One way to fix Social Security's deficits over the long haul is to shrink Social Security and provide smaller benefits for higher earners.
A team of economists at Texas A&M examined a 2013 report from the Office of the Chief Actuary at the Social Security Administration and concluded that shrinking the entire Social Security program has the potential to significantly reduce what all earners have to pay in Social Security taxes while preserving higher benefits for low-earning workers who need Social Security the most.
They argue that what higher earners save in taxes actually could fuel their retirement planning and in the long run improve their financial situation in retirement. Plus, because lower earners would get a relatively large Social Security payment, higher earners would have to pay less to fund welfare programs that provide food, housing and medical assistance. And because lower taxes would mean more money to spend, the economy would grow and that could actually increase the amount of wage taxes paid, as well as the number of people paying them.
Thomas Savings, distinguished professor of economics at Texas A&M, and one of the authors of the analysis, says a shrunken program would result in "higher income people who are no worse off -- tax reductions offset benefit reductions -- (and) lower earners who haven't lost anything. And you can have a reform that permanently fixes Social Security. I think that is important."
The analysis points out that a number of reform proposals made by both Democrats and Republicans are similar. The one on which they are basing their analysis was actually mentioned in the 2013 Social Security Trustees Report. It suggests that beginning with workers born later than 1957, the system create two new "bend points," starting at the 40th percentile of Social Security earnings. All workers with earnings above this point would receive lower benefits. This would affect the top 60 percent of earners. It doesn't affect low-income workers at all. The reform proposal also delays eligibility for full retirement age income by an additional two months every two years. This would affect workers born in 1961 and later.
Over a 75-year period, the reformed program's expenditures would be 25 percent smaller than they would be if Social Security were unchanged, the economists estimate. No one currently receiving Social Security or old enough to currently receive it would be affected. The benefit to younger workers is that they would pay less to support older workers and over time, the program's deficit would disappear.
Savings says that he teaches a class in public policy at Texas A&M where he explains this analysis to students, who often reject it, concluding that they will get lower benefits and that's bad. He tells them that they have it all wrong. If the program doesn't shrink over the next 45 years, he says, "You'll be living in smaller houses, driving cheaper cars and eating out less often than your parents because you have to support all the old people. This fixes that."