The Diamond-Orszag plan to “save Social Security” reduced benefits for future recipients. The first reason given for reducing benefits was based upon an assumption of gains in life expectancies. During the 20th century, life expectancies had indeed improved steadily due to advances in public sanitation methods and advances in medical treatment. Now a recent paper indicates that these increases have slowed.  Most of the future life expectancy gains are likely to be found in improved medical treatments for older people. Most of the progress made against the diseases of midlife appear to have reached a ‘wall’. Additional future increases in life expectancy may also rely on changes in behaviors which are risky, such as over-eating, inactivity, smoking, drinking and unsafe sex. Inequality is also a big factor:

From a related, cited article,

“During periods of expansion in length of life, a similar expansion has occurred between more and less advantaged groups – the rich get richer, the poor get poorer, inequality grows and life expectancy is dramatically impacted,” Denney said. “And despite disproportionate spending on health care, life expectancy in the U.S. continues to fall down the ladder of international rankings of length of life. It goes to show that prosperity doesn’t necessarily equal long-term health.”

Denney said many of the chronic conditions that have led to smaller gains in life expectancy are more easily treated when people are more financially stable. He said the study shows “the ugly side of inequality,” and he hopes it will draw attention to the fact that more needs to be done to address stagnating life expectancies in the U.S. and eliminate inequalities in the U.S.”

The Diamond-Orszag plan described in this paper, rationalizes across all age group cuts in future benefits in order to account for anticipated, universal increases in life expectancy, and the expectation that Social Security recipients would live longer in retirement and claim benefits for a longer period of time.

In addition to asking for cuts based upon life expectancy data, the D-O plan also reduced all benefits by the equivalent of a 3% Legacy Tax.  D-O authors rationalized this tax as appropriate to pay towards closing a projected gap between future revenues and future benefits.  Both of the reductions to benefits proposed by D-O appear to be inappropriate.

The Life Expectancy data should be updated to reflect a slowdown.  That part of the benefit reduction should be eliminated.  The Legacy Tax based reduction seems to overshoot the goal of increased revenue collection as I described in my last post. If both reductions were eliminated, benefit reductions would disappear and Social Security could then pay out according to the current plan.

Social Security’s future actuarial deficit appears not to be due to increased life expectancies, nor due to prior generosity of benefits to those who did not pay into Social Security.  The future gap appears to be due to “GAP X”, a gap between revenues collected and benefits scheduled to be paid to future recipients. Gap X appears to be due to uncollected taxes on the higher income earners and due to the ever shrinking paycheck of low and middle income earners.

We should raise the FICA cap and capture enough income under the FICA tax to fund future beneficiaries. There is no basis for future Social Security benefits to be reduced and to further harden social and income inequality.  We should tax equitably among all income groups and all incomes including capital gains. We can afford to offer Social Security benefits which show respect for our wish for older people to be able to live in dignity, not in poverty.