Why Oh Why Are We Ruled by These Fools? (Yet Another Social Security Edition)

Ah. It becomes clearer and clearer why nobody in the administration who knew anything about Social Security substance was trotted out the week before last to provide details on Bush's endorsement of Pozen's "progressive price indexing." The numbers are ugly.

Jason Furman reports:

The Impact of The President's Proposal On Social Security Solvency And The Budget, 5/10/05: In an April 28 press conference, the President announced sliding-scale benefit reductions modeled on a plan proposed by investment executive Robert Pozen. Unfortunately, the White House has not released the traditional analysis by the Social Security actuaries of the effect of its plan on Social Security solvency. It is standard practice for policymakers and outside analysts who present Social Security plans to provide the actuaries’ analysis when, or shortly after, they release their plans.

In the absence of an analysis by the Social Security actuaries, this analysis provides some of the standard actuarial and fiscal estimates of the President’s proposal. The analysis is based on the actuaries’ analysis of the Pozen proposal, which has been released, analyses by the actuaries of other private-account plans that contain features similar to those of the President’s plan, analysis by the actuaries of the President’s private accounts through 2015, and the data in the 2005 Social Security trustees report....

Because the sliding-scale benefit reductions (also called “progressive price indexing”) that the President has proposed would not start until 2012 and would be small initially, this proposal would move back the date when Social Security’s benefit costs will first exceed its tax revenues by only two months, to slightly later in 2017. [Note that Bush and the Bushies have been pushing the 2017 date as a "crisis" point for months.] The sliding-scale benefit reductions would have a somewhat larger effect on the date when Social Security would become "insolvent" — the benefit reductions would move that date back by six years, from 2041 to 2047.

The President’s private accounts, however, would accelerate the date on which Social Security begins to have a cash-flow deficit, as well as the date of insolvency, because establishing the accounts requires diverting large sums from Social Security to the accounts. When the sliding-scale benefit reductions and the private accounts are considered together (i.e., when both components of the President’s plan are examined), the plan is found to move forward the year in which Social Security would become "insolvent" from 2041 to 2030. This result could be averted only by large cash transfers from the Treasury or additional benefit reductions or tax increases. The plan also would accelerate the year in which the program begins to run cash-flow deficits from 2017 to 2011.

The President’s sliding-scale benefit reductions, by themselves, would close 59 percent of Social Security’s long-term (i.e., 75-year) funding shortfall.[2] (White House statements that the benefit changes would close 70 percent of the cash flow gap are somewhat misleading; they refer to the percentage of the gap that would be closed in a single year — 2079, the 75th year — not to the share of the cumulative 75-year gap that would be closed.)

When the private accounts are added in, however, the President’s plan as a whole is found to close only 30 percent of the 75-year gap. [Here Furman assumes a--high, as assumed by the SSA actuaries--3% real Treasury borrowing rate. With a lower, more realistic borrowing rate private accounts make money for the government (it borrows at 2% and lends at 3%) and lose money for beneficiaries.]

More than two-thirds of the gap would remain. Additional benefit reductions, new revenues, or large transfers from the rest of the budget would be necessary to fill the substantial remaining gap.

Comments

[David]

Note that the day after the President's press conference, the White House assigned Catherine Martin, Deputy Assistant to the President and Deputy Communications Director for Policy and Planning, to take what must have been planted/harvested and silly questions in a White House interactive session:

http://www.whitehouse.gov/ask/20050429.html

I contributed a question that went "why isn't an economist answering these questions?" but alas, my query wasn't chosen!

[bakho]

Most people stopped listening once the words "benefit cuts" crossed his lips. That was a "read my lips"moment. At some point it will become too politically damaging to not drop the SS hot potato.

From the Furman analysis comes the question, "Why make things worse?"

[Lee A. Arnold]

The great thing about this whole progressive indexing idea is how wonderfully Byzantine and confusing it is! Imagine, the party of smaller government and tax simplification is mounting the most complicated boondoggle in the history of the nation! You will need charts and graphs just to follow the charts and graphs! Why, I was merely saying to Poopsie the other day that there just isn't enough bloated crap to steal our precious time, and how I longed mightily that a big steaming pile of smelly swindle be delivered to the doorstep! I shall step into it gratefully! Though indeed it makes me sad to see the poor Republicans waste their valuable leisure in hammering out the numbing details of their infantile greed, I know that they will soon regurgitate a chunky stew of mind-blowing complexity, and all the pundits and third-raters in the land will step forward once again to write what a very very good plan it is, too! ...I love this goddamned country! Beware those lousy Democrats, though--they'll run on some platform like "Vote for Us--We Always Make Plans You Can Understand" or maybe just "Follow the Money"--and end up in control of the goddamn government! Bastards!

[Bruce Webb]

What Bakho said. Or even what Krugman said. Benefits cuts today that will not materially offset benefit cuts in 2041. When I am 84. I can promise 100% of currently scheduled benefits to the lowest 30% of earners until 2041 by doing nothing, to eternity by working to ensure that the economy returns a better than 2.0% return between now and retirement, or by taking a guaranteed cut right away.

The whole thing is odd. Why should I take a cut from 2023 (when I am scheduled to retire) to 2041 to keep retirees in that latter year, and only those in the lower 30% from having to reconcile themselves with the responsibilty for growing the economy at some rate approximating what every generation before them have done. What we have here is 18 years of Inter-Generational Income Transfer - backwards.

Here is a better idea. Lets say all post-Boomer, worker age Americans (which takes in everyone from 1964 to 1987) get a job and help me grow the economy at more than a 2.0% rate. Doesn't seem like a huge demand. Get out of bed and show up for work and both you and me get a full check forever.

[rsl]

As we discuss Social Security, let's not ignore what just happened at United Airlines. The private (employer-sponsored) pension system is in danger of collapse too. (It's already been greatly weakened by the general replacement of traditional "final average pay" pension plans with private accounts (401k's) and "account-based" pensions (such as cash balance plans).) The old "three-legged stool" retirement concept (i.e., the idea that Americans should have a diverse retirement program that includes (1) individual savings (personal and 401k), (2) employer-sponsored retirement insurance (i.e., traditional pension), and (3) government-sponsored tax-transfer programs (Social Security)) is being replaced by a very wobbly one-legged stool all tied to individually-funded private accounts invested in the stock and bond markets. Funding cuts in all retirement programs (both employer-sponsored and government), as well as anemic private savings rates, meanwhile, are shaving away much of the mass of that leg, so it's getting fragile as well as wobbly. Add on the massive debt so many Americans will be carrying into retirement and we have a huge problem looming over the horizon.

No one in Washington or in the media seems to be talking about the big picture though . . . maybe it's just too ugly to face.

[chris]

Yeap, nothing conservative around, but it's the picture.

[rsl]

One other comment related to my last post:

The retirement security issue also needs to be placed in the context of an even bigger financial security issue for the middle class, which includes the following problems:

The increasing cost of health care (and, to a lesser degree, education, housing, etc.)

The growing federal deficit (which will need to be paid at some point--as long as the deficit continues to grow, Bush's tax cuts are really just tax deferrals; what the taxpayer doesn't pay today will need to be paid--with interest--by future taxpayers)

The growing trade deficit

Global competition for jobs

A change in the tax structure, which transfers the burden of taxes to wage earners and away from people who get their money through investment or inheritance (putting more pressure on the income of wage earners)--if we move to consumption taxes, the pressure on lower- and middle-income wage earners could be even greater, since these people need to spend a large percentage of their income to cover basic living expenses and therefore will be exposed to more taxation than wealthier people who can save more of their money

A general shift away from group-provided insurance-type benefits which offer benefits based on need (i.e., pensions, social security, medical insurance, etc.) to individual savings accounts, which offer benefits based on one's own income and ability to pay

Add these all up, and we're looking at a very bleak future . . .

[Hederman]

Bush's plan won't score well under a 75 year window.

This is because someone who is 66 at year 75 has contributed a life-time of assets to the system but has built up a liability. That shows up as a positive for Social Security.

Someone under Bush's plan has contributed less under the current system but has far less liability long-term.

Furman's view on Bush's contribution to solvency is skewed by the fact that SS obligations is reduced by Bush's notional offset. This study says that Bush's reduces revenus to SS but doesn't give as much credence to the long-term reduction in SS liabilities.

BTW, I don't understand this argument either. After hearing how draconian the bush cuts are, I'm not sure how you can sell "They don't go far enough in fixing SS"

[anne]

Kyle

"First, the problem with Bush's social security reform was that there was no problem. Then it was that his policy is too painful. Now it doesn't do enough to stop the huge looming deficit. This is ridiculous. I'm a Democrat, but these attacks seem contradictory, absurd, and opportunistic to me."

Right: There is no problem with Social Security for at least another 40 years and with moderate economic growth of 2.2% there simply will not be a problem.

Right: Benefit cuts are not necessary and are too painful.

Wrong, wrong, wrong: There is no looming deficit for Social Security for at least 40 years and likely not then.

The deficit mongers are wrong and do most damage to public support for Social Security.

Thank you Kyle :)

[anne]

The hysteria is wholly driven by Matt Miller, another fear monger, another deficit monger, pretending to other than what is:

http://www.nytimes.com/2005/05/11/opinion/11mill.html

Wanted: Responsible Demagoguery
By MATT MILLER

You'd never guess from the Democratic hysteria that President Bush's plan to "progressively index" Social Security is an idea we liberals may one day want to embrace. So farsighted Democrats who want to (1) win back power and (2) use that power to fix big problems should quit carping about Bush's evil "cuts" and punish him instead with what I call Responsible Demagoguery: harsh politics that leaves sound policy intact.

Why do I say this? Start with this poorly understood fact: Under today's system of "wage indexed" benefits, every new cohort of retirees is guaranteed a higher level of real benefits than the previous generation. Workers retiring in 2025, for example, are scheduled to receive payments 20 percent higher in real terms than today's retirees. Today's teenagers are slated to get a 60 percent increase. When Democrats cry about "cuts," they mean trims from these higher levels.

A Democrat might ask: Why would we ever change this way of calculating benefits, other than from some Scroogelike desire to slow the rise in future benefits? Well, we probably wouldn't think about it if we weren't on the cusp of the biggest financial crunch in American history. But we are. And with the baby boomers' retirement looming, Democrats need to think beyond Social Security alone to think intelligently about achieving progressive goals.

Indeed, if you care about social justice and economic growth, the big policy question for the next generation is this: How do we square the needs of seniors with the needs of the rest of America, at levels of taxation that don't strangle the economy? ...

[anne]

There is no Social Security problem, rather there is a massive and growing surplus. There are all sorts of other problems, but the focus on Social Security is designed simply to undermine the program while there is still a chance. Social Security has been fought against for 65 years, as the wonderful affirmation of the gains of middle class America from the New Deal on. Medicaid is under far more severe pressure, and Medicare pressure is coming. After all, low income retirees are now to be given a choice whether they wish drug coverage or food stamps. Care to make the choice?

[anne]

Care to choose?

http://www.nytimes.com/2005/05/08/politics/08drugs.html

Under New Medicare Prescription Drug Plan, Food Stamps May Be Reduced
By ROBERT PEAR

WASHINGTON - Elderly people with low incomes may lose some of their food stamps if they sign up for the new Medicare prescription drug benefit, the Bush administration said Saturday.

When Medicare begins covering drugs in January, older Americans will spend less of their own money on drugs and will therefore have more to spend on food, reducing their need for food stamps, officials said.

The new reading of the Medicare law, set forth in a document sent to Congressional offices this week, comes just as federal officials begin a nationwide campaign to persuade low-income people to apply for the drug benefit.

The document, addressed to elderly and disabled people who receive food stamps, says, "You may qualify for extra help paying for your Medicare prescription drug costs." But it adds, "If you qualify for extra help, your food stamp benefits may decline." ...

[rsl]

Kyle,

Under a consumption tax, people who need to spend a large portion of their income on living expenses are disadvantaged in several ways (all of which make the tax regressive):

1. A large portion of poorer people's income is taxed immediately because it has to be spent immediately to cover essential expenses. Wealthier people have the option of saving more of their income and therefore deferring taxes to the distant future (or even to distant generations). The tax deferral significantly reduces the burden of paying taxes, even if taxes are eventually paid. (The tax deferral has significant value because of the time-value of money, tax-free compounding, flexibility to defer paying taxes until tax rates are more favorable, etc.)

2. In any given year under a consumption tax, poorer people are likely to spend a much higher percentage of their income on taxes than wealthier people. For instance, a wealthier person may spend 60% of his income each year and a poorer person 80%. A 25% consumption tax applied to 60% of the wealthier person's income amounts to a tax on 15% of that person's annual income, while the same 25% tax applied to 80% of the poorer person's income amounts to a tax of 20% of their annual income. Even if the wealthier person (or the wealthier person's grandchild) eventually pays taxes on his saved money, the tax deferral is a huge advantage. And the higher effective percentage tax rate is a significant disadvantage to the poor person, who will find saving more difficult, because of his higher immediate tax burden.

3. Government revenue needs are immediate, so the more rich people decide to defer taxes, the more the consumption tax rate will need to rise to cover current government expenses. For the poor who can't afford to save much (and therefore can't defer much of their taxes), the immediate tax burden will increase. Meanwhile, rising tax rates will create even greater incentives for the rich to defer taxes--and as the rich defer more of their taxes, the immediate tax burden is shifted to those who don't have the option to defer their taxes.

4. The very wealthy can accumulate huge sums of wealth, which in fact may not be spent for many, many generations and therefore will effectively be tax-free. Since the amount these wealthy people spend is a very small fraction of their total wealth, their tax cost will be absurdly small relative to their overall wealth. The loss of tax revenues from this untaxed wealth will also need to be made up somewhere--i.e., by raising taxes on people who have to spend more of their money.

You are right that exempting necessities like food from the tax would make it less regressive. However, it would also tend to make it more of a "luxury tax" and therefore less effective as a revenue raiser. This would mean significantly higher taxes on so-called luxuries, which could have a very negative effect on the retail economy. Some people have suggested some kind of "tax reimbursement" for living expenses, but this becomes administratively complex. (The VAT in Europe has been very difficult to administer from what I've read.)

IRAs don't solve the problem for people who don't have much to save. And besides, if there were not taxes other than consumption taxes, IRAs wouldn't be necessary, since any saved money is untaxed already.

Finally, don't put it past the accounting industry to develop all sorts of shelters to protect savings from ever being taxed. It isn't hard to convert savings to paper losses or business or charitable expenses that may never be exposed to consumption taxes, even though the money was still used to buy things.

[cynic]

Here is my solution to the SS issue. Do away with the trust fund. It never was a trust fund but politicos spend it for other things. When all the attention is on the trust fund it diverts attention form the medicare and overall budget, which are larger problems. We can say the fund is out of money in 20?? but do not say the general fund has been out of money since 19??.
I know this sounds crazy at first and other can work it out better than I can, but think about it!

Combine SS spending with other spending in each year's budget an make the Congress and president face it every year, year after year, and then run on what they did.

A second propsal, adopt private accounts (or whatever they are today) but let us designate up to 2 percent of out total taxes to it and not just our FICA tax. And we can say where it comes from. You can take yours from SS. I can take mine from defence and space, someone can take theirs from pbs and the state department. I know budgets are slimy and it would take some thought to make the reductions hold.

[anne]

The Social Security trust fund is indeed a trust fund, and has not been spent, and will not be spent for many years. The trust fund will preserve Social Security for the coming 40 years and likely through the century. Treasury debt is a constitutional obligation.

[anne]

How is it that we can ask retirees in need to choose between food stamps and medicine and there is simply no cry to be heard? Can we simply not understand such a choice having to be made?

[rhood the real]

Kyle:

Step 1:
Turn off Faux News.
Step 2:
Turn off Sean Hannity
Step 3:
Think.

[Auros]

Addressing Anne's response to Kyle -- I agree with her take on the first two points (per Bruce Webb, above and in many other posts here and elsewhere, there really is no crisis; and per Dean Baker*, the cuts are far too steep, even for a median worker). However, on Kyle's third point, I think he completely misunderstands the position of Democratic deficit hawks. We're complaining about the deficit IN THE GENERAL FUND and in MEDICARE/MEDICAID. These are large and growing problems. Social Security is a footnote, compared to these.

* Dean Baker, here:
http://www.cepr.net/publications/regressive-progressive_2005_03.pdf

Here's the money quote:

Measured relative to retirement income, the benefit cuts implied by progressive indexation are regressive. The projected cut in benefits for a middle wage earner in 2080 is equal to 26.9 percent of their retirement income, while the implied cut for a maximum wage earner would be equal to just 11.9 percent of their retirement income.

When coupled with private accounts, the benefit cuts create a situation in which the highest earning workers will owe the Social Security system an amount of money that is larger than their remaining Social Security benefit, if they opt for a private account. President Bush has created no mechanism through which this money can be reclaimed. This creates a situation in which the highest wage earners will be able to place money in a private account without any offsetting cut in benefits. As a result, the implied cut in benefits will fall even more sharply on middle-income workers.

[Auros]

By the way, it's worth noting that rich people are far more able to seek foreign venues in which to make large purchases, esentially tax-sheltering those expenditures, similar to how many companies shelter their income by having a "headquarters" in Bermuda.

Heck, Volvo already has a program where they help you fly to Sweden for a short vacation, during which you buy a car. They ship it to you after the 90-day window where you would have to pay taxes on it. If we got a substantial national sales tax, count on dozens of companies to start using systems like this.

Oh, and BTW, aside from the fact that home sales would have sales tax applied directly to them, upping the price by the value of the tax (which might, in theory, be made up for by the removal of the income tax -- but if you seriously research this, you find that the income tax rate isn't high enough on people below the median, who pay at least as much FICA as income tax, for this to work) you'd also see a drop in home values because you'd no longer have the mortgage interest deduction. Since the middle class has a huge portion of its net worth wrapped up in housing -- I've heard figures as high as the middle quintile of earners having nearly two-thirds of thier net worth in real estate -- even a 5% or 10% drop in the real estate market could cause a massive ecoonomic catastrophe, as the bankruptcies of a few marginal buyers with interest-only loans and ARMs cascades into further drops in the market due to housing returning to a market where there's no longer sufficient demand. (This of course would be aggravated even further by the recent bankruptcy legislation, which made it much harder for people to hang onto their houses.)

[anne]

Auros

Agreed, but you remind me that running for election by running against deficits has almost always been a losing cause. There is a problem. Also, it may be the focus has to be no on deficits at all but on the true well-being of Social Security.

[anne]

Nonsense: Enough of deficit fear mongering....

http://www.nytimes.com/2005/05/11/opinion/11mill.html

Wanted: Responsible Demagoguery
By MATT MILLER

A Democrat might ask: Why would we ever change this way of calculating benefits, other than from some Scroogelike desire to slow the rise in future benefits? Well, we probably wouldn't think about it if we weren't on the cusp of the biggest financial crunch in American history. But we are. And with the baby boomers' retirement looming, Democrats need to think beyond Social Security alone to think intelligently about achieving progressive goals....

[rsl]

Running against deficits by itself may not be a winning strategy, but pointing to general Republican financial irresponsibility is a winner, in my opinion for two reasons:

1. It addresses the anxieties of many conservatives who backed the Republican party primarily because of its alleged commitment to fiscal responsibility. These people are having some second thoughts and what the Democrats need to do to have a chance of winning some of them over is to (a) increase their doubts about Republican financial responsibility by slamming the Republicans continually on their financial profligacy and (b) offering an opposite message of more cost-efficient, responsible government.

2. While deficits may not be most people's primary concern, people are worried about the economy in general and their personal financial health in particular. The whole Republican economic and financial security program (which includes creating massive deficits, spending irresponsibly, transfering the tax burden to wage earners, and reducing benefits like Social Security) is jeopardizing the financial solvency of middle- and lower-income workers. This point should be made continuously by the Democrats--and arguments against the deficit should be part of that greater point.

Democrats also need to get more creative about how they refer to deficits. I think they should talk a lot more about how Bush by increasing spending and growing the deficit is "running up the people's credit card"--and we and our children are going to get stuck with the bill plus interest--just like what happens when we don't pay our credit cards at home! Bush likes to tell you he's giving you a tax break, but as long as spending keeps rising and the deficit keeps growing, he's just delaying your payment of taxes until the future--and the bill just keeps gathering interest and growing and growing!

I like comparing the deficit to a credit card bill because people have a basic fear (and gut-level understanding) of credit card debt. Comparing the deficit to the credit card bills people actually struggle with each month makes the deficit more scary, more personal, and more comprehensible.

[chris]

Good points, RSL, about how to frame the Bush deficits. I hope it works. Considering what we have been doing, talking about the people here not the government, it certainly destroys the idea that we're rational economic actors racking up personal debts while the govt does the same. I thought the citizenry and the govt are supposed to go counter-cyclical with the spending.

[PaulB]

Kyle wrote: "First, the problem with Bush's social security reform was that there was no problem."

Not quite an accurate restatement, Kyle. There certainly is no "crisis." There also is a very good chance that there will be no problem, assuming that we see the same kind of growth over the next 50 years that we've seen over the past 50 years. These are accurate statements.

"Then it was that his policy is too painful."

This is not mutually exclusive with the first statement, Kyle. A proposed policy can certainly be too painful, particularly if that pain is wholly unnecessary.

"Now it doesn't do enough to stop the huge looming deficit."

Think of it this way, Kyle. Bush has claimed that there is a huge looming deficit, that Social Security is in "crisis" and that it will be "bankrupt." So one natural consideration as we review his proposals is to wonder whether his proposed "solutions" actually solve the potential problems. And, of course, the answer is that, so far, they do not.

There is nothing remotely contradictory about these assessments. They are simply reactions to the propaganda that Bush has been spewing for months now. You have claimed that these are "contradictory, absurd and opportunistic," and yet these statements are wholly correct. If you have a specific problem with any of them, let's hear it. Right now, though, you're just spouting nonsense.

[Kyle]

“There also is a very good chance that there will be no problem, assuming that we see the same kind of growth over the next 50 years that we've seen over the past 50 years. These are accurate statements.”

Seeing as how predictions of future productivity growth have been notoriously hard to forecast and the last fifty years have had unusually high growth rates, I wouldn’t count on another fifty years of impressive growth. Is 50 years of moderately high, or even extremely high growth possible? Of course. Might we see a productivity slowdown over the next half a century? It’s a definite possibility. It seems funny to rely on high growth rates (something that people who want to convert social security into an index fund also rely on) if the point of social security is to provide retirement security.

I’m amenable to a system of handing out TIPS which would be much more secure than the current system because it doesn’t rely on high growth to ensure benefits (it misses out on the nice lifetime annuity component, but it’s a small price to pay for an actual risk free investment).

“Then it was that his policy is too painful.
This is not mutually exclusive with the first statement.”

No, it’s not. In fact, it would be difficult to imagine a scenario where they would be mutually exclusive. I was just listing off the arguments as I saw them coming in.

“Bush has claimed that there is a huge looming deficit, that Social Security is in "crisis" and that it will be "bankrupt." So one natural consideration as we review his proposals is to wonder whether his proposed "solutions" actually solve the potential problems.”

I’m pretty sure that Jason Furman is using the numbers he thinks are most accurate, not Bush’s numbers. I didn’t see anything in the article that said, “There is no actual crisis, but pretend there is for a moment: Bush won’t solve that imaginary crisis.” What I got was that “The President has laid out part of a plan rather than a full plan. This analysis highlights how much further he needs to go to have a complete plan that fully restores solvency.” This is clearly in contradiction to the analysis that Bush’s plan is far too excessive of a benefit cut for a solvency problem that isn’t in a crisis.

I agree with the last point of criticism; I don’t think that the plan will entirely fix the long-term solvency problem. However, that’s a fatal flaw – it just means that there will have to be other benefit cuts or tax increases now or in the future.

[Kyle]

Anne posted:
"The Social Security trust fund is indeed a trust fund, and has not been spent, and will not be spent for many years. The trust fund will preserve Social Security for the coming 40 years and likely through the century. Treasury debt is a constitutional obligation."

Paying back treasury debt is a constitutional obligation. Paying back social security benefits is not.