Tuesday, February 22, 2005

Senator Reid and Social Security

Last Thursday, Senate Minority Leader Reid added some Social Security related pages to his website. Here is a press release, which announces a new "calculator" to describe benefits under a reform like the ones proposed by the President's Commission in 2001 and outlined in the State of the Union address.

First, what does this calculator do? From the brief documentation, we learn that it assumes that the benefit formula will switch from wage to price indexing starting in 2012 and allow personal accounts, where contributions diverted to the accounts (plus interest at a real return of 3 percent) are further deducted from traditional Social Security benefits. This is a reasonable description of the way that personal accounts have been described by the Administration. The user can input a year of birth and a current level of earnings and the calculator will illustrate how future benefits from the traditional system and the personal account will compare to those projected under current law.

Second, what does this calculator show? As acknowledged in the documentation, only the date of birth matters for the percentage reduction in benefits from the two systems compared to what is scheduled under current law. For someone my age, the reduction is 22 percent of scheduled benefits. For someone my son's age, the reduction is 48 percent. I haven't verified these calculations--see some interesting decoding by Awptimus on that score.

Third, what is missing from this discussion? Five critical elements, as far as I can tell:

  1. The calculator explictly refers to benefits under current law as "promised." This is entirely inaccurate. Apart from the ability of the government to change the law at any time, there is no legal authority for some portion of these benefits to be paid after the Trust Fund is exhausted. The appropriate terminology is "scheduled" benefits, which conveys a lot less security than "promised" benefits, particularly when Senator Reid has proposed no way to fund the benefits that are scheduled but in excess of the system's future revenues.
  2. The documentation acknowledges that the assumptions used are those of the CBO, but it does not acknowledge that these assumptions are more favorable to the traditional system than those used by the Social Security Trustees.
  3. The calculations do not acknowledge that personal account plans, like Commission Model 2, explicitly include protections for career low-income workers. Senator Reid seems happy to use Commission Model 2 as a reference for some elements of his calculator, while ignoring those that would make personal account plans less risky to low-income workers.
  4. The calculations show only the personal account benefits that would obtain if the whole portfolio were invested in Treasuries. It is true that, in equilibrium, all securities must earn the same risk-adjusted rates of return and that, in most analytical frameworks, this is taken to be the return on Treasuries. However, it is also true that the opportunity to invest some of the portfolio in higher risk, higher return assets has value. The equilibrium condition is only that investors are indifferent between Treasuries and risky assets at the margin. They are not indifferent between an entire portfolio invested in Treasuries and a portfolio invested in their optimal mix of Treasuries and risky assets. The calculator ignores this, to the detriment of the personal account plan. (See this earlier post for additional discussion.)
  5. Most importantly, at no point on any web page--the calculator, its documentation, or the press release--does Senator Reid acknowledge that the President's plan, as implemented in this calculator, would restore the system to solvency in perpetuity based on current projections. This last criticism is particularly important because, at no point on any web page, does Senator Reid offer his own plan to restore the system to solvency.
The press release states:

Nevadans should have all the facts on the President’s plan to privatize Social Security and how it would affect their personal retirement future.
I agree that Nevadans should have "all the facts." This calculator falls well short of the mark. The press release continues:

For the next 50 years, the government will be able to keep its promise and pay full Social Security benefits. Eventually, the baby boom generation will put pressure on the program and I want to find solutions. The right solutions that will not cut benefits or add trillions and trillions of dollars in debt as the President has suggested.
The key sentence is the last one and more specifically the statement "will not cut benefits." If that's his view, then he should propose legislation that restores solvency without cutting benefits. That legislation could be as simple as, "The payroll tax rate will increase by 3.5 percentage points, from its current level of 12.4 percent to 15.9 percent, effective immediately." Senator Reid's approach differs remarkably little from that of Senator Kerry in last fall's campaign: quick to criticize the President, unable to provide solutions of his own.

If either one, or any other legislator, wants to propose a plan that does not include personal accounts, that restores solvency, and that does so without reducing aggregate benefit payments for about 50 years, the heavy lifting has been done by Peter Diamond and Peter Orszag. All any of them would have to do would be to publicly advocate that plan. So far, it has no sponsors on Capitol Hill.

Elsewhere in the blogosphere, see Say Anything and the Neo-Libertarian.

Other blogs commenting on this post


brian said...

Is not either raise the payroll tax or delaying the retirement age the same thing as benefit cuts just through another lense?

Fred C. Dobbs said...

Agreed, the Democrats' calculator has its flaws. But point me to a similar exercise done by those who support Bush's plan: I've looked high and low and I can't find anyone willing to "do the math' on Bush's ideas. Perhaps that's because there is no plan out there with enough details to actually analyze.
The ball is still in Bush's court: He has to propose something substantial before we can expect the Democrats or anyone else to respond seriously.
Backing the status quo isn't that irresponsible: The CBO's analysis shows that doing nothing is better for most people than Model 2 (given 3.3% real returns).

Anonymous said...

For what its worth:

Point 1 is both petty and unfair -I doubt very much that the popular conotations of "promised" and "scheduled" are really so dissimilar in this context. What's more, in the past you have been pretty generous when the President has used less than completely accurate language - holding your political opponents to a higher standard is a cheap shot.

Point 2 is petty but fair - I'm not sure that their failure to disclose everything you wish they did constitutes a major breach of the public trust. And I doubt very much that the White House, when discussing the SSA forecasts, bothers to disclose that there is a competing forecast in town (CBO) with more favorable assumptions. Nevertheless, the SSA is the standard, so point taken.

Point 3 is just silly. Your complaint would make sense if the White House had explicity endorsed Plan 2, but it hasn't. Rather, it has chosen to go around the country speaking in platitudes and then winking in the direction of Plan 2. The White House has made a conscious decision to play the game this way, leaving everyone free to infer their intentions to be whatever they wish - if this decision comes back to bite them in the ass, that's too bad for them, but it strikes me as within the bounds of political gamesmanship.

Point 4 is fair - A calculator showing a 95% confidence interval of terminal asset values would be nice.

Point 5 is difficult for me to understand. What good would come of the Democrats doing as you suggest? The Republicans control the White House, the Senate, and the House, and with them, the terms of the debate. The choices facing the Democrats are either (1) acquiesce to a plan that they believe is, in whole or in part, bad for America, or (2) block that plan from becoming law. There is no option (3) under the current political conditions. You are right that Senator Reid does not offer his own plan to restore the system to solvency. So what?

Let me try this another way: Given the constraint that the Democrats cannot legislate, only compromise or obstruct, then I pose to you the following question: If I, and the majority of Democrats, honestly believe that the combination of benefit cuts and private accounts likely to result from any plan that can pass the Republican House and Senate and be signed by Bush are worse than doing nothing, what is wrong with obstruction?

Anonymous said...

Thanks for the response. It appears that the point on which I disagree with you most seriously is the issue of what it is that the Democrats ought to be doing, if anything. I am going to take another crack at this, because I think it is an important point.

In principal, I agree with you - I would like to see the Democrats put forward something like Diamond-Orszag, at least for tactical reasons. And I agree that they have something of an obligation to offer good-faith alternatives to the Republican agenda.

But it is far from clear that, in today's political climate, things would play out very well for them, even if they did. First, even if the Democrats can agree to a set of legislative compromises in each chamber, there is a real possibility that they will be excluded from the conference committee. This alone is pretty scary, and it isn't like this hasn't ever happened.

Second, even if a Diamond-Orszag like bill is passed, it doesn't follow that the Democrats will get the credit. The White House and the Republicans in Congress will do everything they can to appropriate the credit, and, given that they control both institutions, have a head start in doing so. The bill signing ceremony alone will be gold for the Republicans. And it isn't like this kind of credit appropriation hasn't ever happened, either.

In general, I think that the out-of-power party has a more difficult intertemporal problem than you are allowing for. Let's assume for the moment that the two sides hold sincere, but conflicting, beliefs as to what should be done regarding Social Security. If compromises between the party in power and the party out of power are always resolved in favor of the party in power, then there is a non-trivial instrumental value to regaining power even for the purest of "Mr. Smith Goes to Washington" types - if you can regain power, you can get a better deal. I think that the thought process among many Democrats reflects an understanding of this, and goes something like: it would be better to fix Social Security sooner rather than later, but it might be worth putting off for now in the hope that we can regain power and then be in a position to strike a better deal. So the focus moves to winning, rather than fixing. Given a reasonable chance of former, this seems reasonable to me.

Andrew Samwick said...

Interesting questions, and I am not a political strategist, but I am going to maintain my naive view that the way for a minority party to become the majority party again is to advocate better policies. Suppose Reid stood up and said, "We recognize the financial challenges facing Social Security. If the President meets these 3 criteria for reform (restore solvency, better protections for vulnerable groups, some new revenue to fund the accounts), I'll have 40+ votes for him." That would be better leadership and a reason for more people to affirmatively vote Democratic.

Something more like this, perhaps.

Anonymous said...

Brad DeLong has a post up describing his fear of the dreaded
conference committee
as well.

Anonymous said...

Today it is Paul Krugman.