That’s crucial to rein in unsustainable Social Security spending, and it’s mutually exclusive with ‘expansion’

The basic elements of program reform flow naturally from the financial and social developments just described. Consistent with the historical rate of increasing longevity and rising labor-force participation at older ages, the normal retirement age should be raised by one month every two years. This rate of change should also apply to the early retirement age and the maximum claim age (currently 70), as well as the eligibility ages for old- and disabled-widow benefits. As I have explained more fully elsewhere, the adjustment factors for early and late claiming of retirement benefits — which depend on the age when benefits are claimed — are seriously out of date, as both interest and mortality rates have declined since the rules were designed and put into place. Moreover, the rules are inconsistent among categories of beneficiaries — workers, spouses, and widows and widowers — in terms of age ranges and fair adjustment factors. Under current interest and mortality rates, the early retirement reduction for workers should be about 16% lower than current factors. Reducing the early retirement penalty would generally favor poorer and minority populations, who typically claim earlier and have higher than average mortality rates. Delayed retirement credits should be about 6% lower, disfavoring high-income and educated workers who generally claim late. The appropriate dynamic system for shifting the adjustment factors annually is a five- or 10-year moving average for continuous changes to the adjustment factors, which would remove unusual volatility. Policy logic also supports consistency in the factors across beneficiary categories as well as age ranges: Given higher life expectancies and longer working lives, 62 to 72 is now an appropriate initial age range for benefit claims. The basis for the cost-of-living adjustment needs to change as well. The current consumer price index (CPI) for urban wage earners is based on a shrinking data set, and does not reflect the substitution of lower-priced goods and services for higher-priced ones quickly enough. Policy should instead employ the chained CPI for all urban consumers. Social Security benefits should be taxed in a manner consistent with employer-provided pension income, and the existing lower-income thresholds should be phased out over the next 20 years. The resulting increase in income-tax revenue should be transferred to the trust funds. To achieve more fairness among different types of workers, those with at least 45 years of earnings and still working should be exempt from the payroll tax (both employee and employer shares, as well as those of the self-employed). If a worker achieves the 45-year mark before reaching full retirement age, his disabled-worker insurance status should be maintained. To measure a full working career more accurately and fairly in modern times, the number of earning years used to calculate benefits should be raised from 35 to 40 over the course of 10 years. The confusing retirement-earnings tax imposed on earnings above minimal amounts before the full retirement age should be eliminated, as it discourages work. (It was adopted during the Great Depression, when the government wanted to open up positions for younger workers.) Finally, all new state- and local-government workers should be covered by Social Security. As I will explain below, workers currently exempt should be subject to new, more accurate, and more administrable offset-adjustment factors for any Social Security benefits they may have earned. While maintaining survivors' benefits as is, policymakers should eliminate spousal benefits over time. Earnings sharing should be instituted gradually, whereby the earnings records of married individuals are combined and split equally for each year of marriage for the purpose of calculating each individual's Social Security benefit. In the case of multiple marriages and divorces, the sharing should occur with different spouses over the individual's lifetime during each period of marriage. Because the SSA does not have contemporaneous marital data, this change will be administratively challenging for the agency for the time being; however, it does have plans to obtain such data from the states in order to adjudicate Supplemental Security Income (SSI) claims more effectively. To account for increases in earnings inequality, the earnings above the taxable maximum should be removed from the calculation of the average wage index used to adjust the worker's historical earnings record to account for annual wage inflation. Alternatively, the agency can use the median amount. To make Social Security sustainably solvent without levying new payroll taxes, an additional benefit-element adjustment will likely be necessary. Scheduled increases in benefits should be slowed for those under age 61 by applying an annual multiplication factor to their scheduled benefits for as long as necessary to achieve solvency.