As I wrote last week, provisions built into current law threaten to take $500 billion out of the U.S. economy in 2013. While Congress cannot allow this “fiscal cliff” to occur as scheduled, it should use this “crisis” as an opportunity to pass a smarter package of spending cuts and revenue increases that will gradually put us on the road to fiscal discipline.

But such commitments to future fiscal restraint must be credible—that is, citizens, businesses, and bondholders must believe that reforms will actually take place. That means that reform must find elements of support in both political parties.

In my view, a progressive reform to Social Security would make a good candidate for gradual deficit reduction that both parties could credibly support. In 2005, I proposed reforming Social Security by modestly increasing tax revenues and slowing the growth of benefits to high-earners (and, to a lesser extent, middle-earners), among other measures. There would be no change in benefits for any worker age 59 or older. At the end of 2010, Erskine Bowles and Alan Simpson proposed a roughly similar reform (see page 48 of this pdf) as part of their deficit-reduction package.

Social Security reform has been near the top of the GOP agenda for quite some time. Last year, Republican Senators Lindsay Graham (SC), Rand Paul (KY), and Mike Lee (UT) introduced a bill partially following my approach. However, because their plan refused to consider any revenue increases, they had to go much further, drastically slowing the growth of Social Security benefits to middle-earners. Nevertheless, I believe that some Republicans could, in principle, accept a more balanced approach to Social Security reform.

Some Democrats, by contrast, have been opposed to Social Security reform. However, I believe that this plan could appeal to Democrats because it makes the broader American retirement system more progressive. In 2011, only the first $106,800 of earnings were subject to the payroll taxes that finance Social Security. My plan would grow that cap faster than scheduled in current law or, alternatively, impose a smaller surcharge on all income above the cap. In either case, my proposal would slightly increase the progressivity of the tax code.

More fundamentally, my proposal does not affect benefits for low-earning retirees, who rely almost entirely on Social Security for their retirement income. Benefits for low earners would continue to grow much faster than consumer prices under my 2005 proposal and under Simpson-Bowles. By contrast, middle- and higher-earners make greater use of 401(k) and IRA plans– which are subsidized to the tune of $90 billion per year (in present value terms; see Table 17-4 on page 264 of this pdf). Furthermore, higher-earners tend to live longer (pdf) than lower earners, and thus receive Social Security benefits for longer. My reforms would focus the retirement program of Social Security on those low earners who need it most.

Indeed, some top Democrats have hinted that reforms like these could find support within the party. At a recent conference, former President Clinton [link] said that he believed that Social Security “can be fixed with relatively little controversy…if you look at the Simpson-Bowles plan [for Social Security], it’s very clever” (start watching at 16:30, here). In an interview with Ezra Klein of the Washington Post, Senator Tom Coburn (R-OK) [link] said that he had had conversations with President Obama “where he’s told me he’ll go much further than anyone believes he’ll go to solve the entitlement problem if he can get the compromise. And I believe him. I believe he would” (scroll to the bottom, here). 

Of course, those on the far left and the far right may not support any realistic plan for Social Security reform. Those on the far left may object to any reduction in the current benefit schedule for any class of workers. Meanwhile, on the right, conservatives loyal to the Tea Party may refuse to consider any increases in payroll taxes. However, the threat of a fiscal cliff will provide a powerful incentive for Congress to consider centrist proposals like mine or Simpson Bowles.

In short, Social Security reform can be a key building block in a deficit-reduction package designed to avert the fiscal cliff. Both parties will have to go out of their comfort zone to make this happen; Republicans will need to accept modest revenue increases, and Democrats must be willing to engage in entitlement reform.

But there’s plenty for each party to like in these centrist proposals. Democrats can cheer the increased progressivity of government retirement support, and Republicans can applaud the long-run solvency of Social Security.