The Purple Social Security Plan

Dear Fellow Economists and Other Concerned Citizens,

Social Security is America's most cherished public policy. But the system is in grave financial trouble that can no longer be ignored. Indeed, Social Security is in worse financial shape now than in 1983 when the Greenspan Commission "fixed" the system's finances. According to the Social Security Trustees (see Table IVB6 in the 2011 Trustees Report), the system is 29 percent underfunded, notwithstanding its $2.6 trillion Trust Fund.

This means Social Security needs an immediate and permanent 29 percent hike in its payroll tax rate to pay its bills over time. The Social Security payroll tax rate is 12.4 percent. Increasing that rate by 29 percent requires raising the payroll tax rate, starting today, by 3.6 percentage points and keeping the rate at 16.0 percent forever. The alternative to raising Social Security's tax rate is cutting its benefits. Achieving long-term solvency via benefit cuts requires immediately and permanently cutting benefits by 22 percent.

Either of these options would be extremely painful. Imagine asking workers to pay another 3.6 percent of their pay to the system in exchange for no higher benefits or asking retirees, many of whom are entirely or primarily dependent on Social Security, to accept a 22 percent cut in their monthly check. But delaying such adjustments requires only larger tax hikes or benefit cuts down the road. The system is already experiencing financial stress. It's running cash flow deficits (benefit outlays now exceed tax receipts) and can no longer afford even to send us our annual benefit statements.

Social Security's unfunded liability is just one part of the government's overall fiscal gap. Based on the Congressional Budget Office's long-term forecast of June 22, 2011, our nation's fiscal gap - the difference measured in the present (the present value) of all future projected spending, including servicing the existing debt, and all future taxes is $211 trillion. The fiscal gap represents, in effect, the nation's credit card bill. Unfortunately, we're not even paying interest on this liability, which, in large part, is why it grew by $6 trillion last year.

Social Security's problems extend far beyond its finances. The system is incredibly complex. It's Handbook's has 2728 complex rules and its Program Operating Manual has thousands of even more complex rules to explain the Handbook's rules. As a result, many of the system's key features are virtually incomprehensible. Due to this enormous man-made complexity as well as the opaque taxation of Social Security benefits, millions of workers may be seriously over-estimating their retirement income and saving far too little for retirement. And millions of retirees may be taking benefits at the wrong age, ending up with a much lower living standard in retirement than they should because they didn't understand the rules.

In addition, these thousands of rules produce very major inequities and inefficiencies. Thanks to the system's spousal and survivor benefits, millions of workers pay Social Security taxes year after year and end up with no extra benefits. Indeed, they can end up with lower benefits than people who never work. And when no one understands what they are getting back for their extra Social Security taxes, they can easily decide that working has a much smaller payoff than is actually the case.

It's time to fix Social Security from the ground up without sacrificing its key objectives. If we are going to ask younger generations to pay most, if not all, of the current system's unfunded liability, let's give them a modern Social Security system that is simple, transparent, fair, efficient, and financially sound. To that end, I seek your endorsement of The Purple Social Security Plan, where "Purple" reflects the belief that both sides of the political aisle can agree to this plan. The Purple Social Security Plan would eliminate roughly $60 trillion of our $211 trillion fiscal gap. Please join me and other signatories in endorsing this plan by clicking the Show Your Support tab. Also, please send the url (www.thepurplesocialsecurityplan.org) to other economists and concerned citizens you know.

Sincerely yours,

Laurence J. Kotlikoff
Professor of Economics, Boston University

PS, Please also check out www.thepurplehealthplan.org, www.thepurplesocialsecurityplan.org, www.thepurplefinancialplan.org, www.thepurpleenergyplan.org, www.thepurplegenerationalbalanceplan.org, www.thepurpleeducationplan.org, and www.thepurpleplans.org.