Social Security Reform, Back in the Spotlight

A recent op-ed by Mark Duggan, an economist who directs the Stanford Institute for Economic Policy Research (SIEPR), and a podcast by Charles Blahous, a former public trustee of Social Security, highlight the programs projected shortfalls on the occasion of its 88th birthday. Both give appropriate updates on the financial condition of the program.

Social Security was one of the topics featured regularly on my original blog, VoxBaby, from 2004 - 2008. A guide to those posts is available here. Social Security, and its possible reform to include personal accounts that would build up assets outside of the trust fund, has been a topic of interest and research since the mid-1990s. At the time, we had the Baby Boom generation in the workforce in some of its most productive years. Had we started reform then, we might have tapped the resources of this generation to help close the projected fiscal gap. With all Baby Boomers now "at or near retirement," the phrase that seems to trigger political immunity from having to contribute via benefit reductions or tax increases to provide more financing, that window has closed. There is now no longer an opportunity to meaningfully prefund future liabilities. Those future liabilities will soon be current liabilities. Failure to act sooner has increased the burden on all subsequent generations.

I would call your attention to this post, What Social Security Reform Should Democrats Propose?, written on the eve of the 2004 Presidential election in which President Bush's plans for reform were relevant. It refers to the book written originally in 2003, Saving Social Security: A Balanced Approach, by Peter Diamond and Peter Orszag. My expectation is that as the date of trust fund insolvency approaches, policy makers will eventually implement most of the changes described in their approach. Those immediate tax increases and phased-in benefit reductions will have to be updated to the present -- larger in all cases -- since we wasted two decades not acting to solve a crisis whose arrival was completely predictable.

One of the Most Important Financial Decisions You Can Make ...

... is when to begin receiving retirement benefits from Social Security. Related to one of the themes in my last post, a new study discusses how claiming at age 62 can impact widow poverty:

This happens to a significant share of couples, because almost 40 percent of all Americans claim their benefits the same year they turn 62.  But a husband who waits until age 65 can increase his widowed wife’s future benefits by up to $170 a month, according to new research by Alice Henriques, an economist with the Federal Reserve Board in Washington.

What’s interesting about this study of nearly 14,000 older couples is that she teased out how much the husband’s decision was determined by the filing date’s impact on his own benefits, versus the financial impact on his wife’s spousal and, later, her survivor benefits.  Similar research in the past had examined the impact of a filing date on their combined benefits during all their years of retirement.

Henriques was able to show that the husbands, when they made their decisions, took into account the impact on themselves of the claiming date they selected.  But they showed virtually “no response to the large incentives” of having the ability to provide their widowed wives with more income in the future, she said.

If the purpose of Social Security is to provide insurance against outliving one's means of support in old age, then there should be a strong presumption that benefits should rise in real terms during retirement, as other forms of support are exhausted and financial burdens of declining health are increased. In the current system, n individual can do this most easily by delaying the initial receipt of benefits from age 62 to an age closer to 70 (after which benefits are no longer actuarially adjusted).

Policy Changes for a Brighter Retirement

This week, I contributed to a panel with the same title as the post. My two questions were:

If you could make one policy change to improve the retirement outlook for the average American, what would it be?

“I would change the Social Security benefit formula, in an actuarially fair manner, so that initial benefits were lower but benefits grew with age in real terms. Elderly poverty is concentrated among older households and, in particular, widows. Without spending more or less on average, we could do more to keep elderly out of poverty in their retirement years.”

Beyond that, and aside from overall economic improvement, what needs to happen for our aging population to enjoy a secure retirement?
“It is not complicated. To consume more in retirement, consume less while working or retire later. People should be thinking about which of those options suits them better and looking for ways to save and ways to extend the productive part of their working lives.”

You might enjoy the responses from the other panelists, posted here.

Some Social Security Tweaks

Social Security is back in the news this morning as the Senate Democrats have produced their 10-year spending plan, a counterpoint to the plan released by the House Republicans earlier this month. Here's some language that caught my eye from today's Washington Post article:

While Democratic leaders are offering quiet support for Obama’s renewed campaign to strike a grand bargain with Republicans that would include cuts to Social Security and Medicare, a significant number of Democratic lawmakers are digging in their heels and vowing to protest any reduction in promised benefits. [emphasis added]

The appropriate word is "scheduled," not "promised." I've been over this before. 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 judicial system recognizes this -- beneficiaries have no legal standing to benefits other than what the law says at the time the benefits are payable. The press, and policy makers and analysts, would do well to choose their language accordingly. It's an easy mistake to make -- I used to do it myself.

The article then reports on an area of possible bipartisan compromise between the President and House Republicans. This alone should signal that it might be a bad idea:

Meanwhile, a growing number of Democrats have declared their opposition to a proposal that has emerged as Obama’s biggest selling point to Republicans: his offer to apply a less-generous measure of inflation to Social Security, resulting in slightly smaller annual cost-of-living increases.

I am in favor of using the most accurate measure of inflation possible to index the benefits of retirees for inflation. So yes, the change should be made, but the larger problem with Social Security benefits is that they do not rise in real terms at higher ages. The purpose of Social Security is to provide insurance against outliving one's means of support in retirement. That risk increases, dramatically for some people, at higher ages. Other sources of support, like private saving, may not be annuitized and may thus run out at advanced ages. An increasing age profile to Social Security benefits in real terms helps to offset the decline in other sources of support.

The reductions in future Social Security benefits should come in the initial benefits, not the way those benefits change over time. That would also improve incentives for older workers to stay in the labor force. But, of course, that would require agreement on principles of design, which seems very far removed from the realm of possibility in the current climate.

More Bad Public Policy

I am with my friend Chuck Blahous on this one -- payroll tax cuts and continued extensions of them are just bad policy.  Chuck cites seven reasons, all of them worth your consideration.  If this story in the Washington Post is correct, then the breakthrough came when Republicans agreed to allow the payroll tax cuts to proceed without an offset, while the extended unemployment insurance and continued "doc fix" would be offset (in ways to be named later).  When will we have a parade to celebrate?

We are now over four years into the downturn and weak recovery, and we are still engaged in short-term policy measures.  These policies focus almost entirely on consumption and very little on investment, which drives the business cycle.  Wrong in 2008.  Wrong in 2009.  Wrong in 2010.  Wrong in 2011.  Wrong in 2012.

Walker, Fiscal Ranger

Former Comptroller General David Walker will join us at the Rockefeller Center on Monday as part of our NH primary programming.  If you are in the Hanover area, stop by Filene Auditorium at 4:30 p.m. for his lecture on "America at a Crossroads: The Fiscal Challenges and a Way Forward."  See this post for more details.

Debt in the White House

Greg Mankiw posts an e-mail from a colleague in the White House regarding "Debt and the Real Threat." Some elements are correct (like the need to scale debt or deficit figures by GDP and the challenges presented by future entitlement programs). One element is not correct, and it is reflected in a couple of instances regarding whether it is appropriate to include the Treasury bonds in the Social Security trust fund in the measure of total indebtedness or whether the right deficit measure is the unified deficit (which includes the Social Security surplus) or the on-budget deficit (which excludes it). Here's the key excerpt:

2. gross debt vs. debt held by the public - (this is the hard part) What we care about is how much the US Government owes to the American public and the rest of the world (meaning to those who buy Treasury bonds). This is commonly known as "debt held by the public". To this amount, the Chairman adds debt that one part
of the government owes to another part of the government, to get what budgeters call "gross federal debt". If you use funds from your savings account to pay down a credit card, you have decreased your "debt held by the public". For comparison, if you borrow from your savings account and put it into your checking account, and leave in your savings account an IOU from you to you, Chairman Conrad's metric would say that you have "increased your gross debt." This is economically meaningless.

Not so fast. The difference between Total Debt and Debt held by the Public is the bonds held in the Social Security trust fund. Those bonds represent a claim on future tax revenues just like bonds held directly by the public. The taxpayers in 2025 will not care whether the additional income taxes they are paying are to pay off an American citizen who holds a Treasury bond or the Social Security beneficiaries who have presented a bond from the trust fund to the Treasury for redemption so that they can collect benefits. It's the same to them--it should be the same to us.

The only way the trust fund is equivalent to "using funds from your savings account to pay down a credit card" is if the Social Security surplus is used to repurchase Debt from the Public as an equivalent amount of special issue debt is placed in the trust fund. Debt held by the Public should go down, but Total Debt should stay constant if we are operating the trust fund as it was intended.

In 2025, we get the reverse. As beneficiaries make their claims, bonds come out of the trust fund. Either taxes go up, or new debt must be issued to the public to generate funds to pay off those bonds. Debt held by the Public goes up, but Total Debt stays the same. In both cases, it is Total Debt that is telling you accurately about the size of the liabilities being passed on to future generations. Debt not currently held by the public will eventually be held by the public.

The honest budget policy is to target the on-budget deficit or Total Debt/GDP. Anything else leaves you open to the charge that you are spending the Social Security surplus, raiding the Social Security trust fund, etc. You can ignore the debt held in the trust fund only if you don't intend to honor its redemption. Let's not go there.

For more on these issues, see these earlier posts: "Chairman Ben and the Long-Term Budget" and "Which Budget Deficit to Target?"

Krugman on Obama on Social Security

Senator Obama's decision to make Social Security's long-term financial health an issue in last week's debate has generated some discussion among economists and pundits. As usual, Paul Krugman gets us going, claiming that Obama has been played for a "sucker:"

But the “everyone” who knows that Social Security is doomed doesn’t include anyone who actually understands the numbers. In fact, the whole Beltway obsession with the fiscal burden of an aging population is misguided.

As Peter Orszag, the director of the Congressional Budget Office, put it in a recent article co-authored with senior analyst Philip Ellis: “The long-term fiscal condition of the United States has been largely misdiagnosed. Despite all the attention paid to demographic challenges, such as the coming retirement of the baby-boom generation, our country’s financial health will in fact be determined primarily by the growth rate of per capita health care costs.”

How has conventional wisdom gotten this so wrong? Well, in large part it’s the result of decades of scare-mongering about Social Security’s future from conservative ideologues, whose ultimate goal is to undermine the program.

For the record, Obama has not said that our country's financial health won't be determined primarily by the growth rate of per capita health care costs. He is merely not using that as an excuse to ignore the challenges to Social Security's long-term financial health.

Greg Mankiw takes Krugman to task for ignoring a few people who have pointed out Social Security's long-term financial challenges who would hardly qualify as conservative ideologues. We might also point out that Peter Orszag, who is quoted so approvingly by Krugman, is the co-author of the Diamond-Orszag plan for "Saving Social Security." Conservatives like myself who do understand the numbers readily praise the plan as one that Democrats should have proposed years ago.

Krugman concludes:

But Social Security isn’t a big problem that demands a solution; it’s a small problem, way down the list of major issues facing America, that has nonetheless become an obsession of Beltway insiders. And on Social Security, as on many other issues, what Washington means by bipartisanship is mainly that everyone should come together to give conservatives what they want.

We all wish that American politics weren’t so bitter and partisan. But if you try to find common ground where none exists — which is the case for many issues today — you end up being played for a fool. And that’s what has just happened to Mr. Obama.

I will agree with Krugman that there have been some cases where that's what bipartisanship has meant, substituting "President Bush" for "conservatives." Medicare Part D is the leading example. However, I have not met the conservative who wants what Obama has proposed: raising the maximum taxable earnings level and doing nothing else. Conservatives want something like this, which makes all of the adjustments on the benefit side. Conservatives will settle for something like this, which includes Obama's proposal plus some other changes, like gradual reductions in future benefits, small increases to the payroll tax and retirement ages, and personal accounts to absorb any new revenues to make sure they are saved rather than spent.

What is frustrating about Krugman's column is that he's given up on finding common ground and mocks those like Obama who haven't. There may be no common ground at the moment on the issues Paul thinks are relevant, and the President is as much to blame for that as anyone, but that doesn't mean that there can be none after the next election. Krugman seems to be looking for his turn to be in the majority of 50.1%. I'm looking for something better and something different.

Read more commentary from PGL at Econospeak, Don Boudreaux at Cafe Hayek, and Tom Redburn in the New York Times, who quotes some non-conservative, non-ideologues about the size of Social Security's financing problems.

A Guide to Posts on Social Security Reform

Welcome to any readers who arrived here from the link in the local Valley News' article, "Democrats Raise Issue of Raising Social Security Income Cap," by John Gregg. His article makes reference to this post and an interview from last week.

If you would like additional information (and opinion) about Social Security reform, there are a few ways to navigate the site to find it.

1) John's article quotes me in one part as follows:

“As a … conservative, I would prefer to do almost everything on the benefit side, that's how I'm wired,” said Samwick, who supports funneling some Social Security payments into “personal” (or what opponents call “private”) accounts for recipients. “But if you are going to raise (revenue) from taxes, raising the cap is probably the most reasonable way to do it.”

That's an accurate quote, but it could use some clarification that is permitted by a blog if not the space constraints at the Valley News. To see a conservative approach to reforming Social Security, see these three early posts on the topic from October 2004:

• Why Is Social Security a Campaign Issue?
• How to Reform Social Security, Part I
• How to Reform Social Security, Part II

For a very good reform proposal that would appeal to those on the political left, see this post from the same month:

• What Social Security Reform Should Democrats Propose?

2) Along with Jeff Liebman, a former advisor to President Clinton, and Maya MacGuineas, an advisor to Senator McCain in his 2000 Presidential campaign, I have proposed a Nonpartisan Social Security Reform Plan. The plan documents are here, and my initial post on it is here. It represents the sort of compromise that we think could emerge from a genuine bipartisan effort to restore long-term solvency to Social Security.

3) There's plenty of other writing about Social Security on this blog. You can find it:

• A post-by-post listing in Part I (through May 2005) and Part II (since then) of the Social Security archive.
• A single link to all posts tagged as being about Social Security.
• A search for the term "Social Security," linked here.

Enjoy!

Social Security in the Democratic Candidates' Debate

There was a portion of the debate on Wednesday night focused on Social Security, and, in particular, raising the maximum taxable earnings as a way to collect more revenue and improve projected solvency. You can watch the segment here. The issue at hand is whether solvency can be restored by removing the cap on taxable earnings, so that all earnings are subject to the 12.4% combined (employer plus employee) tax for Social Security. This is currently the case for the 2.9% combined payroll tax for Medicare Part A.

There are two ways in which this might be done. In the first, workers who pay this additional tax would have the earnings on which they were taxed included in the calculation of their subsequent benefits. In the second, workers who pay this additional tax would not have these incremental earnings included in the calculation of their benefits. The Office of the Chief Actuary at the Social Security Administration has made it very easy to assess the effect of changes of this sort on projected solvency. The first case is shown here, and the second case is shown here.

In the first case, the system can pay full benefits for almost all of the 75-year projection period. You can see this in two ways. First, the second to last column is -0.10, meaning that over the 75-year period, full benefits could be paid entirely if this provision were enacted and the combined payroll tax rate were increased (on the old base) from 12.4 to 12.5 percent. Second, you can see that the new path of the trust fund crosses zero just at the end of the projection period.

In the second case, the system can pay full benefits for the full 75-year projection period. The second to last column is now +0.28, and the trust fund has a balance of about 3.5 years worth of benefits at the end of the period. Is this enough to say that the system is solvent? I don't think so. Even in this case, the balance in the trust fund is declining and will cross zero at some point after the 75-year projection period ends. The last column of numbers shows that annual deficits are equal to almost 3 percent of (the old base) taxable payroll. More would need to be done here to ensure that the trust fund is never projected to cross zero.

It is not clear which provision the candidates meant, but I am going to assert that it was the second one. If the problem is that there is not enough money to pay currently projected benefits, then it seems odd to now increase the claims that will be made on the system by the very wealthiest recipients. (Very roughly, if I pay these taxes on another million dollars of earnings each year over the course of a career, my benefits will go up by $150,000 per year during retirement.)

This is a large increase in top marginal tax rates on incomes where the supply-side response could be relevant. When Jeff, Maya, and I were developing the LMS plan, we decided that we didn't want to do this all on the revenue side and didn't want to get all of our revenue via increases in the cap. Instead, we borrowed the idea from the Diamond-Orszag plan to lift the cap to a point where 90% of all earnings were taxed (with no incremental benefits for the additional earnings subject to taxation). This was roughly the amount subject to the tax at the time of the last big reform in 1983. (Since a lot of the increase in average earnings has been at the high end, over time, a lower share of total earnings have been below the cap.) We also added an increase in the payroll tax rate for 1.5 percent of (the old base) taxable payroll, and made up the rest of the financial shortfall with changes on the benefit side.

More importantly, we required that all new revenues go into a system of personal accounts. This was my deal-breaker. If we were to raise this much additional revenue, without channeling it to personal accounts, we would simply be compounding a budget problem that is already severe. When the government runs a Social Security surplus, it treats those monies as available to spend on things other than Social Security. We know this because it targets the unified budget deficit, and has done so pretty routinely over the last several decades. (See here and here.) If these government inflows are matched by offsetting outflows (into the personal accounts), then there is no danger that they will be used to finance current expenditures, and the additional revenues will actually raise saving rates to help prefund future obligations.

Fine Work by the Treasury on Social Security

The U.S. Treasury Department has released its first of six issue briefs on the Social Security and its potential reform, "The Nature of the Problem." It is a very good overview of the projected future shortfall based on the latest Social Security Trustees Report. It is particularly gratifying to see these passages in a Treasury brief:

Viewing Social Security from the perspective of how it affects current and future individuals and generations explains why reform can be fairer to future generations the sooner it is implemented. Delay reduces the options for distributing the financial burden of reform across generations because delay exempts additional generations from sharing in the financial consequences of reform.

To make this point more concretely, consider a policy of closing Social Security’s permanent financing gap by immediately increasing the payroll tax rate by 3.5 percentage points. This policy would affect all current and future workers. If the tax increase were instead delayed until 2041, when the trust fund is projected to be depleted, the requisite tax increase would be 5.8 percentage points rather than only 3.5 percentage points—the difference being that there are fewer cohorts (and therefore less resources) to tax the longer one waits. Similarly, all retirees’ benefits would have to be cut by 20.4 percent in 2007 to make Social Security permanently solvent—but this would rise to a benefit adjustment of 30.4 percent if reform were initiated in 2041. These examples show that fairness to future generations requires that action be taken sooner rather than later.

They appeared here (my first post on Social Security) nearly three years ago. The teaser for the next of the six briefs, from footnote 4 of the current brief:

The special Treasury securities in the present trust funds represent claims on the government and—ultimately—the public, in the form of future general tax revenues. Whether these trust fund accumulations constitute true pre-funding is an open question, and is discussed in Treasury’s second issue brief.

I'll look forward to seeing it.

Social Security in France

Fascinating news from France, reported earlier today:

The French President has unveiled controversial plans to overhaul his country's generous social security system.

Nicolas Sarkozy is eyeing off the pensions of public servants.

In 1995, moves to reform France's pension system led to weeks of protests.

Now, the new French President has announced a package aimed at cutting benefits to workers like train drivers and electricity workers, who until now could retire early.

Mr Sarkozy says the system is financially unsustainable and he has pledged to negotiate with unions and companies, but he insists the new system will be implemented without delay.

The French President also criticised generous social security payments, arguing that handouts discourage people from working.

"Our social system is not financially tenable. Our social system discourages work," he said.

"Our social system does not ensure equal opportunities. Basically I'm saying, let's stop the hypocrisy."

The moves are part of a wide-ranging plan for social reform, aimed at boosting the country's economy.

France's demographic shift, like those in other developed countries, is more pronounced than in the United States. The French system also penalizes work by older workers to a greater extent than the system in the United States. It is not surprising that the French President feels like he has to act sooner, rather than later. If the United States cannot begin the process of reform in the coming years, it is likely that we will find ourselves in an analogous position in the future.

Good luck to President Sarkozy. He's going to need it.

My country's Social Security deficits are thiiiis big.

A New Approach on Social Security Reform?

Courtesy of Paul Bedard of U.S. News, we learn that Treasury Secretary Hank Paulson is now searching for "small changes both Republicans and Democrats can agree on" to reform Social Security. The full post:

President Bush's main architect charged with reforming Social Security today sounded resigned to moving forward on small changes both Republicans and Democrats can agree on instead of the massive program once envisioned by the White House.

"We need to fix this problem," Treasury Secretary Henry Paulson told reporters at a newsmaker roundtable this morning. But he said that with both sides eager to fight instead of debate the issue's major problems, it's best now to move on the fronts where there is agreement instead of simply giving up. One of those issues he indicated would not be worked on is the administration's goal of individual retirement accounts, in part because Democrats worry about how those would be affected by poor stock market conditions. He also said that solving the issue can't be done unless there is a bipartisan solution.

"I'm not naive; I'm not going to tilt at windmills," he says, explaining why he isn't pushing for a new debate on massive, Bush-styled reform. Paulson described himself as a lonely soldier in the effort to battle for Social Security reform, one of the major issues he came to Washington to work on. He said that he has been encouraging ideas from all sides, but so far, "I've been playing solitaire."

To break the logjam, he plans to have Treasury start issuing papers on topics that both political camps agree on with the hopes of pushing through some changes.

I agree that he's been a very lonely soldier--there are only handful of people in the Executive Branch (maybe as few as three) keeping this alive. The post specifically says, "the fronts where there is agreement." It does not say compromise. Reinforcing this, the post says that individual accounts will not be part of the reform at this point. As I've thought of them, individual accounts might be a right-of-center policy that is so important to conservatives that they would be willing to give up something to get them. (See this prior post and the LMS plan itself.)

I was not aware that there were "fronts where there is agreement." Maybe this working relationship has now produced some. We'll all be waiting for those Treasury White Papers to tell us.

Rove and Mythology

From the WSJ editorial with Paul Gigot, in which Karl Rove announced his departure from his current position as Deputy Chief of Staff at the White House:

"I'm a myth. There's the Mark of Rove," he says, with a bemused air. "I read about some of the things I'm supposed to have done, and I have to try not to laugh." He says the real target is Mr. Bush, whom many Democrats have never accepted as a legitimate president and "never will."

When I was at CEA, I was in perhaps a dozen meetings where Karl Rove was also present. I never spoke to him personally--I was more in the role of observer at those meetings. I took two things away from those meetings. First, when Rove was in the room, you had better be on mission. He would have no hesitancy at all in asking anyone the direct question, "What have you done to advance the President's agenda today?" He'd be expecting a lengthy and comprehensive reply, and you'd feel like a moron if you didn't have one for him. Second, and it's worth keeping in mind that I would only be at such a meeting if much of the content were economics (as opposed to national security or some other policy), I never heard him take the wrong side of an argument based on the economics.

That said, there is quite a bit of myth in Rove's interview. Gigot's editorial comments around the quotes from Rove are right on the money:

Mr. Rove also makes a spirited defense of this president's policy legacy, sometimes more convincingly than others. On foreign affairs, he predicts that at least two parts of the Bush Doctrine will live on: The policy that if you harbor a terrorist, you are as culpable as the terrorist; and pre-emption. "There may be a debate about degree," he says, "but it's going to be hard for any president to reverse that."

He's less persuasive on Medicare, where he insists that market reforms and health savings accounts are building a "critical mass" of popular support that will make them unrepealable. Yet Democrats are even now trying to kill Medicare Advantage, blocked only by the promise of a veto. If Mrs. Clinton wins in 2008, the Medicare drug expansion may prove to have been all spending and no reform.

He also insists that Social Security reform was worth the failed effort, and that Mr. Bush's ideas will be adopted inevitably by some future president. I ask if, given Mr. Bush's falling approval ratings in 2005 due to Iraq, he shouldn't have pushed for something less ambitious. Not a chance. "You cannot advance on the fronts you want to advance if you're playing mini-ball," he says, once again sounding like Mr. Bush.

Medicare Part D was a betrayal of conservatism. Conservatives are supposed to see fiscal responsibility as their friend, precisely because the need to pay for what the government does should constrain the overall size of that government. This Administration let go of fiscal responsibility early in its first term and has been undermined by its absence ever since. (With the current budget target, weak as it is, we are essentially in a pay-as-you-go situation, so it's not quite so bad.)

The President's attempt at Social Security reform was the first casualty. The reason to reform Social Security is its long-term fiscal imbalance. The President understood that, even if his rhetoric was at times hyperbolic or misleading. The President lost all credibility on using that as a motivation for reform when he decided that the short-term non-entitlement budget imbalances "don't matter" and when he passed a Medicare expansion whose unfunded obligations were larger than those in Social Security. That was contradiction number one. (Read more here.)

Contradiction number two came from the President's statements that he wanted to "strengthen" the system. It is reasonable to believe that strengthening an entitlement program means putting more resources into it. There was no plan put forward by the Administration, even in the form of a trial balloon, that tried to strengthen the system with new resources. That doesn't mean the proposals were bad ideas, but it does mean that the honest description of what his plans do is to pare back projected future spending so that it is balanced by projected future revenues. The President's intentions here were both conservative and (to use Rove's word) ambitious. They just weren't presented coherently, and so they got nowhere.

This notion that the President's legacy on matters of fiscal policy--which will be written by historians (and bloggers!) that Rove can't spin--will be anything but a severe and harsh critique is what I consider the Myth of Rove.

Quiet Discussions of Social Security Reform

An article posted yesterday to CNNMoney.com by Nina Easton reports on some quiet policy discussions about Social Security reform between two unlikely but well placed collaborators:

WASHINGTON (Fortune) -- Picture this: A rotund, theatrical politician from Harlem and a wiry, introverted policy-wonk from Shreveport sitting elbow to elbow on the House floor, shuffling between each other's offices, passing paper between staffs. Two men from opposite ends of the political spectrum, they are joined in secrecy on a project that just about everyone else in Washington considers doomed to failure. Charlie Rangel and Jim McCrery are on a mission to rescue Social Security from bankruptcy.

Conventional Washington wisdom long ago wrote the death notice on Social Security reform. What Republican would want to touch a project that blew up in George Bush's face just two years ago? What Democrat would risk frightening senior citizens when party leaders are hoping they'll be passing out tickets for Inaugural Day, 2009?

But McCrery, a conservative, and Rangel, a liberal, are willing to take the heat because they actually believe in the old-fashioned notion that if lawmakers offer serious solutions to serious problems, Congress' miserably low standing in public opinion doesn't have to be permanent. "I think it's important for the institution to reform Social Security," McCrery tells Fortune. "The public's opinion of the federal government right now is as low as it's ever been in my lifetime. And that's dangerous, because we have big problems to solve. And if we don't have political capital with the public, we can't solve those problems. We need public support to solve Social Security, Medicaid, Medicare, healthcare." "Social Security is the easiest one, so let's start there," he adds. "Let's build some capital and show we can work together, and get big things done."

The Rangel-McCrery conspiracy matters only because these two men are, respectively, the Democratic chairman and the ranking GOP member of the powerful House Ways and Means Committee, ground zero for matters ranging from tax and trade policy to entitlement reform. Quietly, and over the course of the past three months, the two men have been meeting alone and with staff to hammer out a compromise plan. "We're not there yet," says Rangel, even as he makes clear - as a self-described "old poker player from Harlem" - that he's betting on a breakthrough.

The article goes on to reference the demise of the immigration bill as a cautionary tale for this sort of left-right pairing of legislators on big issues. But because of their status on the Ways and Means Committee, this is the pair that would have to get the process started. Let's hope they get a good foundation for the bill, with the opportunity for the rest of the legislators to do their jobs as well.

Where's Your Brain?

If you ever wondered whether there was a place in the online world where the use of Google was prohibited, I have a candidate for you. How else would we politely explain Matt Stoller's post at MyDD, "Where's Your Core?" in which he refers to Jeff Liebman as a "Cato-infused nut?"

At issue is Jeff's position as one of Barack Obama's top economic advisors and his status as a co-author of the LMS plan to reform Social Security. Stoller quotes a Bloomberg article as follows:

Liebman, an expert on Social Security, isn't easily pigeon- holed either. He has supported partial privatization of the government-run retirement system, an idea that's anathema to many Democrats and bears a similarity to a proposal for personal investment accounts that Bush promoted, then dropped in 2005.

``Liebman has been to open to private accounts and most people in town would say he's a moderate supporter of them,'' said Michael Tanner, a Social Security expert at the Cato Institute in Washington, a research organization in Washington that advocates free markets and often backs Republicans.

In a 2005 policy paper Liebman, along with Andrew Samwick of Dartmouth College in Hanover, New Hampshire, and Maya MacGuineas, a former aide to Senator John McCain, advocated a mix of benefit cuts, tax increases and mandatory personal accounts to shore up the system, which will begin paying more in benefits than it takes in through taxes by 2017 under current actuarial estimates.

Obama has called Social Security's problems ``real but manageable'' and has pledged to preserve what he's called the ``essential character'' of the pension program.

If they allowed the use of Google at MyDD, then Stoller might have typed in "jeffrey liebman" "social security" and hit return. The first link would be to this description of the LMS plan, the first paragraph of which is:

The three of us – former aides to President Clinton, Senator McCain, and President Bush – did an experiment to see if we could develop a reform plan that we could all support. The Liebman-MacGuineas-Samwick (LMS) plan demonstrates the types of compromises that can help policy makers from across the political spectrum agree on a Social Security reform plan. The plan achieves sustainable solvency through progressive changes to taxes and benefits, introduces mandatory personal accounts, and specifies important details that are often left unaddressed in other reform plans. The plan also illustrates that a compromise plan can contain sensible but politically unpopular options (such as raising retirement ages or mandating that account balances be converted to annuities upon retirement) -- options that could realistically emerge from a bipartisan negotiating process, but which are rarely contained in reform proposals put out by Democrats or Republicans alone because of the political risk they present.

It's hard to see what's so inflammatory about that. If I had to guess, it's either "bipartisan negotiating," "compromise plan," or "personal accounts." Let's give Mr. Stoller the benefit of the doubt and assume he understands that the first two are essential to getting any substantive public policy implemented. So it must be those "personal accounts."

Where oh where could Mr. Stoller find the answer to his conundrum of how a top advisor to Senator Obama could support such things? This is where that Google thing helps again. Mr. Stoller could click on the second link in the search, in which he would find the following excerpt from an interview with Jeff:

Q: Why are personal retirement accounts such an important element to the Social Security system as we move forward?

Liebman: The benefit of having personal retirement accounts in the plan is that if we’re going to spread the burden across generations and start putting some extra revenue into the system now, we need to have a way to save that money so that it doesn’t get diverted to other purposes, as the current Social Security surplus often does. If you bring in new revenue but put all of the net new revenue into personal retirement accounts, then you have a way to spread the burden across even current workers in terms of making extra contributions today, but to do so in a way that you can really be sure is going to be contributing to people’s retirement incomes in the future.

Yes, that's a very sinister explanation--you cannot reliably prefund without personal accounts. If Mr. Stoller would like to take the opposite position--that, for example, President Bush's budget policies have not spent the Social Security surpluses during his time in office--he's welcome to do so.

I don't know how Senator Obama would fare as President, but it seems pretty clear that he's better off with Liebman as an advisor than Stoller as a supporter. As I wrote regarding some earlier criticism of the LMS plan, "If you fancy yourself a liberal, and if your coalition doesn't extend far enough to the right to include Jeff Liebman, then you have relegated yourself to political irrelevance."

Normally, this is the part of the post where I would suggest that we raise some money to help Mr. Stoller afford a decent search engine. But search engines are free and improving the quality of the posts at MyDD may be impossible. Making progress against Cystic Fibrosis is neither. The pledge drive is still on. You can support our team at Great Strides or make donations directly to the Cystic Fibrosis Foundation in honor of Mother's Day.

The Center for a Responsible Federal Budget

On Tuesday, I had the opportunity to attend the annual conference of the Committee for a Responsible Federal Budget and participate in a roundtable with its Board of Directors and others. The president of CRFB is Maya MacGuineas, the "M" from the LMS plan. Here are the points I made:

1) Articulating a Budget Target

Some of the discussion referred to the possibility of a budget summit. (The CRFB's co-chairman have called for this publicly.) I think that the critical element of budget policy is setting the target. I think the target has (at least) two parts.

First, the government budget should be in balance over the course of business cycle, where budget here refers to the General Fund, excluding surpluses or deficits in entitlement programs. As an alternative, I would accept a weaker standard that there be no trend in the ratio of total federal debt to GDP. (This debt figure includes any debt held by government trust funds.)

Second, all entitlement programs like Social Security and Medicare should be sustainably solvent using enumerated and dedicated revenue sources. Sustainably solvent means that the program's trust fund is projected to have a positive and non-decreasing balance at the end of the relevant projection period. Enumerated and dedicated revenue sources means that the practice of relying on the General Fund to finance upwards of 75 percent of Medicare Part B and D should end--no open-ended commitments. Enumerate a revenue source to pay for it.

Personally, I won't work actively for the election of any political candidate or the in the administration of any politician who espouses a budget policy at odds with these targets.

2) All Dollars Matter

I still give the current Administration great credit for being willing to engage on Social Security's solvency. But I remain disappointed in the way that engagement was undermined by policies toward other entitlement programs and the General Fund (leaving aside design and marketing issues in the personal accounts). The public was supposed to be concerned about Social Security reform because the program is projected to shift from surpluses to deficits as the Boomers retire, life expectancy continues to increase, and fertility rates remain around 2. I acknowledge that's why I'm concerned. That's why the President said he was concerned, or at least one of the reasons.

If concern over tax burdens on future generations is what motivates you, then it is completely inconsistent with that motivation to pass a Medicare prescription drug bill that generates a projected unfunded obligation that is bigger than the projected unfunded obligation in Social Security. It is also completely inconsistent with that motivation to run General Fund deficits that are not balanced by later surpluses, raising the debt burden on future generations. This sort of inconsistency will doom any chance at prudent reform of any of the programs.

3) What If This Becomes a Class Conflict?

I've been working on Social Security and its reform for over a decade, closer to two. I have always framed the issue as a matter of conflict between generations over resources. The inconsistencies in #2 are starting to frame the debate in terms of class. For example, those who want to preserve entitlement programs as they are currently structured think that debt finance of entitlement programs is not so bad. Debt is serviced primarily through the income tax, and of all taxes (other than inheritance taxes), the income tax is the most progressive. So why accept any increase in payroll taxes or mandatory broad-based contributions to personal accounts now? The normal answer would be so that we can reduce the tax burden on future generations. But they don't see it that way. High future income taxes fall on the highest-income members of future generations. According to this view, those people are largely the children of the highest-income members of the current generation who, again according to this view, are not paying enough income taxes today. Sure, they would rather have the current highest-income people pay more today, but the second-best alternative for them is the highest-income people some other time. When this becomes an issue of class divide, I think we'll have an even tougher time bridging it.



I'd like to take this opportunity to thank people who have given me feedback through the blog about these issues. Anyone who's been reading for a while can see how my views have been shaped through these productive and polite exchanges of ideas.

The Social Security Coloring Book

It appears that I've been replaced by a coloring book, courtesy of The Stand-Up Economist. It's actually quite a good discussion of the policy issues. [h/t The Big Picture].

What Did the Greenspan Commission Do?

An anonymous commenter on the last post made some very good points. The last of which generates the title of this post.

There are number of problems of both fact and interpretation, both with Mr. Baker's original comments and with the subsequent follow-up comments equating Social Security adjustments with "defaulting" on government bonds.

First, neither Bernanke nor other would-be reformers is seriously advocating "defaulting" on government bonds. To the contrary, analysts on all sides of this debate, including the reformist side, stress that no one doubts that the government will honor the bonds. Further, if you actually read the specs of the various reform proposals that have been introduced, they all they all honor the bonds in the Trust Fund. In fact, some would even issue additional bonds, though this is besides the point.

All that is being pointed out is that the government can't effectively pre-fund future benefits by issuing bonds to itself, from one account to the other. This has nothing to do with the creditworthiness of the federal government. If someone proposes to spend money that the government doesn't yet have the resources to pay, saying that the government will issue a bond to cover the expenditure doesn't answer the question of where the money will come from. Bond or no bond, we still have to decide who is going to pay for that expenditure, and how.

Equating adjustments to Social Security's benefit schedule with a default on government bonds is a red herring. The government has adjusted Soc Sec's benefit schedule repeatedly (for instance, in 1977 and 1983) without this being interpreted as a government default.

Moreover, it's simply incorrect to assert that the Baby Boomers have already paid for their own benefits. The Social Security shortfall does not arise because of an imbalance between the scheduled benefits and promises of future participants; it's entirely a function of an excess of promised benefits over revenues for participants in the program to date. Diamond-Orszag and others have written about this as the "legacy debt." Here it shows that the excess of past taxes over benefits for participants in the program to date is $1.9 T. The excess of future benefits over taxes from those people is $15.1 T, producing a net shortfall (after rounding errors) of $13.3 T. (Diamond-Orszag estimated it at closer to $11 T, which reflects the fact that they wrote in 2003). It's simply not correct that participants to date have pre-paid their own benefits. Under current law, future generations are being asked to pay for their own benefits (in the aggregate) plus make good on the enormous mbalance of payments of program participants to date.

Finally, it's a widely-accepted myth, but a myth nevertheless, that the Greenspan Commission "deliberately" tried to pre-fund benefits by building up a big Social Security Trust Fund. This myth is so widely accepted now that anyone could be excused for repeating it, but a review of the historical evidence shows clearly that it isn't true. Whether you read the CRS report on the 1983 amendments, the interview with the Commission's Executive Director Robert Myers, the documents consulted by the Greenspan Commission itself, or transcripts of various speeches by the late Senator Moynihan, another Commission member, it's clear that they never thought they were pre-funding future benefits through the Trust Fund. They simply sought a result of 75-year actuarial balance on average, without careful attention to how they got there. This is one reason why a series of Advisory Councils since the Commission have all advocated using a different metric than 75-year balance, so as not to repeat the same mistake. According to Myers and others, had they realized that they had produced "balance" by following big surpluses in the 1980s, 1990s and 2000s with big deficits in the 2020s and beyond, they might have gone about it another way. So, not only has the Trust Fund not been an effective source of advance funding, the Greenspan Commission never actually argued that it would be.

The bottom line is that if Bernanke's critics were more confidently in the right, they'd respond to the arguments he had made, rather than attacking one (arguing for default) that he didn't.

Some Clarifications

The comments to the last post contain a thread, spilling over from AngryBear, about whether Dean or I favor default on some part of the government's obligations. I don't favor default on securities issued by the federal government. I didn't bring this up--it shouldn't even be a question.

But Social Security is not a security issued by the federal government. It is a program that current generations legislate on their own behalf and largely at future generations' expense. It is not the only such program. I think all such programs need to be carefully considered, and in particular, that we should tread very lightly on future generations' income when the proceeds go for our own consumption, not for investments that increase the size of the economy they will inherit. That attitude applies to Social Security, to Medicare, and to the level of federal debt.

I admit that I applied it first and most attentively to Social Security. I have been studying the program since 1988. The current debate about Social Security was beginning at that time. Medicare was smaller. Over the subsequent years, there appeared to be some hope for the federal debt to brought to a manageable level. But if you read the two things I wish that Bernanke would have said in his testimony in the previous post, I am acknowledging that there is no difference in how I would apply this attitude today. And it's the past six years that have done it.

I wouldn't characterize anything I've suggested at any point as a default on Social Security. I do want to scale the program back to what can be afforded in the long term (as I have defined both "afforded" and "long term") with roughly the same payroll tax rate on future generations as we've paid. I have been clear about what I would do if I could implement my own preferences and what I would do if I had to compromise with others who don't share my preferences. If those two options are not on the table, then I tend to side with changes to the program that keep the program--and its impact on future generations of workers--small rather than large. So, perhaps to PGL's disappointment, I would take the President's plan (Commission Model #2, possibly updated to Progressive Price Indexing, and with the carveout personal accounts, which I don't view as necessary in this plan) over the status quo, even though I think we can do better.

But that's really not the issue here. In his post, Dean said that "workers have already paid for these benefits" and "if benefits are cut at a point where the program could easily afford the benefits (e.g., 10-20 years), then the government has effectively stolen from the people who paid Social Security taxes." He equated that with defaulting on the bonds in the trust fund. Others have appropriately argued that the two are not the same thing. I argued that I don't buy his appeal to morality to preserve benefits for current workers at the level in current law, largely because the balance in the trust fund that he's using to make his case doesn't actually represent savings that those workers have amassed to help future generations afford the scheduled benefits.

UPDATE: Felix Salmon has a nice roundup of the blogosphere's discussion of this issue.