PRESSMAN: Christie Social Security plan not the answer

Gov. Chris Christie kicked off his likely presidential campaign in New Hampshire earlier this week. The highlight was a proposal to save Social Security by sharply cutting benefits.

Benefits would be reduced for those making more than $80,000 and eliminated for those making more than $200,000. Cost-of-living adjustments for everyone collecting Social Security would be slightly reduced. Finally, Christie would raise the age for collecting full Social Security benefits from 67 to 69 (beginning in 2022).

As a plan to save Social Security, it is bad politics, bad economics and also completely ineffective.

Politically it is a losing idea. The American public strongly opposes increasing Social Security's retirement age. According to a 2013 Associated Press poll, 56 percent of Americans and two-thirds of Republicans over 50 oppose this. Older Americans count on Social Security to support them in retirement; they tend to vote in elections and will comprise a large fraction of voters in 2016.

Even if Christie somehow wins the Republican nomination, it is unlikely he can become president by promising to cut Social Security benefits. Hillary Clinton will certainly point out that you can't trust Christie to deal with the nation's retirement program when he can't deal with New Jersey's pension problems.

The plan is bad economics as well as bad politics. In 1983 Congress enacted the Greenspan Commission recommendations to save Social Security. Taxes were raised, and benefits were cut through increasing the retirement age and delaying some cost-of-living adjustments to Social Security recipients. These changes were supposed to keep Social Security solvent for 75 years.

There are many reasons this didn't happen. One major factor is that inequality increased, thereby reducing revenues. Wage income above $118,500 (for 2015) is exempt from Social Security taxes and all other forms of income are not subject to Social Security taxes.

Since almost all income gains during the past few decades have gone to those making over $120,000, Social Security revenues have stagnated while more people retired and received benefits. Although our problem is a revenue shortfall, Christie proposes cutting only benefits. Questions of fairness aside, this will have negative macroeconomic consequences — it will reduce spending and economic growth.

Most Social Security benefits go to people who count on it to survive. This money gets spent and helps stimulate the economy. Raising taxes on those making more than $118,500, in contrast, would take income that would more likely have been saved than spent; it would have a smaller impact on the whole economy.

Perhaps worst of all, the Christie plan to save Social Security is not much different from what would happen if nothing at all were done. Phasing out benefits for affluent retirees saves very little money. Less than 1 percent of seniors make more than $200,000, and around 5 percent make over $80,000. The spending reduction for the Social Security system would amount to only 1 percent here.

Reducing cost-of-living adjustments lowers Social Security expenditures by three-tenths of a percentage point ($45 to $50 per person on average) each year. Although this sounds trivial, interest compounds over time. After two decades, benefits will be nearly 10 percent lower for Social Security recipients and Social Security would spend nearly 10 percent less annually.

Increasing the retirement age is the biggest money saver. Retirees will lose 15 percent each year unless they wait longer to retire. If people do retire later, Social Security saves two years of payments while retirees lose two years of benefits. This large loss explains why so many older Americans oppose a later retirement age.

Adding everything up, Christie proposes cutting Social Security benefits by 25 percent, or giving retirees 75 percent of what they were promised. The Social Security Administration projects that by around 2035 the trust fund build-up due to the Greenspan Commission will be exhausted and Social Security will be able to pay just 75 percent of the benefits people were promised.

Christie's bold solution to save Social Security is therefore exactly what would happen if we did absolutely nothing during the next 20 years.

Dealing with the problems facing Social Security requires thinking about the pros and cons of both raising taxes and lowering benefits. The nation needs to have this discussion. But such a discussion requires a bold leader who understands politics and economics as well as the problems facing Social Security.

Steven Pressman is a professor of economics and finance at Monmouth University, and author of "50 Major Economists."