Why the president's grand bargain offer is so conservative

Ever since Obama made it clear that he was engaging with Republicans to strike a multitrillion deficit reduction deal, Democrats have lamented how far the goalposts have been moved to the right.  Why were Democrats not insisting on, say, a 50/50 split between spending cuts and tax hikes? Why was the floated half-loaf deal weighted an apparently 83/17 in favor of cuts, and the more recently proffered grand bargain something like 3-to-1? (Though I wonder whether, as in the president's initial proposal, that is not in fact 2-to-1, with another trillion in savings credited to reduced interest paid on the debt.)

I believe that Chuck Schumer's statement yesterday in response to Boehner's rejection of the grand bargain may contain an explanation that's been hiding in plain sight, per the passage I've bolded below:

Where taxes are always too high

Another day, another deeply misleading screed on taxes by a Wall Street Journal editorialist - in this case, Stephen Moore. Democrats, he warns, are proposing tax increases that will bring us "back to the taxes that prevailed under Jimmy Carter, when the highest tax rate was 70%."  By adding together every tax increase that any Democrat is currently proposing, along with every increase implemented under Bush Sr. and Bill Clinton, he gets to an ill-defined "tax rate" of 62%.  That's hardly 70%, (or the 91% top marginal income tax rate that prevailed under Eisenhower), but what's an extra 8% among scare tacticians?   

Moore would have us believe that federal taxes have been climbing relentlessly since the halcyon days of Reagan's second term, when the top marginal income tax rate was, he says, 28% (it was actually 33% in a bracket below the top bracket).  Never mind that federal tax revenue as a percent of GDP is currently lower than it was at any point in the Reagan years, and is in fact at its lowest point since the early 1950s. To paint this picture, Moore needs almost one distortion per paragraph. A sampling:

An alternative to raising the retirement age for Social Security

Alan Simpson, of Bowles-Simpson fame, is a die-hard for raising the eligibility age for social security, as the Bowles-Simpson plan proposes.  Ryan Grim reports (hat tip: Chait) that Simpson is a tad unreceptive to to information furnished by the Social Security administration to the effect that life expectancy for those who reach age 65 has risen only modestly since 1940 (about five years each for men and women).  Meanwhile, the retirement age for receiving full social security benefits has been raised from 65 to 67 -- so the system is paying people for an average of three more years than it did for retirees in 1940. 

The Bowles-Simpson plan calls for a roughly proportionate rise in early and full retirement ages -- to 68 in 2050 and 69 in 2075 for full retirement, an to 63 and 64 at the same points for early retirement.  Opponents of that change point out that it is implicitly regressive, since lower income people have shorter life expectancy, and those who do manual labor find it harder to work to older ages. Besides, few people want to work deep into their sixties, and there are other ways of making social security solvent. In Bowles-Simpson as in other plans, raising the retirement age is only one in a broad menu of ways to raise further revenue or reduce the growth of benefits.

The social security segment of the deficit reduction plan put forward by the Bipartisan Policy Center does take increased life expectancy into account, but in a different way.  The BPC proposes to index the benefit formula to longevity : "Specifically, the replacement rates used to calculate benefits each year for new beneficiaries will by 99.7 percent of what they were in the previous year -- which offsets about two-thirds of the additional costs associated with estimated longevity increases." This plan treats social security like an annuity, which is calculated on the basis of life expectancy. 

Two approaches to Social Security reform

Ezra Klein has recommended the deficit reduction plan put forward by the Bipartisan Policy Center* as "easily the most thoughtful, detailed and credible deficit reduction plan on the table. On social security, the BPC plan overlaps in two major features with the  that of the Bowles-Simpson commission. But one major difference is instructive.

First, the two major points of overlap. Both plans would gradually lift the cap on earnings subject to social security to the range of $180-190k in today's dollars, the level needed to restore a target set in 1977 of taxing 90% of Americans' wage earnings.  Both also propose to slow down the cost-of-living adjustment by moving from the current Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to a so-called "chain-weighted" CPI (CPI-U) that aims to account for changes in consumers' habits when the prices of particular items goes up. According to the BPC plan, the "chained" CPI-U is estimated to grow .3 percentage points more slowly (I assume annually) than the CPI-W. According to the Bowles-Simpson plan, these two measures would close 61% of the existing shortfall over 75 years.


The most instructive difference is in changes to the benefit formula -- the percentage of their lifetime average indexed monthly earnings (AIME) that workers in various income brackets earn as a permanent social security pension.  Both plans, it should be noted, eschew so-called "means-testing" of benefits -- that is, proportionately reducing benefits for those who have significant other sources of retirement income. Means-testing is a GOP talking point for reasons I can't fathom, since it constitutes a major disincentive to accumulate wealth and would raise only modest additional revenue, since the vast bulk of social security payouts go to non-affluent Americans.