Social Security Reform

The Economist hopes for a grand bargain on Social Security reform:

Ingredients of a grand bargain? | Free exchange | Economist.com: So Washington is full of rumours that 2007 will bring a Grand Bargain on social security reform (see Mark Thoma's take here and Vox Baby here). The Bush team's plan is to sound sufficiently conciliatory and open-minded that it becomes impossible for the Democrats not to sit down and talk. That strategy just might succeed. Stonewalling is a plausible political tactic when you are in opposition (though still shamefully shortsighted). It doesn't work so well if you are actually in charge on Capitol Hill, particularly when you announce that retirement security is one of your top legislative priorities.

Nancy Pelosi and her friends may be loath to touch social security but they are worried that poorer Americans don't have enough of a retirement nest egg outside the government pension system. As part of their schtick on dealing with "middle class anxiety", Democratic wonks have all kinds of ideas for getting ordinary Americans to save more. Some stem from the insights of behavioural economics (such as automatically enrolling workers in 401(k) plans unless they explicitly choose to opt out). Others involve restructuring tax subsidies towards the less affluent by, for instance, replacing today's system of tax-deductions with a limited government match. A paper for the Brookings Institution's Hamilton Project by Bill Gale, Jonathan Gruber and Peter Orszag lays out the details.

If Mr Bush wants to sort out social security and the Democrats want to revamp the government's role in the rest of retirement security, there is clearly room for a compromise. One option: combine the Gale/Gruber/Orszag ideas for restructuring retirement tax subsidies with the Liebman/MacGuineas/Samwick social security reform plan. You can find all the details over at Vox Baby but it is probably the best bipartisan plan around and, importantly, includes a mandatory individual contribution to a personal retirement account. By restructuring tax subsidies for retirement saving so that poorer Americans got a hefty top up to their mandatory contributions from Uncle Sam and you might convince enough Democrats that a system which includes personal accounts makes sense.

Back in 1998, 1999, and 2000 there was a deal to be struck: bring the existing Social Security system back into balance with a combination of (small) tax increases and (moderate) future benefit cuts, and supercharge it with add-on private but regulated and insured personal accounts. But neither Gingrich, Hastert, Armey, Delay, or Lott were interested in such a deal--it would give another substantive public-policy victory to Bill Clinton, you see. After 2000 Bush was interested in--well, it was never clear what Bush was interested in, for different advisors said very different things, and Bush never proposed a plan.

But the deal that was there to be struck in 1998, 1999, and 2000 is still there to be struck, if program design and decision-making can be moved out of the White House to locations with credibility.

Comments

[bakho]

I don't see SS as an issue the Dems will address. Health care is much more of a problem that voters want fixed.

As they say in Indina: SS- It ain't broke. Why fix it?

[RT]

Of course decision-making can't be moved outside the White House as long as the veto pen resides there.

And what bakho said - no reason to fix what ain't broke. And even if it's a problem, the reality is, the polar icecaps may well melt before Social Security has a shortfall. It's pretty obvious which is more important to deal with - Social Security is about distribution and management of wealth; responding to climate change is about keeping much of our world's wealth from being swept away.

[dale]

I think we'll see 50 variations on bakho's theme on this thread.

Of all the freaken problems that face this country- SS is not one of them. I would be so disappointed if any "reform" that was more than eliminating the income exemption cap was put forth.

I guess I would be open to increasing the Capital Gains tax or the estate tax to give more retirement security to lower income Americans. That would be my idea of "reform." More benefits for ordinary Americaans with no increase in their taxes.

But back to reality. We have an Army of occupation in Iraq. Bring them home. That's reform. We have a health care system in real crisis mode. There's plenty of room for reform there. We are nearing a tipping point on Global Warming- man oh man do we need to reform our ways there.

But SS? Not so much.

[anne]

No; there is no deal to be struck. No deal, none at all. When our grandparents and parents have been paying enough taxes for more than 20 years to generate a massive and growing Social Security surplus, cuts in Social Security are not to be tolerated. No deal, for there is no deal that can be fair to the dedication of our parents and grandparents.

Worried about Social Security, which I am not, then leave Iraq immediately and save $10 billion a month. There is a deal.

[wcw]

Why bargain?

On policy, it doesn't matter. Social Security always and ever pays current retirees out of current production. Unless you believe that small tax increases, moderate benefit cuts, add-on private accounts will increase future production, I don't see the point. Will they?

On politics, compromise gives away one of the Democrats best campaign lines for the next decade. The status quo for fifteen-second-spot consumption is that Republicans tried to take away Social Security. The Republicans are not about to stop running substantially more misleading and abusive attack ads. Why should any Democrat unilaterally disarm?

I understand why The Economist (cough, McArdle "Galt", cough) wants a compromise. I can't understand why the Semi-Daily Journal does.

[anne]

http://www.nytimes.com/2006/11/19/opinion/19sun2.html?ex=1321592400&en=78f19b5f4f0cde16&ei=5090&partner=rssuserland&emc=rss

November 19, 2006

A Bad Choice for Social Security

A day after the midterm elections, President Bush announced that he had deputized Henry Paulson Jr., the secretary of the Treasury, to work with the new Congress on reforming Social Security. Mr. Paulson would bring formidable deal-making skills to the task, honed over years as a top investment banker. In an interview with The Times after the announcement, he stressed the importance of bipartisanship. "We were going to have to build a consensus, no matter who won the election," he said.

But then Mr. Bush nominated Andrew Biggs, a zealous advocate of privatizing Social Security, to a six-year term as the next deputy commissioner of Social Security. The nomination puts Mr. Paulson in a tough spot, raising questions about whether Mr. Bush really wants to build a consensus for Social Security reform.

To have a serious discussion with Congress, Mr. Paulson must first take the idea of private accounts off the table. As an experienced negotiator, he has to know that. In opinion polls the public largely rejected Mr. Bush's plan for private accounts. Congressional Democrats resisted en bloc. Most Republican lawmakers were lukewarm at best. Mr. Bush has interpreted the defeat as evidence that the public and Congress are too frightened of change to embrace his vision. But private accounts were rejected because they are bad policy and bad politics.

Mr. Paulson — who has a reputation for pragmatism — could indeed be the right person to take the lead on developing a new set of reforms. But with the nomination of Mr. Biggs, Mr. Bush is signaling that he doesn't want new ideas....

[anne]

http://www.nytimes.com/2006/11/25/opinion/l25pension.html

If It's Not Broken ...

To the Editor:

You say that "to have a serious discussion with Congress," Treasury Secretary Henry M. Paulson Jr. "must first take the idea of private accounts off the table."

I would take that a step further. One must acknowledge that the program has no long-term financial problem. There is no need for consideration of privatization. The political trustees, with the complicity of Social Security's actuaries, have manipulated the long-term actuarial projections to generate a 2 percent deficit.

A reality check makes this obvious. My recent 10-year comparisons of projected versus actual assets show a 20 percent understatement of actual assets, enough to produce the deficit. When corrected, a surplus emerges instead.

David Langer
New York, Nov. 19, 2006
The writer is a consulting actuary.

[RKKA]

And remember who occupies the Oval Office. The President and those around him are the sort of lying thieves who are entirely capable of repudiating the debt the US government has built up to the Social Security trust fund. It's nothing but "worthless IOUs", after all.

It is imperative that Congress not allow his greedy fingers anywhere near Social Security.

[anne]

Andrew Samwick's plan for Social Security is cut cut cut while denying there are any cuts. Why just let the retirement age rise a few years here and a few years there, and with luck too few will survive to collect Social Security.

Deomcrats were elected to secure Social Security and Medicare and not to cut either. Republicans have wanted to set aside the legacy of the New Deal for a generation, but they have failed to do so and will not do so now. No compromise, for none is needed.

Democrats won! Now, if Reppublicans are supposed to be worried about cost here and cost there then turn to the tragic lunatic costs of Iraq and support leaving immediately.

[No Dartmouth economist was harmed in the making of this comment.]

[Lee A. Arnold]

This is not an economic issue, it is a political one. You economists do not wish to "make the perfect the enemy of the good," and for that I applaud you, but you fail to consider that the good may become the enemy of the better.

The only way to (I use the term unhappily) "reform" Social Security is with tax increases (which, by definition, also covers things like mandatory accounts) AND/OR benefit cuts. Those tax increases will be on payroll. And this "reform" will not cure all the other budget problems -- some of which are far bigger problems.

Yet once you have increased taxes/reduced spending, ALL other attempts at fiscal responsibility will be defused. The whole issue goes into the endgame. The Republicans and their mind-plundering pundits will scream, "The Democrats just increased taxes, now they want to do it again? It's going to hurt the economy! You can't trust them!" etc. etc.... and just around the time that we will be in the middle of the next campaign.

Politically, this problem should be turned on its head. Right now, the public already, and correctly, believes that we have other, bigger issues: use this fact. Leave Social Security alone, and fix other things. This makes good moral sense, for your politics: as a flagship New Deal program, it is the oldest promise, and you should keep your promises. This makes good fiscal sense, for your politics: because you must start dealing with other fiscal problems. You do not play with your biggest chess pieces when you still have the pawns to move the game forward.

The Democrats should NOT touch Social Security "reform" until they also control the White House, and can make sure it stays as the flagship program. Otherwise they are walking into a very big political trap: burdening their own base, and getting nothing (but the thanks of ivory tower policy wonks) in return.

[Lee A. Arnold]

Make no mistake: something so big as Social Security "reform," (unnecessary as it may really be,) will be trumpeted far and wide as such a large historical fix for our Federal budget problems, that it will serve to obviate, in the public discourse, the perceived need for any other reforms in spending and taxes. And it will do this, on the backs of the workers. Social Security "reform" is a Trojan horse out of the White House. Acting on it, will probably sink the Democrats.

[Rebecca Allen, PhD, ARNP]

I'm sorry, but this is just idiotic, as it's based on a demonstrably false assumption, that is, that Bush wants to save/improve SS (as the Dems do). Bush wants nothing of the sort; he wants to DESTROY SS, as do all right-wingers, who've always seen SS as a socialist transfer program that moves money from the wealthier to the less wealthy (which indeed it does). I seem to remember one of Bush' old Harvard Business School profs saying that Bush hated SS way back then. The reason Bush was so vague about his SS plans is that he didn't want to tell the public that he really wanted to destroy the program, as that would have been very unpopular. Fortunately, the public, and the Dems, saw through him. The Dems weren't fooled then, and won't be now. Any proposals they make will be designed to improve the program, which will guarantee a Bush veto--which the Dems can then make into a 2008 campaign issue.

[Tom DC/VA]

"But the deal that was there to be struck in 1998, 1999, and 2000 is still there to be struck, if program design and decision-making can be moved out of the White House to locations with credibility."

That's plain stupid. There is no "deal" that needs to be struck. The whole notion that a "deal" should be struck is Lieberman-style bipartisanship, a.k.a. Democrats capitulating to insane Republicans. By 2008 the Republican implosion will be complete, the Dems can remove the cap on salaries - the only adjustment that is needed - and move on to a much more important issue, which is reforming the health care system.

[anne]

Think now what it was for 5,000 janitors in Houston, to struggle to form a union and to be successful only a year ago. Here were janitors making $5.15 and $5.25 an hour on hours carefully limited to deny benefits, but even in the South they would have a union. Then, in having a union they bargained for a living wage and benefits and were denied.

Think again, that Houston janitors struck at the beginning of the month, before the election, and they won, after the election, and won so that even company managers praised the winning let alone the workers.

There will be no giving away worker rights to Social Security and Medicare. The struggle for such rights has been too dear.

[bink]

One problem:

Social Security is not broken.

It works just fine. In fact, it works wonderfully well.

There is no need to do anything with the program now. Come back to me in a couple of decades when it's time to make an adjustment to the way contributions are made.

But for now, there is nothing to be done.

It's a great success and I, for one, am going to be rather pissed if anyone tries to change it.

[Avedon]

This is like a deal to improve my health by cutting off one of my healthy legs, and then the Republicans offer "compromises" like only cutting it off below the knee. When that doesn't work, they'll suggest cutting it off below the ankle. I still won't be able to walk, but hey, it's a cool new modern plan!

Private accounts have nothing to offer, and anyone who thinks there's "a deal" there should not be making public policy. Period.

[miguel]

There is a problem with SS and people like Atrios need to stop denying it. The problem is that the SS trust fund has been raided by the huge Republican deficits. At some point there will not be enough money to pay the baby boomers from current income and the IOUs in the trust fund won't help.

Al Gore had the solution 6 years ago, a Lockbox to keep Republican's sticky fingers out of the cookie jar.

My 'serious' solution: stop deficit spending, repeal Bush's tax cut on the rich (capital gains, top income bracket and estate tax) and then increase it by a temporary 10% (or whatever it takes) and use that money solely for replenishing the trust fund, fill the trust fund with solid foreign debt instruments to prevent internal accounting tricks and then pass a constitutional amendment prohibiting federal spending using SS money. You need a constitutional amendment to prevent future Republicans from stealing it again.

Oh yeah, you also need to get rid of Republicans in the White House.

[pgl]

I think Bush was interested in two things: (1) reducing the Soc. Sec. system ala partial privatization; but more importantly (2) cutting benefits by more than we cut payroll "contributions", which of course, is a backdoor employment tax increase. How else could he ever pay for those reductions on capital income? Of course, to say this is what he was for would spell its defeat - so no wonder he wasn't quite clear on this score. After all, bank robbers don't call the bank president before they drop by.

[Cranky Observer]

> The reason Bush was so vague about his
> SS plans is that he didn't want to tell the
> public that he really wanted to destroy the
> program, as that would have been very
> unpopular

The fact that W Bush only talks about his Social Security plan behind closed doors to groups of "Rangers" (Republicans who have contributed more than $100,000 to his campaign), in both 2004 and 2006, is a strong data point that Dr. Allen's analysis is correct.

Cranky

[pgl]

I just read Duncan Black calling folks who are for privatization "stupid" and then he links to this post. But I have to protest - as Brad does not advocate carve-outs. He does advocate add-ons, which might be a good idea. And despite most of my leftists colleagues who commented that the Soc. Sec. system needs no cuts or new taxes, let me suggest you are relying upon some optimistic assumptions. While we on the left should reject what George Bush may have been thinking, let's not be so rude to folks like Andrew Samwick and those on the left (e.g., our host) who know and trust what he is trying to offer.

And Duncan - if you happen to be reading this comment, please go back and actually read what Brad wrote. You see Duncan, I think you overreacted.

[Nat]

It is insane to contribute any more money to the SS Trust Fund when Republicans view it as a slush fund or worthless IOUs. The yearly surplus in the SSTF is used to offset approximately 160 billion of the shortfall in the general fund. Dumb, dumb, dumb to throw more money at dishonorable people.

The problem is not in 2041 when the SSTF allegedly will be depleted. The problem is in 2017 when the pay as you go system begins to run a deficit and the SSTF must be used to meet payments. The wealthy of America do not want to honor the deal struck by the Greenspan Commission in 1983. The wealthy of 1983-2017 got/get lower taxes in exchange for higher taxes on the wealthy in 2017 through the depletion of the SSTF, eg.2041. That is how a trust fund works.

The current estimation of SSTF depletion is 2041. In 2041 FICA and SECA taxes will cover 76% of the SS payments and 24% will be covered by the repayment of the SSTF. In other words, in 2041 24% of SS payments will be funded either by income tax or additional borrowing.

One way of looking at the SS issue being discussed in this thread is essntially this: should we take more money out of our pockets today in order to give the income tax payers in 2042 a tax cut equivalent to 24% of the SS payments?

SS has been supplementing our general fund since '83. The general fund will start supplementing SS starting around 2017. I am of the opinion that should the fund run out (in 2041 or whenever) the general fund should just keep on doing what it will have been doing since 2017: make up the difference.

And to point out the obvious: even if SS relapses to a pure pay as you go system at that point, the 76% amount is not 76% of today's payments but payments based on estimate wage growth from now until 2041.

As always, please refer to Max Sawicky on this subject.

[dale]

Miguel,
the problem you refer to is not a SS problem. It's a problem of unfunded mandates for tax reduction, military increases, illegal,unnecessary wars of choice, etc.

Those are the areas that have a problem. We can't let anyone hold SS hostage to those parts of our government spending which have not been placed on a firm footing.

PGL, why is there a potential problem with SS? Let's get the cards out on the table.

[Michael Cain]

All forecasts -- the SSA's intermediate cost, the CBO's more realistic one, even the Cato people -- show SS expenditures as a fraction of GDP stable at something very close to 6.2% in the long run. The current tax rate is 12.4% in total -- convenient, that, since it makes the calculation so simple that even journalists should be able to follow it. The ONLY way that this system can have a long-term solvency problem is if the forecasts show less than half of national income going into the tax base. Turn that around -- more than half of national income shows up as unearned income or earned income over the the cap ($97.5K for 2007). Either way, it's a forecast that says the rich get a larger and larger slice of the pie, and ain't gonna share.

Give the Republicans what they've always wanted -- a flat tax. 4.8% today, rising to 6.2% over the next 30 years. On ALL income, earned or unearned, personal or corporate. The vast majority of workers and most small businesses get a tax cut.

[sm]

See if the country and its constitution survives the tsunami of woe that is just about to hit and then worry about SS.

[GHWB]

"let's not be so rude to folks like Andrew Samwick and those on the left (e.g., our host) who know and trust what he is trying to offer."

Mustn't criticize our host. Not gonna do it. Wouldn't be prudent.

[jerry]

"let's not be so rude to folks like Andrew Samwick and those on the left (e.g., our host) who know and trust what he is trying to offer."

What's this comment form here for? Oh yeah, so we can let Professor DeLong know that we agree with him.

I am certain that Professor DeLong has a more developed ego than Professor Althouse and Professor Reynolds, so I am confident that that is not the purpose of this comment form.

[pgl]

Dale - take the intermediate forecasts and you'll note that we will have to cut promised benefits somewhere in the next 40 to 50 years. Better to cut a WEE bit earlier rather than later is my view - even if I agree with those who think the BS coming from the cato-Heritage crowd is not just that: BS. I think "problem" is the wrong word. Rather we should talk in terms of solvency. And yes, we are far, far from bankruptcy even if the nitwits at Cato argue otherwise.

[Cranky Observer]

> as Brad does not advocate carve-outs. He
> does advocate add-ons, which might be a good
> idea.

See NCLB (No Child Left Behind). The microsecond that "private accounts" are quote added unquote to Social Security the Radicals will get to work on dismantling the rest. And if we have learned anything from the W Administration it is that the Radicals need only 6 years to do damage that can _never_ be undone.

Cranky

[Frank Warner]

In 11 years, Social Security will begin to wither.

Social Security is not a "system" that sustains itself. If nothing is done to make it solvent, benefits will have to be cut 30 percent.

Compromise isn't a bad thing if it solves a problem. Last year, Republican Congressman Bill Thomas even proposed a Value Added Tax to pay for reform. But Democrats ignored him, instead exploiting the "Republicans want to kill Social Security" theme.

So who will be responsible for a 30 percent cut in Social Security benefits?

If you can't fix Social Security, where are you going to find the brains and courage to fix even bigger problems, like Medicare?

[Lee A. Arnold]

Frank Warner, see a little flowchart movie at YouTube, that shows what the politicians are trying to do:
http://www.youtube.com/watch?v=Tts2uTWt6e8

[Barkley Rosser]

Brad,

There may have been the possibility of a compromise in the late 1990s, before Clinton got caught in Monicagate, but there was no more need of one then than there is now. Eisner, Baker, and Weisbrot all fingered how screwy those scary projections were then, and they were absolutely right as history since then has shown. Why should we continue to be frightened by the basically same set of wildly pessimistic forecasts.

Frank Warner,

You are just behind the curve. To get the SS surplus, which is still rising right now, to be negative in 11 years requires the economy to start growing at half its historic (and recent) rate and for immigration to sharply decline. Do you seriously think any of this is likely? If the economy grows at more than 2.2& per year and immigration stays above about half its current rate, the surplus lasts forever, yes, forever. No withering at all in 11 years.

In the meantime, medicare is currently running a deficit. Why are they not talking about doing something about that?

[David Nowakowski]

I don't understand all the posts claiming SS is fine and doesn't need a fix. It has a $11 trillion hole if left alone. Private and state pension funds have another $1.25 trillion hole. Just because they are cash flow positive doesn't mean they are unsustainable / insolvent. Worse, the SS surplus is largely phantom because it is not saved (as the Dutch, Norwegians, and Alaskans are doing). Even if the numbers are a bit off, arguing whether the debt burden is 70% or 90% of GDP is not very relevant -- it is a BIG PROBLEM. The US, and some other aging Western economies who live like the grasshopper and not the ant may still survive (just like GM and United Airlines and Argentina 'survive) but the reality is lower standard of living, and the choice is between belt-tightening now or major crisis risk later. Please read Kotlikoff and/or Gokhale.
The only valid point is that the health care crisis is an order of magnitude bigger.

[Barkley Rosser]

David,

You don't understand? Go look at the assumptions made in the Social Security Trustees Report. The ones that provide the numbers you are spouting are simply ridiculous, that the economy will start growing at half its historic rate from now on, and that immigration will crash to near zero very soon and stay there. Do you believe such ludicrous tripe?

For the umpteen millionth time: if the economy continues to grow at more than 2.2% and immigration remains at about half its current rate, the fund never runs a deficit. Your $11 trillion owed becomes a negative number as the trust fund will continue to lend to the rest of the government forever, continuing to pile up an ever-increasing amount of assets. So, relax.

[gimmiegets]

social security is already withered and on life support.