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.