In a post yesterday, Max Sawicky writes:
What would I do, supposing 2042 approached and circumstances were as they are currently projected? I would do a combination of payroll tax increases, increases in the retirement age (ideally voluntary, and with adequate advance notice), a slowdown in benefit indexing, and some general revenue infusions. There is no need to do any of this for some time. (There will be a need for tax increases over the next ten years to redeem debts to the Trust Fund.).I commend the whole post to your attention, not because I agree with all of it, but because it does clearly state (in this paragraph most of all) the rationale that many on the political left (like Congressmen Matsui and Rangel) have used to delay reform.
The part that is disagreeable to me is that I think Max doesn't fully appreciate (or, at the very least, articulate) what he would find in 2042 if he waited to reform the system. (He says 2042 "approached" rather than "arrived," but for the sake of argument, I'll assume he does in fact wait until 2042.) Here are two ways to characterize the circumstances projected for 2042:
1. The annual cash flow deficits. According to the 2004 Trustees Report, Social Security is projected to run annual deficits of 4.5 percent of taxable payroll in 2042. Over the subsequent four decades, those deficits are projected to widen to 6.0 percent of taxable payroll. So if Max waits, this is the problem he faces in 2042. (To put these in perspective, note that in 2004, taxable payroll is $4.522 trillion, these deficits would be $203 and $271 billion, respectively, if we were running them today.)
2. The unfunded obligations. The 2004 Trustees Report also tells us that the present value of unfunded obligations is $10.4 trillion, using a long-term real interest rate of 3 percent (based on a nominal interest rate of 5.8 percent and a CPI inflation rate of 2.8 percent). If Max waits to reform the system, then the unfunded obligations compound at about 3 percent for 38 years, leading to unfunded obligations of roughly 10.4 x (1.03^38) = $32.0 trillion in 2042.
As I have stated before, the Diamond and Orszag plan is a much better strategy for people on the political left to adopt. They do several things that Max discusses, except that the Diamond and Orszag plan starts doing them sooner rather than later. This is a substantially fairer way to spread the burden of plugging the $10.4 trillion hole, while it is 90 percent of GDP, before it gets to be a $32 trillion hole (141 percent of a much larger GDP). How would you feel if, with the foresight that we have about the demographic factors that will cause the future deficits, policy makers 38 years ago decided to punt on reform, causing you to now have to pay payroll taxes of 16.9-18.4 percent rather than 12.4 percent?
The trouble in this debate is that the people on the political right seem to want to lead with the personal accounts rather than the solvency issue (even though Commission Model 2 achieves both). My fear is that, in the process of making this an issue, we'll get the personal accounts without restoring solvency. The people on the political left are so terrified of personal accounts that they refuse to enter any debate constructively. The Diamond and Orszag plan now stands out as an exception, but, as I noted in the original post on that plan, no Democrats on the Hill have mustered the political courage to advance it legislatively. More typically, we find the attitude that Max has expressed--we can cross that bridge when we come to it. I think that argument does not adequately consider how the size of the problem grows if we wait to address it. Maybe Max will favor us with the magnitudes of the various changes he would suggest as 2042 approaches.
Elsewhere in the blogosphere, Brad DeLong has posted on the circumstances under which he might "accept" personal accounts as part of reform, commented on the post by Max, and linked to some posts by Duncan Black at Eschaton that show some of the political left's misgivings about personal accounts per se.
Some loose ends that I have yet to tie together on this issue, and thus hope to address in future posts: some measures that could be imposed on the personal accounts that might allay the political left's fears of including them in Social Security reform, the relationship between the tax cuts and the underfunding of entitlement programs, and the even more serious problems with Medicare (including the new prescription drug benefit).