Cuts in Social Security

August 20, 2010 - The Wall Street Journal

Social Security Cuts Weighed by Panel

By LAURA MECKLER

A White House-created commission is considering proposals to raise the retirement age and take other steps to shore up the finances of Social Security, prompting key players to prepare for a major battle over the program's future.

The panel is looking for a mix of ideas that could win support from both parties, including concessions from liberals who traditionally oppose benefit cuts and from Republicans who generally oppose higher taxes, according to one member of the commission and several people familiar with its deliberations.

In addition to raising the retirement age, which is now set to reach age 67 in 2027, specific cuts under consideration include lowering benefits for wealthier retires and trimming annual cost-of-living increases, perhaps only for wealthier retirees, people familiar with the talks said.

On the tax side, the leading idea is to increase the share of earned income that is subject to Social Security taxes, officials said. Under current law, income beyond $106,000 is exempt. Another idea is to increase the tax rate itself, said a Democrat on the commission.

Even before the commission settles on a plan, many liberals are vowing to block any cut in retirement benefits. But the White House and the powerful senior group AARP appear open to a deal.

Republicans on the commission have mostly held their fire. One of them, Rep. Jeb Hensarling (R., Texas) said Thursday he opposes tax increases but wouldn't rule anything out at this stage in the discussions. Otherwise, he said, "the thing blows up before it has a chance to work."

The commission's Social Security proposals would face an uncertain reception in Congress, which would have to approve changes to the program. But some commissioners were optimistic.

"Are Republicans willing to sign onto a tax increase, and are Democrats ready to sign onto a benefit cut? I think the answer is probably yes in both cases if the other is willing to do it," said Alice Rivlin, a Democrat and former White House budget director. Some have suggested raising the retirement age to as high as 70, but Ms. Rivlin said she doubts there is support on the commission to go that high.

Some in the White House view a deal on Social Security as a confidence-building measure that could prepare the political system to tackle even tougher fiscal questions, such as the federal government's budget deficit. Asked about Social Security on Wednesday, President Barack Obama hinted of coming changes, saying: "We're going to have to make some modest adjustments in order to strengthen it."

The 18-member National Commission on Fiscal Responsibility and Reform is charged with generating solutions to address medium- and long-term fiscal problems. To be endorsed by the panel, an idea must garner 14 votes.

The commission includes 12 members of Congress, six Democrats and six Republicans appointed by congressional leaders, plus four non-lawmakers chosen by the White House. The White House also appointed the co-chairmen, Democrat Erskine Bowles, a former White House chief of staff, and Alan Simpson, a retired GOP senator. The group is to issue its report by Dec. 1.

The Congressional Budget Office underscored the challenge Thursday, forecasting that the federal government's budget deficit for this fiscal year would total $1.34 trillion. That is slightly less than previous projections as a result of lower-than-expected spending on the Troubled Asset Relief Program financial rescue. The deficit will fall to just over $1 trillion in 2011, due to lower stimulus spending, the office said. But the deficit would grow if Congress extended the Bush tax cuts.

Social Security officials project that beginning in 2014, the program will routinely pay out more in benefits than it collects in taxes, requiring it to draw on reserves that have been funding the rest of the government. By 2037, the reserves would be depleted and the program would only be able to pay about 75% of promised benefits.

The U.S. is facing the same demographic trends that are at play in most other parts of the world: life expectancies have lengthened while fertility rates have fallen, leaving countries with a shrinking proportion of young workers to help support elderly residents.

The problem is particularly acute in Europe. Germany raised its retirement age by two years, to age 67. In France, President Nicolas Sarkozy has proposed raising the retirement age to 62, up two years. According to the World Bank, Hungary has raised its retirement age, while Poland has moved to reduce incentives for early retirement, and other nations have changed the way benefits are calculated.

In the U.S., this election year's political debate on Social Security has been dominated by Democratic attacks on Republicans who support individual private accounts that could be invested in stocks, an idea that President George W. Bush pushed unsuccessfully in 2005. But many predict any 2011 debate on Social Security will focus on the issue of benefit cuts and tax increases.

Liberal Democrats are already organizing to head off any proposal that cuts Social Security benefits, including any plan to raise the retirement age. They argue the program's finances can be fixed with tax increases alone and that benefit cuts would harm low-income seniors who have little savings.

"People would rather pay more or have revenue raised than cut the benefits," said Rep. Jan Schakowsky (D., Ill.), a commission member. She said she was fairly confident a proposal that included benefit cuts would not garner the needed 14 votes.

Many liberals are particularly opposed to any plan that would link cuts in Social Security to deficit reduction. They say that because the retirement program has long run a surplus, it is not to blame for the budget deficit. The commission's mandate is to examine ways to balance the budget and to address the growth of entitlement programs.

Outside the commission, Moveon.org, the Campaign for America's Future and other liberal groups are pressuring candidates for Congress to promise not to support benefit cuts, posting name-by-name results on a website. A coalition of 125 groups, called Strengthen Social Security, calls for closing the shortfall with tax increases alone. But others are open to the conversation, including the powerful senior group AARP.

"We're prepared to be quite supportive of a real engagement on the issue," said John Rother, director of public policy for AARP. Acting sooner allows for changes to be made gradually, he said, and will reassure younger workers that the program will be there for them. He dismisses those who said they can never support benefit cuts. "I know all these people personally and they'll say we have to be hard line now to influence the debate...I kind of take it with a grain of salt, these emphatic statements."

—John McKinnon contributed to this article.

Write to Laura Meckler at laura.meckler@wsj.com