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On the Economy

AARP agrees to benefit cuts!?

AARP may have changed its position on Social Security cuts. But how much is the shortfall, anyway?

By Jared BernsteinGuest blogger / June 19, 2011

Kathleen Cramm winces as she tries to remember the spelling of a word during the AARP National Spelling Bee, June 18, 2011, at the Little America in Cheyenne, Wyo. News reports suggest that the organization representing seniors may have changed its position on benefits cuts for Social Security.

James Brosher/Wyoming Tribune-Eagle/AP

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This is a big story, for obvious reasons. Seniors have been a powerful lobby against benefit cuts to Social Security and if their main representative organization here in DC is OK with cutting benefits to close the funding gap, then such cuts are a lot more likely today than they were yesterday.

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But before you get the scissors out, a few things to keep in mind.

First, you might get the impression from this debate that Soc Sec benefits are chump change to seniors. But in fact:

“…for recipients age 65 and up on, Social Security is about two-thirds of their income and that share grows with age—for the old-elderly, it’s closer to 70% of their income. Other data show that for a third of those over 65, Social Security accounts for at least 90% of their income.”

So if you must cut, you’ve got to go to the top of the income scale, and here, from Dean Baker and Hye Jin Rho, the fact is:

“The percentage of benefits that go to affluent seniors is too small to make very much difference to the program’s finances.”

Note that Baker and Rho are critical of means-testing Social Security (tying your benefit levels to your income at retirement). There are other ways to cut benefits but means testing is the worst, IMHO, as it undermines the universal nature of the program, is administratively complex, and breaks the link between what you earned and what you get back. But any plan to cut benefits must deal with this problem that you’d have to cut pretty deep into much needed benefits to close much of the gap.

Finally, I very much object to the way this point is made in the NYT article:

“The most recent estimates from the Social Security Administration, issued last month, indicate that under currrent law the program’s trust funds will be exhausted by 2036, and that $6.5 trillion in additional money will be needed over a 75-year period to pay all scheduled benefits.”

That shortfall number sounds impossibly high, doesn’t it? It leads the reader to think, “Hey, I hate to sign on to this, but that’s a huge shortfall.”

But it’s not! Not if you put it in the correct context, which factors in 75 years of economic growth. In fact, it’s less than 1% of GDP. Back over to Baker:

“The best way to make the size of the projected Social Security shortfall understandable is to put it in context. Relative to the size of the economy, the projected Social Security shortfall is equal to 0.7 percent of GDP. By comparison, annual spending on the military increased by more than 1.6 percentage points of GDP between 2000 and 2011. So the burden imposed by the wars in Iraq and Afghanistan are almost 2.5 times larger than the money that would be needed to eliminate the Social Security shortfall.”

The reason it’s so important to get the context right here is that the real magnitude of this shortfall–0.7% of GDP–is probably manageable without benefit cuts. Taking them off the table won’t be easy, because it means you have to get the revenue elsewhere, but it could be done. I’d vote for closing two-thirds of the shortfall by raising the tax cap on earnings to once again cover 90% of earners, shifting to the chained CPI (which also shaves benefits), and including state/local workers. Believe me, closing two-thirds of a 75-year gap–who knows what’s going to happen between now and then (maybe the wars will end!)–would be an excellent day’s work.

I’m sure AARP knows all of the above. I’d like to learn more about why they changed their position on this. But for now, if we must go to the benefit-cut place, let’s tread very, very carefully.

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