base by 2 percent per year more than the growth in the average wage (making the FICA cap $140,100 in 2015).

A debt reduction plan y former Sen. Pete Domenici and former Clinton budget director Alice Rivlin is more complicated. It would gradually raise the income ceiling over three-plus decades until it covered 90 percent of all wages and salaries, a metric deemed important by Reagan's 1983 presidential commission on Social Security headed by Alan Greenspan.

Various studies indicate that the ratio of this so-called capture rate is now as low as 83 percent, reflecting the above-average wage gains for high-income earners over the past three decades.

Though such a measure doesn't have much traction in Congress, there are two exceptions of note.

Sen. Bernard Sanders, I-Vt., supports legislation that would enact a proposal Obama put forward as a candidate for president in 2008: expanding the capture rate by imposing the payroll tax on income over $250,000.

Raising the capture rate "is a proposal that used to have bipartisan support," said public policy expert Christian Weller of the American Center for Progress and the University of Massachusetts, referring to the decade-old legislative proposal known as the 21st Century Retirement Act. Weller, who like Reno would like to see an expansion of Social Security, said increasing the capture rate would address the program's funding needs in "one single step."

Spreading the Pain

Most experts, however, agree that if Social Security reform is successfully jammed into the fiscal cliff solution, the money-saving measures will need to be as egalitarian as possible, and the more of them the better.

"You just can't pick out one or two reforms, because then it has the appearance of one segment sacrificing too much," said Bixby, who was on the Domenici-Rivlin panel. "You need to have a comprehensive approach. We were very aware of that."

Yet despite the wealth of thoughtful proposals, the Social Security debate on Capitol Hill often turns on a more basic formula.

"Democrats wish to raise the payroll tax ceiling to hit high earners, while Republicans wish to reduce benefits for high earners," said Biggs.

Some say that divide has deepened since the budget-cut talks of 2011.

"I don't think Social Security will be part of any fiscal cliff conversation," said Weller. "The Democrats have definitely moved away from any [such] talk because it has not contributed to the deficit. Separating it has been a successful strategy."

Senate Majority Leader Harry Reid, D-Nev., underscored that point Nov. 14, restating his opposition to cuts in benefits in any deficit package. Reid, plus Sanders, who founded and chairs the Senate's Defend Social Security Caucus, are among a group of 30-odd senators who signed a letter opposing cuts for beneficiaries in any deficit reduction package.

A week ago, however, Boehner said everything should be on the negotiating table.

One difference between the talks of 2011 and today is the ascension of Rep. Paul Ryan, R-Wis., a development that may also complicate the GOP position.

Ryan was an ardent proponent of shifting Social Security funds to private retirement accounts as well as reducing benefits and gradually raising the age of eligibility before Romney tapped him for his running mate.

Going forward, the fate of Social Security may be a now or later issue.

Steuerle, a former Treasury official, said it is possible the entitlement program will be included, if only for practical reasons.

"The longer you wait, the more complicated it is to be fair," he said. "If you phase things in slowly, the adjustment doesn't have to be that great."

Reno agreed: "It would make sense if it could be framed as a solution to a retirement security problem as opposed to a deficit reduction problem."

And some analysts say the outcome depends on the man who has said the least recently —Obama.

"President Obama has to be deeply involved," said Biggs, noting that after he mentioned a "crisis" in Social Security during his first campaign, the left wing of the Democratic Party protested and he backed down. "Most [of them] would be content to do nothing on Social Security," he said.

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