Nobel laureate Peter Diamond has a message for everyone worried about the future of Social Security. He knows exactly how you feel.
“This is a vital program and it’s really important that we preserve, in my mind, the basic structure,” Diamond said at a March 9 event hosted by the Pension Action Center at McCormack Graduate School of the University of Massachusetts Boston.
But the problem is as serious as it is clear. The Social Security Trust Funds are projected to run out of money and there’s a 50 percent chance that will happen by the end of 2034. A depleted fund would mean a benefit cut of more than 20 percent and forecasts beyond that are pessimistic.
Diamond, an Institute Professor Emeritus at MIT, pointed to the past as a guide to possible policy options ahead. All of them had been tried – or at least discussed – in previous negotiations to solve Social Security funding problems. Twice in the 1970s and again in 1983, legislation employed many of them to temporarily shore up the program.
Diamond himself was a member of one commission advising Congress on helping the retirement program and later wrote a book on his own ideas for saving Social Security. The economist was especially critical of one tactic employed in 1983 – gradually boosting the age to become eligible to access full benefits.
“Increasing the full benefit age has nothing to do with retirement,” he told the audience at the University of Massachusetts Club in Boston. “It is simply a benefit cut. Whatever age you claim at, you’re just going to get less. You can still claim at 62. It’s not an equal percentage benefit cut, it’s a larger cut for earlier retirees than later retirees. That, to my mind, is outrageous.
“What do we know about the people who retire at 62? On average, they have much lower lifetime earnings than the people retiring at any other age. And we also know that they have shorter life expectancies than people retiring at any other age. The thought that a politician would stand up and say let’s give a bigger cut to people with low incomes and short lives, nobody with a straight face would say that. But that’s the implication and this remains, with further increases, a hot topic.”
Diamond said he had found projections about the scale of Social Security’s current funding problems daunting and “my first reaction was if we don’t get on this right away we can’t get on it. And then I realized I was wrong. While Social Security is not allowed to borrow, Social Security can be given the ability to borrow.”
Indeed, the Social Security Trust Funds were once given permission to borrow a small amount from the Medicare Trust Fund to help get out of a hole years ago. When the privatization of Social Security became a policy topic of conversation a decade ago, many elected officials came up with their own proposals.
“But how could you take the payroll tax revenue away from Social Security to invest in individual accounts and keep Social Security going? The answer in every one of those plans was to let Social Security borrow,” he said.
In the past, Diamond said, the potential political fallout from a serious Social Security failure eventually led negotiators to compromise on a new plan. He sounded less confident that dynamic would work so well again.
“I think members of Congress envisioning just before an election that millions of people will get a 20 percent benefit cut might be highly motivated to save Social Security,” said Diamond. “But I worry about the balance of power in the negotiation when some people are more concerned about that than others.”
The Pension Action Center, the sponsor of Diamond’s presentation, provides free legal assistance to low- and moderate-income workers, retirees and their survivors in the six New England states and Illinois whose pension benefits have been wrongfully denied. The center has recovered more than $55 million in benefits.