Friday, November 12, 2004

Max Speaks, and He Listens and Replies

Max Sawicky kindly (and constructively!) responds to my recent post about whether we need to reform Social Security today. His original statement began:

There is absolutely no reason at present to make changes in Social Security, except out of political fear of the Right.
As I noted, first in "Why is Social Security a Campaign Issue?" and then again in the post to which Max is responding, my reason is that we make the problem about $300 billion worse every year that we delay. This is roughly the interest that we accrue on the unfunded obligation of $10.4 trillion in a year when the real interest rate is 3 percent, as in the 2004 Trustees Report's long-term assumptions.

I should reiterate that my preferred solution--raising the age of full benefit entitlement (with some other modifications) for future beneficiaries--does not require new funds to flow into the system today (or ever). And there is no need to do that immediately, except to give people as much time as possible to react to the new law and plan accordingly. If we don't mind giving them one fewer year of notice, then I don't suspect that we would mind enacting the same reforms to plug a $10.7 trillion hole tomorrow rather than a $10.4 trillion hole today. But taking a "wait and see" approach does not strike me as sound fiscal management.

In addition, to the extent that the reforms will include raising revenues in the near-term to provide investment returns to support benefits in the future (whether through personal accounts or the Trust Fund), then delay does have distributional consequences across different age cohorts. According to the way Social Security played out in this year's campaign, neither side was willing to ask more of or give less to those cohorts who are "at or near retirement." If an additional year of delay means one more birth cohort crosses the threshold of being "at or near retirement," and thus exempt from its share of filling the $10.4 trillion hole, then we should reform sooner rather than later.

I don't think Max and I disagree about the math underlying this calculation, but we do disagree about how relevant it is. Max writes:

I don't get excited about measures of the present value of unfunded liabilities from now till forever because I think they are jive. It's a way of ginning up a huge number. If you want to do that, compare it to the present value of GDP.
Fair enough. In "How to Reform Social Security, Part I," I noted:

Once new revenues are being added to the system, then it becomes important to figure out where they should go--the Trust Fund or personal accounts.

Confronted with that choice, I opt for personal accounts. For me, an immediate and permanent contribution of 3.5 percent of taxable payroll into personal accounts for all workers, in addition to the 12.4 percent payroll tax that they and their employers already pay, is preferable to the current system. The contributions are 3.5 percent because that is the amount that the Social Security actuaries say is required to restore solvency even if invested entirely in Treasury bonds. But such a reform, though preferred to the current scenario, is also far from ideal.

The 3.5 percent figure is roughly what Max is asking for in the way to make the comparison. (The small difference is that taxable payroll is projected to fall by about 5 percentage points relative to GDP over the next 75 years.) Max and I can differ on how much confidence we have in the Social Security actuaries' projections. The Trustees Report does contain some sensitivity analyses and additional projections that factor in uncertainty, but not on these two measures. The latter projections do suggest that there is essentially no chance that the system won't be running annual deficits in 75 years. Factoring in the uncertainty suggests to me that there is more, not less, of a need to act sooner rather than later.

Max also wonders:

One thing that is baffling about this whole privatization campaign is why a knowledgeable person like Andrew would prioritize the 2042 problem over the 2018 problem. The latter date is of course about when income tax revenue will be needed to redeem obligations to the Trust Fund and, by extension, Social Security beneficiaries.

In fairness, I have never thought of this as a 2042 problem, or even a 2018 problem. (That was, if I recall, the third paragraph in this post by Max.) To me, it is a 2004 problem that I don't want to mushroom into an even bigger problem, in 2005, 2018, 2042, 2080, or any year at all. Entitlement programs should be projected to be in balance--period. Accomplishing that requires changes in the programs in the future (if not the present). Those changes should be debated and legislated sooner rather than later, so that the changes can spread the burden as evenly as possible across cohorts.

Max concludes with some statements about the politics of reform:

As far as politics goes, you can hardly blame the Dems for declining the opportunity of leading with their chins with tax increases and benefit cuts, in the face of a hugely fiscally irresponsible Administration.
What does he mean? Of course I can blame them, like I did here. And I can also try to point them to "Democrat-friendly" reforms like the Diamond and Orszag plan, like I did here. Social Security's unfunded obligations are not a creation of the Bush administration and have been widely discussed for over a decade. The Democrats and Republicans alike have had ample opportunity to behave responsibly on entitlements. Some have, but most have not, and the sooner the first group can prevail, the better off we'll be.


Anonymous said...

Perhaps you can blame the Democrats, but no one will take you seriously about the politics of Social Security. I'm willing to venture a prediction: no matter what Social Security reform the Bush administration eventually comes up with, if anything passes it will, at best, keep the unfunded obligations of Social Security the same and will, more likely, will increase them substiantially. The reason I am confident about this is because, unless you honestly believe the government can make money by borrowing it and investing it in the stock market (which, at bottom, is what assuming greater returns from private accounts means and sounds quite dubious to me) the only way to cut the unfunded obligations of Social Security are to increase funding or cut expenditures - neither of which this administration has shown any inclination to do on any issue.

Anonymous said...

(1) Do you think that the Bush administration is at all likely to back the kind of proposal that you favor?

(2) Assuming arguendo that the current reports of the likely Bush proposal - i.e., merely diverting a portion of current social security taxes to private accounts, without other reforms - do you favor such a reform (as opposed to doing nothing for now)? As suggested by the above comment, wouldn't such a proposal just make the short and medium term (2018) problem worse, without making the long term problem (2042) much (if at all) better?

LRose said...

There are a group of debt mongers, mongering end of the world figures for affording Social Security and Medicare. The figures are stretched out over much of a century, when we have trouble planning accurately for 5 or 10 years, and the figures are so glum as to suggest we begin asking our parents not to bother going on living past 60. Nonsense. Social Security is fine for another 38 years, and we can surely extend the fineness beyond with ease if we care to. We can as well afford to care for our parent's medical needs. Enough with the end of the world stories that are simply designed to erode support for Social Security and Medicare, and the heck with those who need the programs.

LRose said...

A friend just sent me an investment portfolio that was put together several years ago by an adviser at Bank America. The portfolio is rather large. What startled me was the way in which the only thing that seemed to matter to the adviser was making sure the funds chosen had absurdly high yearly fees and 5% sales charges. Since the portfolio is quite large, simply increasing the size of investments in a given fund with a sales charge could easily have been used to cut the size of the charge. Nope.

The idea of most investment companies gaining access to private Social Security accounts, strikes me as most dangerous. Wonder what Eliot Spitzer thinks?

LRose said...

The problem I have is generally agreeing with you, and wishing I did not. We took a regressive payroll tax that was supposed to have generated enough of a surplus to support baby boomers, especially those will most need the support, and used the excess funds for general spending. Now, we learn there is a problem and our precious children will be sore pressed to support us. Good grief.

I care about us and I care about the children, and I find the idea of weakening the intergenerational commitment to Social Security most disheartening.