Wash Post Blog: Obama Campaign “Clarifies” Social Security plan

Glenn Kessler reports on the Washington Post's political blog that the Obama campaign provided additional details regarding Sen. Obama's proposals for Social Security. Here's the news, such as it is, then some notes:

Sen. Barack Obama today plans to make a firm commitment to a Social Security tax hike on people making more than $250,000 a year, stepping away from an earlier plan he floated last year to boost the 12.4 percent payroll tax on all workers as a way of extending the program's solvency.

Taxes to fund Social Security end once a worker makes more than $102,000 this year, a ceiling that is indexed to inflation. Workers and employees share the cost, with each contributing 6.2 percent. Under Obama's plan, which the presumptive Democratic nominee will discuss this afternoon at a retirement community here, there would be a "doughnut" between $102,000 and $250,000 when no taxes are paid, according to a campaign adviser who asked not to be identified. But then new taxes would be imposed on people making more than $250,000.

While Obama has discussed the doughnut concept before, the adviser said there has been some confusion about his position and the campaign wanted to make it clear that he was embracing this option and setting aside the idea of boosting the payroll tax on everyone. The ceiling on the Medicare tax was lifted as part of former President Clinton's budget bill in 1993, but the Social Security tax has been much more politically sensitive.

In prepared remarks the campaign distributed to reporters, Obama plans to say that such an increase "can extend the promise of Social Security without shifting the burden on to seniors" while leaving "absolutely no change" in taxes for 97 percent of Americans."The best way forward is to adjust the cap on the payroll tax so that people like me pay a little bit more and people in need are protected," Obama plans to say.

Obama also plans to tweak Sen. John McCain, the presumptive Republican nominee, for having once expressed interest in a payroll tax hike and for denying ever having supported President Bush's plan to create private investment accounts for retirees.

The Obama campaign adviser said "such a change would likely be gradual, either phased in over time, implemented with a delay, or both." He also said there are various ways the plan could be implemented, such as with or without crediting the extra taxes toward benefits, lowering the tax rate at higher wage levels, and extending the income base beyond the payroll tax.

Fully eliminating the payroll tax cap would provide more than enough income to keep Social Security solvent for more than 75 years; Obama's current proposal would fall short of that goal, the adviser acknowledged.

Social Security is currently running a surplus, which is being used to help reduce the annual budget deficit. While Social Security receives Treasury bonds in exchange for those payments, eventually those bonds must be redeemed by the U.S. government, putting further strain on the federal budget as the baby boom generation begins to retire and the pool of workers needed to finance Social Security payments begins to shrink.

My thoughts: I'm not sure what this tells us that Jason Furman's letter to the Wall Street Journal didn't, and I'm quite certain I know less about Obama's Social Security plan than I did before these clarifying remarks were added. We know, as we did before, that workers earning over $250,000 would pay more in taxes. We also know that Sen. Obama is "setting aside the idea of boosting the payroll tax on everyone," but then we had no reason to believe he wanted to raise the 12.4% payroll tax rate since he'd never mentioned it before and has, if I'm remembering right, previously ruled it out.

What we still don't know is a) what the rate would be; b) whether additional benefits would be paid on the additional taxes, and c) whether taxes would be levied on income other than earnings, as Social Security has traditionally done. I'll try to provide some measuring stick information on questions a) and b) to give at least a rough idea how much a given increment of taxes, with or without benefits, would do for system financing.

Update: Given all the above, and given Jason's reference in the WSJ to Sen. Lindsey Graham's draft reform plan from a couple years ago, my best guess is that they'd be looking at a surtax above the cap on which no benefits would be paid. It's much simpler than taxing non-wage earnings, and doesn't complicate things by paying extra benefits later. It was a provision contained in the Diamond-Orszag plan so they could claim bipartisan support, I guess.

Some quick numbers run with the GEMINI Social Security model: a 3% surtax above $250,000 implemented beginning in 2015 would improve the 75-year actuarial deficit (currently around 1.7% of payroll) by around 20 basis points and would add maybe 5 years to trust fund solvency. If they go to a 6% surtax – say, 3% each on employers and employees – then you can roughly double the improvement in the actuarial balance. I don't think the trust fund effect is linear, but that's not as important in any case.

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Auto-IRAs in the news

The Politico
reports on automatic-enrollment plans for IRAs being pitched by the ideological odd-couple of the Brookings Institution's Mark Iwry and the Heritage Foundation's David John. The highlights:

Take the much-heralded "Auto-IRA" proposal, which could help head off the fiscal train wreck of tens of millions of Americans being unable to afford retirement. Scholars David John and Mark Iwry, who have pioneered the proposal, come from opposite sides of the ideological spectrum: John is a senior research fellow at the Heritage Foundation; Iwry, a senior fellow at the Brookings Institution.

In 2005, John and Iwry were on opposing sides of the debate over President Bush's proposal to incorporate personal retirement accounts into Social Security. John was one of Bush's most influential advisers on the plan, and Iwry was one of its many critics. Bush's Social Security overhaul crashed and burned. In the aftermath, John and Iwry were speaking together on a policy panel and heard their views converge on what else the government might do about the sad state of Americans' retirement savings.
The pair got together and, after about a year of work, their first paper on an automatic IRA program was born on Valentine's Day 2006.

The gist of their mandate for businesses that don't offer any retirement benefits: Employers above a certain threshold, perhaps 10 employees, would set up a system for employees to automatically enroll and make payroll contributions to an IRA — a tax-favored individual retirement account that's the personal version of a 401(k). Employers would get a tax credit to compensate for administrative costs, and employees could opt out.

The benefit, supporters say, is that many more of the 75 million working Americans without workplace retirement plans — nearly half of all workers — would start saving. And taxpayers wouldn't have to step in at a later date to support throngs of impoverished seniors.

Check out the Retirement Security Project for more details.

My take is that auto-enrollment IRAs are both good policy and a potential way around the "add on" versus "carve out" personal account debate that has made progress on Social Security reform difficult over the past several years.

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New York Times on the challenge of lower fertility

The New York Times Magazine has an interesting story on how low fertility is impacting Europe and how governments are beginning to respond. A few points stand out:

• Fertility appears to follow a U-shaped curve based on the status of women in society. In low-status societies fertility is high; it drops as women enter the labor force, if those countries also retain traditional views regarding working women, men's roles in raising children, etc.; then it rise again in countries where public opinion and public policies are geared toward allowing women to both work and raise children.
  
• High fertility is associated with both generous social provision as in Scandinavia or flexible labor markets, as in the U.S. In different ways, the accommodate women who wish to both have children and continue working.
  
• Various countries are implementing policies to increase birth rates. It is not yet clear how effective these policies will be, and whether those effects are primarily on the number or the timing of births.
  

The whole story is well worth reading.

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Top 6 Myths About Social Security Benefits

Rich White at Investopedia.com has a nice list of the top 6 myths about Social Security benefits. The whole article is worth reading, but here's the quick list:

• Myth No.1 - It's usually a good idea to start benefits at age 62, as soon as you become eligible.
  
• Myth No.2 - If you don't start benefits early, you must wait X years to "break even."
  
• Myth No.3 - If you keep working after you start benefits early, you could permanently lose part or even all of  your benefits.
  
• Myth No.4 - If you keep working after full retirement age, you will keep paying FICA into the system but you won't earn any more benefit credits.
  
• Myth No.5 - The tax on Social Security benefits isn't enough to worry about.
  
• Myth No.6 - Social Security benefits don't really help seniors offset inflation.
  

A couple quick thoughts on two myths.

I totally agree with Myth 2 that using a "break even" approach to choosing when to retire is the wrong way to think about things. It might be an easy way to make a decision – almost always, people seem to conclude that they're better off claiming benefits ASAP – but ignores the fact that life spans are highly uncertain and delaying claiming gives you a larger annuity payment that is designed explicitly to handle those uncertainties. Don't worry about breaking even, worry about having enough money to get by on when you're old.

Second, I disagree somewhat with Rich's treatment of Myth 4, that if you keep working and paying taxes you won't earn more benefits. He's of course technically correct, in that SSA recalculates your benefits each year and will increase them if new earnings enter in to the benefit formula. But in a paper presented at the APPAM conference last year, David Weaver, Gayle Reznick and I looked into how much most people would receive in extra benefits if they decided to work an extra year. The short story is: not much. The median marginal return for an additional year of work was -17%; another way of putting it is that the typical person would receive back only around 9 cents of benefits for each additional dollar of taxes they paid. This is due to a number of factors, including spousal benefits, the progressive benefit formula, the 35 year limit on earnings included in the benefit formula, etc.

My favorite way of dealing with this would be to reduce or eliminate the payroll tax at a given age, such as 62. This would give a direct incentive for individuals to remain in the workforce, and would do so in an easily understandable way.

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Video of Technical Panel forum available online

Audio and video of the June 13^th American Enterprise Institute event regarding the report of the 2007 Technical Panel on Assumptions and Methods is available online here. Powerpoints are also available at the same link. The video includes some interesting discussion and is worth watching for the wonky.

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Treasury Department releases Social Security issue brief

The Treasury Department released the fifth in its series of issue briefs on Social Security. The latest, entitled "Social Security Reform: Strategies for Progressive Benefit Adjustments," makes the case for progressive price indexing of future benefits, a strategy that combines wage indexing of benefits for lower-earning individuals with price indexing of benefits for individuals earning the maximum taxable wage. Here's how the new brief concludes:

There is widespread agreement that any reform to Social Security will involve adjustments to reduce benefits relative to what is currently scheduled but unpayable, and that these adjustments will fall relatively more heavily on high-income workers. There is likewise a consensus that workers with low lifetime earnings will be shielded from the burden of reform. While there are many ways to implement progressive benefit adjustments of this sort, the essential mechanics of any benefit adjustment are the same. In some proposals these mechanics are obvious because they make specific adjustments to the parameters of the benefit formula. It is less obvious—but no less true—for reform proposals such as progressive price indexing, where adjustments to the parameters of the benefit formula are tied changes to to economic variables such as wage and price growth.

While progressive benefit adjustments will represent an important component of some future reform plan, they are unlikely to be the entire plan—that is, progressive adjustments to benefits will be combined with other reforms. Because these other reforms can also influence Social Security's overall progressivity, a meaningful assessment of the effect that proposed changes to benefits would have on Social Security's fairness across and within generations will need to specify those additional reforms.

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Obama campaign responds on Social Security

In today's Wall Street Journal, Obama campaign economic director Jason Furman responds to Larry Lindsey's recent op-ed on the Obama Social Security proposal:

There is much to disagree with in Larry Lindsey's June 20 op-ed, "Obama Turns FDR Upside Down." Barack Obama's proposal to extend the life of Social Security is fully consistent with the spirit of Social Security, just as the elimination of the payroll tax cap for Medicare has not undermined support for that program. Mr. Obama's proposal would also help to restore long-run fiscal balance, contributing to a strong and growing economy. It is modeled on a proposal floated by Sen. Lindsey Graham -- a proposal that John McCain publicly said he could support.

More important, Mr. Lindsey is wrong about Sen. Obama's policy on the payroll tax. Mr. Obama has stated that he would like to extend solvency while protecting middle-class families and asking those making over $250,000 to pay their fair share. As president, he would work with Congress on a bipartisan basis to design the details of such a change, including the tax rate, how it is phased in over time, the linkage between these tax payments and benefits and other critical design elements of this plan. He has not proposed a 12.4-percentage point tax increase on earnings above $250,000.

As I've said before, it makes little sense from a policy standpoint to propose eliminating the payroll tax cap with a donut hole between $100,000-$250,000 without first specifying the tax rate above the current cap, whether extra benefits would be paid, whether the tax would be applied to singles or couples, etc., since the effects of the proposal can differ a great deal based on how these questions are answered.

It seems far more likely to me that the original proposal was designed simply to protect Sen. Obama from criticism from the Democratic base for having called Social Security a "crisis" and saying that all policy options should be on the table. Having accomplished that, at least sufficiently to win the nomination, the tax increase is now a liability for the general election and is being pushed overboard with as much plausibility as the campaign can muster.

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Tax Policy Center blogs on Obama tax plan

Howard Gleckman at the Tax Policy Center reacts to increasing ambiguity about what the Obama Social Security tax plan would actually do:

Barack Obama has a plan to fix Social Security. Or does he?

Obama does have a vague proposal to raise payroll taxes for workers making more than $250,000. But there is a lot less to it than meets the eye, and Obama has left some hugely important questions unanswered.

We know that Obama wants to create a donut hole in the system. In his scheme, if you make less than about $100,000 (actually $102,000 this year) you would pay Social Security tax as usual. You'd pay no payroll tax on wages from $102,000 to $250,000, but if you make more than $250,000 you would again be hit by the Social Security levy. But that's all we know. When TPC pressed the Obama staff for details, we were told that none were available. Interestingly, they warned us against assuming that those in this newly taxable group would pay the same 6.2% rate as lower-wage workers, or that the employer share would be what it is today (also 6.2%). They also said they had not decided what compensation would be taxed.

Click here to read the full post.

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Luskin: Obama’s Fine Print Social Security Plan

In the Wall Street Journal, Donald Luskin says that Barack Obama's campaign is fuzzing up the details regarding his reform plan. Short discussion following the text:

Last week, Barack Obama revealed his plan to shore up Social Security's shaky finances by raising the income level on which the payroll tax is applied. Currently, incomes above $102,000 are exempt, with that threshold rising every year indexed to wage inflation. Mr. Obama would keep that limit in place, but then assess payroll taxes on incomes above $250,000, which his campaign claims would apply to only the richest 3% of Americans.

Mr. Obama angered liberals last year when he admitted that there was a "Social Security crisis." But at least Mr. Obama's base should be appeased now that his solution to the "crisis" is to soak the rich. One liberal columnist actually noted with glee the fact that this would take us back to top tax rates not seen since the 1970s.

According to the nonpartisan Tax Policy Center, Mr. Obama's new tax would siphon off 0.4% of gross domestic product annually. Combined with Mr. Obama's other tax-hike initiatives, "the total tax on labor would be close to 60 percent. In high-tax states like California and New York, the top rate would be even higher."

Would it help Social Security's financing problems? Mr. Obama has no idea. One of his senior economic advisers admitted to me that no one on the campaign has run any detailed models or performed any rigorous analysis. When one proposes an enormous tax increase, shouldn't there at least be a spreadsheet somewhere?

But the most alarming thing about Mr. Obama's proposal is that the $250,000 threshold, above which the payroll tax would be applied, refers to household income, not individual income. So it's quite deceptive when he claims that the $250,000 threshold will "ensure that lifting the payroll tax cap does not ensnare any middle class Americans."

Suppose your household consists of you and your spouse, each earning wages of $150,000 per year. Currently, you are each subject to the payroll tax up to $102,000 of wages, so together you are taxed on $204,000. Under the Obama plan, you'd be taxed again on another $50,000 of wages.

At the current payroll tax rate of 12.4% – 6.2% from wage-earners and 6.2% from their employers – your household would be looking at a tax hike of $6,200 per year. You probably didn't consider yourself rich before, and you certainly won't after paying that tax bill.

But that tax bill could be higher still. While the payroll tax has always been calculated just on wages from labor, Mr. Obama hasn't decided yet what forms of income will be included in the $250,000 threshold. It's an open question whether it might include interest on savings and capital gains income.

And neither has Mr. Obama said whether the rich – and, truth be told, the middle class – paying his new higher taxes will get correspondingly higher Social Security benefits when they retire. Throughout the history of the Social Security program, there has always been a connection between what you contribute in taxes and what you get back in benefits. If Mr. Obama uncaps the wages subject to tax, but doesn't uncap benefits, then he has severed the link between them. Social Security would stand revealed not as a work-related contributory retirement system, but simply as a tax-funded welfare and income-redistribution program.

And for all that, Mr. Obama's proposal won't help Social Security's long-run solvency problems.

According to the Social Security Administration actuaries, uncapping all wages subject to the payroll tax (not just those above $250,000) doesn't make much difference to the system's long-run solvency. If the increased payroll tax payments earn increased benefits, then only about one third of the system's 75-year shortfall is addressed. Even if there is no corresponding benefit increase, only about half the shortfall is addressed.

Remember, that inadequate result is what you get when all wages are subject to payroll taxes. Mr. Obama's plan – even with his household definition of $250,000 income – would collect far less than that. No wonder Mr. Obama's economic advisers aren't interested in doing any detailed analysis.

Worst of all, even the small contribution to Social Security solvency that Mr. Obama's plan might make is entirely illusory. In fact, the more taxes his plan collects, the worse Social Security's long-term situation gets. That's because all plans based on collecting taxes and saving them in the Social Security Trust Fund for future benefit payments rely on the U.S. government being able to redeem the Treasury bonds that trust fund holds.

There's only one place that the money to redeem those bonds can come from: taxes. So ironically, any tax dollars collected today will have to be collected all over again – plus interest. You like the idea of paying more taxes today for Mr. Obama's Social Security plan? Then just wait 20 years or so, because you'll get to pay more taxes all over again.

Mr. Luskin is chief investment officer of Trend Macrolytics LLC.

I've argued previously that Sen. Obama's plan was largely a reaction to criticism for his highlighting the Social Security problem and calling it a "crisis," which most on the left studiously avoid doing. If so, this explains why his campaign would now wish to move away from his tax position by creating ambiguity regarding whether the payroll tax would be applied to individual or household earnings, whether additional benefits would be paid on those taxes, what the tax rate would be, and whether the tax base would be earnings or include other income. To be frank, these questions are so important in terms of the economic and distributional impact of the proposal that it simply makes no sense to specify a reform plan without first answering them. Moreover, employers are no equipped to collect payroll taxes on a household basis, nor to do so on non-earnings income. While I've not agreed with Sen. Obama's proposal, he had earned points for specifying his policy farm more specifically than has Sen. McCain. Those points are now slipping away.

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New paper: How Changes in Social Security Affect Recent Retirement Trends

The National Bureau of Economic Research released a new working paper by Alan L. Gustman and Thomas Steinmeier entitled "How Changes in Social Security Affect Recent Retirement Trends." Here's the executive summary, followed by a link (subscription required, although you can get an earlier version here.)

According to CPS data, men 65 to 69 were about six percentage points less likely to be retired in 2004 than in 1992. CPS and Health and Retirement Study (HRS) data indicate a corresponding difference of 3 percentage points between 1998 and 2004. Simulations with a structural retirement model suggest changes in Social Security rules between 1992 and 2004 increased full time work of 65 to 67 year old married men by a little under 2 percentage points, about a 9 percent increase, and increased their labor force participation by between 1.4 and 2.2 percentage points, or 2 to 4 percent, depending on age. Social Security changes account for about one sixth of the increase in labor force participation between 1998 and 2004, for married men ages 65 to 67. These rule changes encourage deferring retirement from long term jobs, returning to full time work after retiring, and increasing partial retirement. Although married men in their fifties decrease their participation in the labor force over this period, this is not due to changes in Social Security, but may reflect other factors, including changes in disability.

http://papers.nber.org/papers/W14105

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Budget Committee Hearing on Entitlements Commission Legislation

On June 24 at 10 am the House Budget Committee will hold a hearing on "The SAFE Commission Act (H.R. 3654) and the Long-Term Fiscal Challenge." Click here to watch the hearing on video. Witnesses include:

• The Honorable Peter G. Peterson, Chairman, The Peter G. Peterson Foundation
  
• The Honorable David M. Walker, President and CEO, The Peter G. Peterson Foundation
  
• Robert Greenstein, Executive Director, Center on Budget and Policy Priorities
  
• Henry J. Aaron, Ph.D., Bruce and Virginia MacLaury Senior Fellow, Economic Studies, The Brookings Institution
  
• Alison Acosta Fraser, Director of Economic Policy Studies, The Heritage Foundation
  

The SAFE Commission Act, sponsored by Rep. Frank Wolf and Sen. George Voinovich, would establish a congressional commission to consider both reforms to entitlements and changes to tax structures to bring long-term revenues and expenditures into line.

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More means-testing from Mickey (Kaus)

Mickey Kaus returns to the idea of means-testing, arguing that only a means-test can save enough money to both balance Social Security and help fund universal health care.

But any amount of money you want to save through a means-test, I can match through a change in the traditional benefit formula. (Really. Name an amount and I'll put it together.) Let's say you have a means-test that cuts off the top 25% of people from benefits altogether. I can similarly construct a traditional benefit cut that does the same thing. There's no magic here.

The difference is that if you tell higher income folks ahead of time that they won't get any benefits, they'll save more on their own in order to fund their retirements. But if you implement a means-test on total retirement income, this means that the more they save the more their benefits get cut -- and so it becomes a tax on saving in a way that a traditional benefit cut isn't.

I don't have any particular beef with Mickey's idea to reduce benefits for high earners, but I'm puzzled with the fixation on a means-test. Read more!

Lindsey: Obama Turns FDR Upside Down

Former Bush administration economic advisor Larry Lindsey writes on Senator Obama's Social Security tax plan in today's Wall Street Journal.

Obama Turns FDR Upside Down
By LAWRENCE B. LINDSEY
June 20, 2008; Page A13

Sen. Barack Obama has a bad idea for "extending the life of Social Security." He has proposed applying the Social Security tax to incomes above $250,000, in addition to the current tax on incomes up to $102,000. It's unfair, he explained, for middle-class earners to pay Social Security tax on "every dime they make" while the very rich pay on "only a very small percentage of their income."

Reporters cited the Obama statement without asking for the logic behind having someone making $100,000 pay on every dime and someone making $250,000 pay on just 41% of income, while someone making $10,000,000 would pay on 98.5% of income. There is no economic principle or theory of tax law that would endorse such a result.
[Obama Turns FDR Upside Down]
Chad Crowe

Sen. Obama's logic is fairly obvious, although it hardly makes him an exemplar of the "new politics." The $100,000 to $250,000 group is a targeted voter demographic, and he really didn't want to sock them with a 12.4 percentage point hike in their tax rate. But, as Sen. Obama himself noted in his June 13 announcement, just 3% of workers make more than a quarter-million.

Neither Franklin Roosevelt, who started Social Security, nor the intervening three dozen Congresses thought they were imposing an "unfair" system on the middle class. There is a very good and principled reason why Social Security taxes are paid on just $102,000 of income: Benefits are calculated based on that same $102,000 of income.

The fundamental principle of linking taxes and benefits was established when Roosevelt designed Social Security. He wanted to make sure that it was not a welfare system, calling Social Security "a base upon which each one of our citizens may build his individual security through his own individual efforts." His instincts have generally proved sound. Had Social Security been considered "welfare" rather than a return on taxes earned, it probably would never have had the popularity or the staying power that it has enjoyed for the last seven decades.

Although the formula connecting benefits to tax payments or "contributions" has evolved slightly over time, it still adheres to this basic message. Today, what Social Security terms a "low-wage" worker will pay (in present value terms) $77,197 over his or her lifetime and get $112,261 in benefits. A median-wage worker earning $42,000 will pay $171,550 and get back $187,085. A "high-wage" worker making $67,000 will pay $274,480 and get back $245,085.

Under the current formula, lower-wage workers get a slightly better deal than do higher-wage workers, assuming the same life expectancy. But the principle remains that as workers' wages rise so do the taxes they pay, and so do the benefits they will get from the system.

Sen. Obama would do away with this principle by requiring higher-end workers to pay taxes without getting any extra benefits linked to their higher contributions. This would be a big step toward turning Social Security from a contributory pension scheme into just another welfare program.

The economics of what Sen. Obama is proposing should be at least as troubling. A high-income entrepreneur would see his or her federal marginal tax rate rise to 53% from 37.7% under Sen. Obama's tax plan. He proposes a 4.6 percentage point hike in the personal income tax rate, a loss of some itemized deductions, and a 12.4 percentage point hike in the Social Security payroll tax. This would take a successful entrepreneur's effective marginal tax rate higher than what it was under Jimmy Carter or Richard Nixon, when the maximum tax on an entrepreneur was 50%.

One of the lessons from the disastrous economics of the 1970s and the subsequent Reagan tax cuts is that everyone – particularly entrepreneurs – responds to incentives. If you take away 10% of a high earner's after-tax income at the margin, he will cut his taxable income by at least 4%. At the margin, this taxpayer now takes home 62.3% of his earnings, a figure that will drop to 47% under the Obama plan. According to a widely accepted economics rule of thumb, the entrepreneur's taxable profit would drop by 11.2%.

Now consider how the Obama plan would affect the taxes paid by such an entrepreneur with a taxable profit from his business of $500,000. Under current law, he would pay $27,148 in Social Security and Medicare taxes, plus $142,969 in personal income taxes, for a total of $170,117. If the taxpayer did not change his behavior at all, under the Obama plan he would face a $31,000 Social Security tax hike and a $11,494 hike in his personal taxes – or a 25% tax hike. But, if the taxpayer responds as the economic models predict, his taxable profit would drop to $444,000. His Social Security and Medicare tax bill would still soar to $51,580. But his income taxes, even with a higher tax rate, would drop to $132,882 for a total of $184,462.

In other words, Sen. Obama is planning on a combined series of tax hikes to produce $42,000 in tax revenue, but consensus economic modeling suggests the government's net take would rise only $14,000.

We should also keep in mind that the economic well-being of the country is not measured by how much taxes the government can collect, or even the size of the deficit. Rather, it is measured by the country's productive capacity. Our theoretical entrepreneur's 11.2% decline in taxable income reflects both less effort on his part and a less efficient use of his income in order to avoid confiscatory tax rates. Or, to put it directly, Sen. Obama's plan would reduce an entrepreneur's after-tax profits by $70,000 – $56,000 in lost profits and $14,000 more in taxes – just to produce a net revenue gain to the government of $14,000.

It is shocking to think that we have a presidential candidate who would make the private sector $5 poorer in order to make the government $1 richer. More likely, given the calculated political design of the proposal, no one in the Obama campaign told the candidate about the economic, ethical or historical consequences of his suggestion.

This indicates that what is really on offer is not some postpartisan approach to politics, but a Democratic candidate far to the left of Bill Clinton.

Mr. Lindsey is president and CEO of the Lindsey Group, and author of "What a President Should Know . . . But Most Learn Too Late" (Rowman & Littlefield, 2008).

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Peter Ferrara on Obama von Bismarck

Peter's policy proposals aren't exactly my cup of tea, but in the interests of full coverage – and because I think the title is pretty clever – here's a link to his piece in the American Spectator. Here's the lead-off:

For all his talk of a new politics of change and unity across partisan lines, Barack Obama said last week that as President he would deny working people the freedom to choose a better deal for Social Security. No real change for that program, adopted over 70 years ago, following the model adopted by German Chancellor Otto von Bismarck in 1889.

I think he overstates the merits of the Ryan-Sununu plan, which he designed, but that's an issue for another day.

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Rivlin and Kingdon: Tackle Social Security First

Alice Rivlin of the Brookings Institution and John Kingdon, professor emeritus at the University of Michigan, write that Social Security reform should be a top priority for the next president.

The next president and new Congress face a daunting set of challenges come January 2009: Iraq war, troubled economy, global climate change, looming government debt, taxes, health care reform and rebuilding infrastructure, all vying for immediate attention. Such a long "to do" list presents two possible tactics: tackle the hardest problem first or get the easy ones out of the way. We prefer the latter and would start with Social Security.

With the large baby boom generation retiring and Americans living longer, the ratio of workers to Social Security beneficiaries is falling fast. Quite soon the payroll taxes coming into the Social Security system will be inadequate to pay all the benefits promised to retirees. Restoring the system's solvency is crucial to almost everyone's retirement security. The longer we put off setting Social Security on a firm footing, the more expensive the fix will be - indeed, we have waited too long already.

Fixing the Social Security program is relatively simple - far less complex than reforming health care. It requires choosing a combination of revenue increases and benefit reductions, but relatively small changes will do the trick. Emotions run high on which combination is best, but the list of options is short, and political compromise is clearly within reach.

Dealing with Social Security would build rebuild confidence in our elected leaders and give both Democrats and Republicans a legitimate chance to take credit for solving a major national problem. The new president would achieve a major objective, and congressional leaders would score a win as well. That accomplishment would build the momentum and relationships needed for tackling more difficult national problems that require pragmatic cooperation across party and ideological lines.

Of course, everyone has to compromise to accomplish a comprehensive Social Security reform. Republicans have to give up diverting existing revenues into private accounts. But they can preserve private accounts on top of Social Security and strengthen incentives for individual retirement savings without going to "privatization."

Democrats have to accept future benefit cuts, but they need not be drastic and can spare current retirees and lower-income beneficiaries. The package could include future gradual increases in the retirement age and concentrate benefit cuts on higher income people.

As part of the compromise, both parties must agree to revenue increases, but they, too, can be modest and can spare low-income individuals. For example, the cap on income subject to social security tax can be raised in gradual steps.

We know that nothing as politically charged as Social Security can be fixed easily. But saving Social Security is crucial and requires bipartisan agreement. It must be done sometime, and the sooner the better. Let's show that government can function, by solving the Social Security problem early in 2009.

________________________________________

Alice M. Rivlin has directed both the Congressional Budget Office and the Office of Management and Budget, and has served as vice chair of the Federal Reserve. John W. Kingdon is professor emeritus of political science at the University of Michigan.

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Mickey Kaus on the Obama Donut Hole and Social Security “Welfare”

Mickey Kaus – one of my favorite bloggers and a strong proponent of welfare reform – takes on the question of whether Senator Obama's plan to eliminate the wage cap on the Social Security payroll tax would turn the program into "welfare." (His comments came in response to a post by National Review's Ramesh Ponnuru.)

Kaus's answer: no. The Social Security "work test" – if you don't work, you don't receive benefits – will retain the "earned benefit" component even if overall ratio of taxes to benefits becomes far more progressive.

My answer: maybe. In addition to lifting the payroll tax ceiling, Obama has proposed a tax credit to effectively refund payroll taxes to low earners, despite the fact that the EITC was designed to do pretty much the same thing. Clearly, the program under a President Obama would be far more progressive than it currently is. This isn't inconsistent -- while Democrats generally oppose excessive progressivity on the benefit side, arguing that a 'program for the poor is a poor program', they generally favor increased progressivity on the tax side. In any event, would the "work test" keep a more progressive Social Security program from being seen as welfare? Well, does a work test keep the EITC from being seen as welfare? Probably not, though the EITC has fared much better than welfare programs without a work test. This is more of a sliding scale than a yes/no question; whether the Obama plan pushes Social Security over the line isn't clear, but it clearly moves the program more toward the welfare end of the spectrum.

Kaus asks one other interesting question: Why does Obama propose raising taxes on the rich when he could just as easily get that money by reducing their benefits through a means-test? (Kaus's long-favorite reform policy.) This question was implicitly answered, from a Republican perspective at least, in President Bush's proposed reforms: higher income people care more about their taxes than their benefits, even if they're equal in present value, so it's more acceptable to them to cut their benefits than raise their taxes. My answer to Kaus's question is that there's a limit to how much you can cut the rich's benefits – after all, the maximum benefit paid to a new retiree this year is around $25,000 – while there's pretty much no limit to how much you can raise the rich's taxes. A person earning $500,000 would pay an extra $31,000 each year in payroll taxes under the Obama plan (it's unclear whether he would receive extra benefits for those taxes). So in addition to a general inclination to push progressivity more in terms of taxes than benefits, there may be a practical consideration here as well.

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John McCain and Social Security “Privatization”

Recently, Sen. McCain found himself in a bit of a pickle when he said he opposed "privatizing" Social Security, only to be confronted with a video from several years back in which he referred favorably to privatization. The question regarding Social Security nomenclature has been around for a while, as the 2002 op-ed reprinted below makes clear.

Given the time lapse, there are definitely things in the piece I wouldn't write today, but I think the general points still hold reasonably well (including the fact that Sen. McCain isn't one to be forced to a script). The general policy debate would be made better off if terms like "privatization" were better defined or, better yet, we simply focused on policy details.

For instance, Medicare is rarely described as "privatized," yet there's more private sector interaction in Medicare than there would be in a system of personal accounts for Social Security. Moreover, it's possible to have private investment in Social Security without being defined contribution – as in plans to invest the trust fund in equities – just as it's possible for the program to be defined contribution without having private investment, such as in Sweden's system of "notional personal accounts." Policy debate will benefit if advocates make clearer what aspects of different reforms they favor or oppose rather than simply what labels.

May 30, 2002

Just Who Is Afraid of Privatization?

by Andrew Biggs

What's in a word? Plenty, if that word is "privatization." The latest election-year battle over Social Security reform has Democrats demonizing the term "privatization" and applying it to Republican proposals to let workers invest part of their Social Security taxes in voluntary personal accounts. Republicans, predictably, insist their plans are anything but privatization.

In one sense, this debate is a tempest in a teacup: what matters are policies, not the label attached to them. But words influence how people think about issues, and the public deserves to know what personal account proposals actually entail. And the truth is much less scary than account opponents would have us believe. Like most things in politics, the brouhaha over the P-word begins with pollsters. Roughly two-thirds of working-age Americans favor the option to invest part of their Social Security taxes in a personal retirement account. However, apply the "privatization" label to personal accounts and support falls, particularly with older voters who loom large in off-year elections. Knowing this, Democratic strategists are playing the P-word to the hilt.

Republicans, being no fools, describe their plans as "reform," "choice," "voluntary personal accounts," or simply "strengthening Social Security." (Though Sen. John McCain, R-Ariz., always the lone wolf, continues to use the P-word.) The GOP may even have a formal vote in Congress against "privatization" to inoculate themselves against campaign attack ads.

In fact, actual reform proposals such as those from the President's Commission to Strengthen Social Security entail almost none of the laissez-faire, dog-eat-dog, sink-or-swim capitalism the word "privatization" conjures. The Cambridge International Dictionary defines "private" as "not connected with, controlled by, or paid for by the government." Would a reformed Social Security program remain "connected with, controlled by, or paid for by the government"? For better or worse, the answer is yes.

For instance, would personal account reform plans shut down the current program, leaving today's seniors to fend for themselves? No. All reform proposals from the president's commission guarantee benefits for all retirees and near-retirees. For anyone aged 55 and over, nothing would change -- nothing.

Likewise, would personal account plans undermine Social Security's safety net? No. Under plans from the president's commission, the safety net would be strengthened. Minimum-wage workers would be guaranteed to retire above the poverty line, lifting up to one million seniors out of poverty, according to Social Security's actuaries. Commission proposals also increase benefits for as many as two million to three million below-average-wage widows. The commission proposals mean fewer seniors in poverty, not more.

Would personal accounts reduce Social Security's progressivity? Again, no. Commission plans offer progressive personal accounts giving larger account balances to lower-wage workers. Combined with the enhanced safety net, progressivity would increase. Here's the proof: Today, a low-wage retiree's monthly benefit equals 46 percent of a high-wage retiree's. Under one commission plan, that figure would rise to 56 percent, substantially increasing progressivity.

Could workers with personal accounts stop paying into Social Security, or gamble their savings on risky stocks, or withdraw their savings prior to retirement? Hardly. All covered workers would continue to pay into Social Security. Unlike today, though, workers could create true savings and wealth in personal accounts that they own and control.

Accounts would be modeled after federal workers' Thrift Savings Plan, allowing only simple, diversified, low-cost mutual funds, not day trading in individual stocks. Withdrawals would be restricted to retirement, except in the case of the death of the worker.

So what would personal accounts mean? Social Security's nonpartisan actuaries confirm that commission personal account plans would restore Social Security to solvency and pay substantially higher benefits than the current system could afford. Moreover, workers and retirees would have a true legal right to their retirement savings, in an account that can't be "raided" by the government to pay for other programs. Accounts give all Americans the chance to build wealth and to pass it on, turning a mere entitlement into a true asset. Personal accounts mean more safety and security, not less.

Americans should forget about labels and insist that both sides explain in detail how they would strengthen Social Security for the future. Account opponents decry "privatization." But will they raise taxes? Cut benefits? Increase the retirement age? Let the government itself invest in the stock market? We can only guess because they refuse to disclose their own reform proposals. Until account opponents put their own plans on the table, there is only one label that can accurately describe their Social Security proposal: "bankruptcy."

This article originally appeared in the San Diego Union-Tribune on May 30, 2002.

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New paper: “Are people claiming Social Security benefits later?”

In a new paper from the Center on Retirement Research at Boston College, Dan Muldoon and Richard W. Kopcke argue that SSA statistics on Social Security claiming ages are misleading. These statistics, published in the annual Statistical Supplement, indicate that the percentage of individuals claiming benefits at age 62 has remained roughly constant over time. However, these statistics may be biased due to the effects of different cohort sizes.

The SSA statistics show the percentage of all individuals claiming benefits in a given year who claim at age 62. Thus, the population the SSA statistics examine come from a number of different cohorts ranging from ages 62 up to 70. If cohorts are of different sizes in different years – in particular, if younger cohorts are somewhat larger than older cohorts – the average claiming age can remain the same even if the likelihood of any given individual claiming at age 62 declines.

Muldoon and Kopcke use internal SSA data to examine the distribution of claiming ages by birth cohort. They find that

the proportion of eligible workers claiming retired-worker benefits at age 62 drops significantly for both men and women. Of those who turned 62 in 1985, 62 percent of women and 51 percent of men claimed benefits as soon as they became available.7 But for those who turned 62 in 2006, the comparable figures were only 48 percent of women and 43 percent of men. These trends differ significantly from those using claim year data, which show little change over the same 22-year period.

This increase in claiming ages is consistent with declining Social Security benefits, due to increases in the full retirement age, and falling traditional pension coverage. Click here to read the whole paper.

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What have McCain and Obama both voted for on Social Security?

Neither Senator McCain nor Obama has yet published a comprehensive Social Security reform plan. Sen. Obama, to his credit, has offered greater detail than Sen. McCain. However, it may be worth taking a look back at a sense of the Senate resolution passed in 2005 that both Obama and McCain – along with the other 98 Members of the Senate – voted to support.

The full text of the resolution is available at the link above, but here are the operative parts for reform. First, consider the basic standard for reform:

(1) the President, the Congress, and the American people including seniors, workers, women, minorities, and disabled persons should work together at the earliest opportunity to enact legislation to achieve a solvent and permanently sustainable Social Security system;

The references to permanent sustainability is currently more a problem for Sen. Obama than McCain, if only because Sen. McCain has not revealed sufficient details to make judgment possible. Sen. Obama's plan would fix less than a third of the 75-year Social Security deficit and not get particularly close to "sustainable solvency." His campaign's pledge to extend the trust fund's solvency to a half century seems to acknowledge that they may not reach this standard. McCain has offered fewer details, so it is hard to say how he would satisfy this criterion.

Section 2 outlines some more specific criteria for reform:

2) Social Security reform--

    (A) must protect current and near retirees from any changes to Social Security benefits;

    (B) must reduce the pressure on future taxpayers and on other budgetary priorities;

    (C) must provide benefit levels that adequately reflect individual contributions to the Social Security system; and

    (D) must preserve and strengthen the safety net for vulnerable populations including the disabled and survivors; and

For what it's worth, I'm reading part A as simply taking benefit cuts for current/near retirees off the table, though it doesn't say anything about tax increases on those age groups. Part B seems to imply lower future benefits, although Sen. Obama could argue that his tax plan hits such a small portion of the population that it effectively satisfies this criterion. Part C, I believe, would impact progressivity; the system should not be made so progressive, either on the tax or the benefit end, that an individual's benefits are not reasonably representative of his/her taxes. This is an issue both for Sen. Obama and for Republicans who support benefit changes such as "progressive indexing." Part D acknowledges the non-retirement portions of the program, though it's not always clear what "strengthen" is taken to mean in this context.

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More on Obama Social Security Plan

Senator Barack Obama fleshed out a few details on his Social Security plan over the past several days, prompting increased press coverage and commentary.

One specific nugget was that Obama's plan would apply the payroll tax to earnings above $250,000, while in the past he had been vaguer and stated that the top end of his "donut hole" would lie between $200,000 and $250,000. This alters somewhat the numbers I produced for the Wall Street Journal piece a while back. In that case, I had assumed the donut hole extended from $100,000 to only $200,000, with a 10-year phase in. At that time, I'd projected that his plan would eliminate around 43% of the 75-year deficit; with the higher $250,000 cap, that falls to around 36%. The total improvement would actually be smaller than that, as Sen. Obama has also proposed eliminating income taxes on seniors earning under $50,000; since most of these would be taxes levied on Social Security benefits, which by law flow back to Social Security, this would increase the Social Security shortfall by around 10%. In addition, Obama has proposed eliminating payroll taxes for individuals earning $8,000 or less. I haven't yet worked out an estimate on this, but it would also reduce the gains from the expansion of the payroll tax cap.

The Tax Policy Center blog has a good discussion of Sen. Obama's proposal, as does EconomistMom. The TPC notes that the Obama campaign is being vague on the details of the plan, so far not disclosing whether benefits would be paid upon the additional contributions (consistent with Social Security's history, I've assumed they would be) or even whether the tax rate above the donut hole would be the same 12.4% levied on earnings up to $102,000. Both TPC and EconomistMom note that Obama's plan is complex, and TPC points out that by targeting it on a very small chunk of the population it significantly increases marginal tax rates and thus raises incentives to hide income.

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O’Connor and Jones: What we owe our young

Former Supreme Court Justice Sandra Day O'Connor and former Ambassador James R. Jones write on entitlement programs and the young in today's Washington Post:

Our government was founded on the principle that the legitimacy of law derives from the consent of the governed. Today's youths and future generations have not been consulted in the writing of our current social contract. Yet they soon may face financial burdens that most voters would find intolerable.

As we approach this vast expansion of spending, precipitated by a combination of aging baby boomers and abnormally high health costs, it is time to consult our young. That is exactly what we hope to do through the Youth Entitlement Summit taking place today and tomorrow on Capitol Hill.

Click here for more information on the Youth Entitlement Summit.

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McCain position change on tax max?

In light of the McCain campaign's criticism of Sen. Obama for proposing lifting the Social Security payroll tax ceiling, currently $102,000, the ABC news blog Political Radar focuses on Sen. McCain's own views on the subject.

McCain Backtracks on Social Security Tax Hike

June 10, 2008 7:34 PM

ABC News' Teddy Davis and Gregory Wallace Report: Sen. John McCain, R-Ariz., hammered Sen. Barack Obama, D-Ill., on Tuesday for proposing higher Social Security taxes. The presumptive Republican nominee neglected to mention, however, that he was open to a similar approach in 2005.

"The Social Security tax cap, he wants to raise from $105,000 to I think $200,000," McCain told Bloomberg News' Peter Cook. "Do you know how many employers, small-business people that would mean a 12-percent increase in their Social Security tax?"

"I mean, this is just -- Senator Obama wants to raise taxes," he continued. "I want to keep tax cuts in place. And I think that it's important that in a time of real crisis, economic crisis in America, the last thing we want to do is raise people's taxes now."

On a Feb., 23, 2005, edition of "Meet the Press," NBC's Tim Russert asked McCain if he would support "as part of the solution to Social Security's solvency problem, that you lift the cap so that you would pay payroll tax, Social Security tax, not just on the first $90,000 of your income, but perhaps even higher?"

"As part of a compromise," said McCain, "I could, and other sacrifices, because we all know that it doesn't add up until we make some very serious and fundamental changes."

Two years later, during a May 13, 2007, appearance on "Meet the Press," Russert asked McCain if he was still open to lifting the Social Security tax cap as part of a compromise.

The Arizona senator said that he is opposed to tax increases while acknowledging that "tough decisions" would be needed as part of a compromise.

"Am I opposed to tax increases?" said McCain. "Yes. But we've got to sit down together and figure out what our options are, and tough decisions have to be made, Republicans and Democrats. And I know how to do that."

Asked about the 2005 remark, a McCain spokesman acknowledged the tension with his current position while arguing that the Arizona senator's criticism of his Democratic rival is still valid because McCain has spoken out against higher Social Security taxes as a 2008 White House hopeful.

"The contrast here couldn't be more clear, and pulling one dated quote out of thousands won't change it," McCain adviser Brian Rogers told ABC News. "John McCain believes we can fix Social Security without raising taxes. Senator Obama has made clear his intention to uncap the payroll tax, raising taxes while failing to restore the program's long-term solvency."

To put the retirement program on sounder footing, Obama has suggested imposing the 12.4 percent Social Security tax on more income.

At present, the tax is only imposed on roughly the first $100,000 of income.

In a 2007 op-ed written for an Iowa newspaper, Obama floated the possibility of completing eliminating the Social Security tax cap.

More recently, Obama and his advisers have said on multiple occasions that he would continue to exempt income between roughly $100,000 and around $200,000 from the Social Security tax while imposing it on income above $200,000.

Both Senators have put themselves in difficult spots. Sen. Obama has proposed raising the tax cap, but used this as a reason to rule out any other changes such as cutting benefits or increasing the retirement age. Sen. McCain has rejected any increase in the tax cap, although he once said he could accept at least some increase as part of a larger compromise. Social Security reform will ultimately be a compromise that contains a lot of things that no one likes, so it make sense to focus on what you want to do but not spend a lot of time ruling things out.

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New paper: Encouraging 401(k) holders to purchase annuities

Here's an interesting new paper from the Retirement Security Project by Bill Gale and Mark Iwry of the Brookings Institution, David John, of The Heritage Foundation and Lina Walker, of the RSP. Here's the summary:

This paper proposes a policy that would increase the role of lifetime income products in future retirees' overall retirement planning. Over the next few decades, a substantial number of workers will retire with larger balances in their retirement accounts and have fewer sources of longevity protection than retirees today. They, therefore, must manage these resources to ensure they last throughout their retirement. Lifetime income products would be beneficial for many because payments are made for life and they mitigate the risk of running out of resources late in life. Despite the benefits of lifetime income, current retirees do not use lifetime income products very much and future retirees are unlikely to do so under current arrangements. The reasons may be that retirees already feel they have sufficient guarantees—for example, from social security benefits—against the risk of outliving their resources. However, evidence suggests also that the market for lifetime income products functions poorly and that people do not understand and are biased against the products.

Our strategy addresses market function by making it easier for a substantial number of retirees to purchase lifetime income plans; the increased volume of sales would reduce prices and make them a better value for the average consumer. Our strategy addresses the role of ignorance and bias by giving retirees an opportunity to "test drive" a lifetime income product, which would help overcome existing biases, reframe their view of lifetime income products and improve their ability to evaluate their retirement distribution option.

Specifically, we propose that a substantial portion of assets in 401(k) and other similar plans be automatically directed (defaulted) into a two-year trial income product when retirees take distributions from their plan, unless they affirmatively choose not to participate. Retirees would receive twenty-four consecutive monthly payments from the automatic trial income plan. At the end of the trial period, retirees may elect an alternative distribution option or, if they do nothing, be defaulted into a permanent income distribution plan. Employers and plan sponsors would be encouraged to offer the trial income plan and would have discretion over some of its structure and implementation. By making the proposal voluntary, we allow opting out by anyone who is not interested in purchasing guaranteed lifetime income. Several important questions would have to be resolved before this strategy could be implemented. The aim of this paper is to map out the first of several steps toward increasing the use of income products in 401(k)-type plans, with the ultimate goal of enabling improved retirement outcomes for workers.

Some quick comments: First, I agree with the overall goal of the paper, since annuities provide valuable protection against outliving your assets but most Americans typically don't purchase them. At the same time, I wonder how pressing a problem under-annuitization is for the typical retiree. Low-income retirees subsist largely on Social Security, and so are almost entirely annuitized, while higher income retirees are, well, higher income and presumably can self-insure a bit better. This isn't to say that they wouldn't benefit from greater access to annuities, particularly as we shift from a DB to a DC pension world, but I'll be interested in finding out more about this.

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Tech Panel report on Low/High Cost scenarios

We've discussed in the past the use of the Low/High Cost scenarios for system financing, as the Low Cost are often cited as reason to believe the program will remain solvent in perpetuity without policy changes. Given that, the discussion of the Low/High Cost scenarios in the report the 2007 Technical Panel on Assumptions and Methods may be appropriate. What follows is from the executive summary:

The current approach to uncertainty of projections in the Trustees Report, using high-, medium- and low-cost "scenarios" or "variants" to indicate the range of plausible outcomes is a traditional one whose limitations are well-known. The current practice of assuming that all variables could simultaneously move in a low- or high-cost direction produces estimates that lack both an intuitive and a statistical interpretation. The temptation to assign probabilities to the scenarios or to suggest their degree of likelihood should be resisted. Previous Technical Panels have consistently drawn attention to the limitations of the variant approach. For example, the 1999 Technical Panel noted that using high and low alternatives: (1) assumes trajectories are always high or always low; (2) combines trajectories of various assumptions in rigid ways, for example, all are set at their high-cost value simultaneously; (3) ignores that different aspects of the high and low scenarios have different levels of uncertainty, and (4) does not assign any probability to the forecast ranges. We offer one additional observation: there is no requirement for symmetry of uncertainty—that the forecast be plus-or-minus an equal amount along the projection. Indeed, many key drivers have asymmetrical uncertainty as succeeding chapters will show, and the nature of the uncertainty may well change with the forecast horizon.

Stochastic analysis, on the other hand, produces uncertainty bands that are much easier to interpret. Critically, stochastic analysis can incorporate correlations between variables, and allows ranges to be given a probabilistic interpretation. Although, the actuaries have developed a stochastic model that is used to augment the use of scenarios to analyze uncertainty in the Trustees Report, those results appear more as an addendum than as an integral part of the analysis. The Panel therefore recommends using the results of the stochastic analysis to augment if not supplant the high- and low-cost scenarios, and to communicate the range of uncertainty around the intermediate projections.

This discussion mirrors part of the answer to Angry Bear's questions I posted a while back, in particular the argument that the stochastic model, while not perfect, represents a better way of displaying uncertainty than the Low/High Cost scenarios.

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Social Security Bulletin, Vol. 67 No. 4

The latest issue of the Social Security Bulletin, the Social Security Adminstration's research and policy journal, is now available online. Contents include:

Women, Marriage, and Social Security Benefits Revisited

by Christopher R. Tamborini and Kevin Whitman

This article uses a Restricted-Use File of the 2001 Marital History Topical Module to the U.S. Census Bureau's Survey of Income and Program Participation (SIPP) to examine women's marital histories in relation to Social Security spouse and widow benefit eligibility. To assess marital trends over time, the authors compare SIPP estimates to data reported in Iams and Ycas' 1988 article, "Women, Marriage and Social Security Benefits," which used the 1985 Marital History Supplement to the Current Population Survey. The results shed light on important links between sociodemographic trends in marriage and Social Security beneficiaries. Over three-fourths of women aged 40 to 69 in 2001 already had marital histories that guarantee them the option of a spouse or widow benefit at retirement. However, a smaller proportion of these women would be potentially eligible to receive spouse or widow benefits compared to their counterparts in 1985 due to changes in patterns in marriage, particularly among younger women in the baby-boom cohort. Notable shifts include rising proportions of currently divorced women without a 10-year marriage and never-married women.

Disabled Workers and the Indexing of Social Security Benefits

by Alexander Strand and Kalman Rupp

This article presents the distributional effects of changing the Social Security indexing scheme, with an emphasis on the effects upon disabled-worker beneficiaries. Although a class of reform proposals that would slow the rate of growth of initial benefit levels over time—including price indexing and longevity indexing—initially appear to affect all beneficiaries proportionally, there can be different impacts on different groups of beneficiaries. The impacts between and within groups are mitigated by (1) the offsetting effect of changes in Supplemental Security Income benefits at the lower tail of the income distribution, and (2) the dampening effect of other family income at the upper tail of the income distribution. The authors present estimates of the size of these effects.

Financing Social Security 1939-1949: A Reexamination of the Financing Policies of this Period

by Larry DeWitt

Presented is an examination of the financing history of the U.S. Social Security system from the passage of the original law in 1935 up through the enactment of the 1950 Amendments to the Social Security Act. In particular, it focuses on the 1939 Social Security Amendments and the subsequent tax rate freezes enacted between 1939 and 1949. It examines the origins of these taxing policies and assesses the impact of the rate freezes on the long-range actuarial balance of the Social Security program during this period.

The Food Stamp Program and Supplemental Security Income

by Brad Trenkamp and Michael Wiseman

The Food Stamp Program (FSP) and Supplemental Security Income (SSI) are important parts of national public assistance policy, and there is considerable overlap in the populations that the programs serve. This article investigates FSP participation by households that include SSI recipients and assesses the importance of various provisions of the Food Stamp Program that favor SSI recipients.

The Reservation Wages of Social Security Disability Insurance Beneficiaries

by Sophie Mitra

Using the New Beneficiary Data System, this article examines the reservation wages of a sample of Social Security Disability Insurance (DI) beneficiaries with work capabilities. It analyzes the magnitude of the reservation wages of DI beneficiaries compared to the last wage earned and to benefit amounts. In addition, the article discusses the determinants of reservation wages for DI beneficiaries.

KiwiSaver: New Zealand's New Subsidized Retirement Savings Plans

by Barbara Kritzer

On July 1, 2007, New Zealand introduced KiwiSaver, a new subsidized retirement savings plan. All new entrants to the labor force and anyone starting a new job are automatically enrolled in a plan and may opt out if they wish. Anyone younger than age 65, including the self-employed and anyone not in the labor force, may choose to set up a KiwiSaver account. The government provides tax credits for both employer and account holder contributions, a one-time tax-free payment to each account, and an annual fee subsidy to defray administrative costs.

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Technical Panel releases report

The Social Security Advisory Board's 2007 Technical Panel on Assumptions and Methods has released its final report analyzing and making recommendations to Social Security's Trustees and actuaries. The SSAB appoints a panel every four years, and I've sometimes referred to the reports from the 1999 and 2003 Tech Panels. The 2007 Panel is chaired by Dan Crippen, formerly director of the Congressional Budget Office, and includes a number of experts in a variety of fields relevant to Social Security financing and benefits. Next Friday, June 13th there will be an event at AEI discussing the Tech Panel's report. This will also be webcast for those who can't make it in person.

Following is the announcement of the Report made by the Social Security Advisory Board:

Washington, D.C. (June 5, 2008) – The Social Security Advisory Board is pleased to announce the release of the report of the 2007 Social Security Technical Panel on Assumptions and Methods.

Appointed by the bipartisan Advisory Board, the Panel is an independent, ten member body of experts in the fields of demography, economics and actuarial science whose charter is to review the long range projections of the financial status of the Social Security system as reported annually by the Social Security Board of Trustees.While the report solely reflects the views of the Panel, the Advisory Board believes this effort provides an important national service by subjecting the Trustees’ assumptions and Social Security actuaries’ methods to intense and informed public scrutiny.

In the report released today, the 2007 Technical Panel has made over 50 specific recommendations for changes in the methodology and assumptions used in the Trustees projections. Among the key findings:

• The Panel recommends that the Social Security actuaries continue to develop and expand the use of state-of-the art projection techniques such as stochastic and micro-simulation modeling.
• The Panel also recommends specific changes in the methods for projecting immigration and life expectancy and recommends assuming higher levels of immigration and faster improvements in life expectancy.

The 2007 Technical Panel was chaired by Dan L. Crippen, former Director of the Congressional Budget Office from 1999-2003. The other distinguished members include: Mary Daly (San Francisco Federal Reserve Bank); Robert Gordon (Northwestern University); William Hsiao (Harvard University); Deborah Lucas (Northwestern University); Steven Lieberman (The Moran Company); Jeffrey Passel (Pew Hispanic Center); Beth Soldo (University of Pennsylvania); Eric Stallard (Duke University); and Shripad Tuljapurkar (Stanford University).

The Board wishes to thank the members of the Panel for their service and commends them on their efforts to further improve public understanding of Social Security projections and for furthering the dialogue among experts on ways to improve them in the future.

The Social Security Advisory Board is an independent, bipartisan body created by the Congress in 1994 to advise the President, the Congress, and the Commissioner of Social Security on wide variety of matters relating to the Social Security and Supplemental Security programs. It has previously commissioned technical panels in 1999 and 2003.

The Tech Panel reports are a great source of information not only on how Social Security projections are currently undertaken, but on the debates over different assumptions and methodologies and a look into how the process may evolve in the future. Read more!

WSJ: Obama's Social Security Plan Draws Critics, Even Some Dems

From today's
Wall Street Journal. I've already said my bit on this, but I'll put a couple comments at the end. Overall, this piece covers the pros and cons fairly well.

WASHINGTON -- Some Social Security experts -- including Democrats and liberal economists -- are wary of a proposal from presumptive Democratic nominee Barack Obama to shore up the federal retirement program by raising taxes on the highest earners.

Sen. Obama has said he wants to raise limits on wages that are subject to the 12.4% federal Social Security tax. That is the only specific proposal in documents from the Obama campaign directed at helping make the Social Security program solvent over the long term.

Under current law, Social Security taxes are collected only on the first $102,000 of an individual's income, indexed for inflation. Proposals to increase or eliminate that cap have been around for years, advanced mostly by Democrats who claim that the wage cap unfairly burdens lower and middle-class workers.

But some economists and politicians warn that lifting the cap jeopardizes a feature that has underpinned the success of the Social Security system since its inception in 1935 -- the notion that one will ultimately benefit from the system in proportion to what one has paid into it.

"As someone who has contributed to Obama's campaign and will vote for him in November, I don't think that's one of his better proposals," said Henry Aaron, an economist at the Brookings Institution, of Sen. Obama's plan to lift the Social Security wage cap.

Defenders of the wage cap say it serves in part to protect the integrity of the Social Security program as a social insurance plan, rather than a welfare-type plan that redistributes income.

"The linkage between the payroll tax and benefits paid through Social Security has had over the years enormous symbolic value to liberals and conservatives," Mr. Aaron said.

Underscoring the divisions between Democrats on the issue, Sen. Hillary Clinton in an April debate said that Sen. Obama's Social Security payroll tax proposal would "impose additional taxes on people who are, you know, educators here in the Philadelphia area or in the suburbs, police officers, firefighters and the like."

The Social Security system faces long-term deficits and, without tax increases or benefit cuts, will be unable to pay scheduled benefits starting in 2041, the Social Security Board of Trustees reported in March. The Trustees estimated that shortfall at $4.3 trillion over 75 years, in their March report.

Sen. Obama hasn't laid out a detailed plan for Social Security reform, but rather has embraced the general approach of making more earnings subject to the payroll tax. In campaign documents, he has rejected raising the retirement age or directing payroll taxes into private accounts as ways to bolster Social Security financing.

"Obama supports increasing the maximum amount of earnings covered by Social Security and he will work with Congress and the American people to choose a payroll tax reform package that will keep Social Security completely solvent for at least the next half century," according to the Obama campaign statement.

But Sen. Obama does offer one innovation: a plan to ensure that the majority of middle-income earners don't see their payroll taxes increased. Dubbed the "donut hole," it would tax all income below the current cap -- $102,000 -- and all income above a certain threshold. That threshold could be set around $250,000, although the campaign hasn't released an official number.

A key question that the Obama campaign hasn't yet answered is whether higher earners under his plan would collect more in Social Security benefits than under current law, to reflect the additional payroll taxes paid.

Many economists argue that if the earnings cap is lifted, it would be unseemly to pay benefits according to the current formula to wealthy CEOs who don't need to rely on Social Security for financial support in retirement.

But the alternative, to tax more earnings while not paying more benefits, would veer towards a means-test for Social Security benefits, an approach many Democrats have rejected.

"When you say, we're going to begin means-testing the program, you begin to convert Social Security from an insurance program to a welfare program," says former Rep. Charles Stenholm now a senior policy adviser at the law firm of Olsson, Frank & Weeda.

Mr. Stenholm said an increase in the payroll tax cap can be part of the solution to making Social Security solvent over the long term, but it must be paired with other measures including curtailing benefits.

A 2005 analysis from the National Academy of Social Insurance found that eliminating the payroll tax wage cap all together would raise 116% of the revenue needed to cover that shortfall, if additional taxes paid don't count toward benefits.

If benefits are increased to reflect the larger Social Security wage base, removing the cap would still cover 93% of the shortfall, NASI found.

Supporters of raising the wage cap argue that even if doing so would move the program further away from a strict social insurance system, it would only be a small movement. Social Security's benefit formula is already designed to pay out much less per dollar collected on higher incomes than it pays for lower average annual incomes.

And continuing to fund the system through payroll taxes may be preferable, from the point of view of protecting Social Security's integrity, to drawing on the general fund or diverting estate taxes to keep the program functioning, as some have proposed.

Paul van der Water, a senior fellow at the Center on Budget and Policy Priorities, said calls for raising the wage cap are a response to the enormous growth in income in recent years among the wealthiest Americans.

As a result of that increasing earnings gap, only about 84% of all wages fall under the $102,000 cap, he said. The 1983 reforms that established the payroll tax cap intended that payroll taxes apply to about 90% of all income, said Mr. van der Water.

Increasing the current cap to about $208,000 would restore that level to 90%, he said. Such an increase need not be seen as threatening the link between what one pays into the system and what one collects, he said.

"Someone could argue that we have exactly the right balance now, and that anything that makes the program more redistributive would weaken the program," he said. "But it's hard to think that you ever are exactly right."

Two thoughts: first, Sen. Obama seems to be aiming only at an improvement in Social Security's financing – e.g., "for at least the next half century," which would mean to 2058 – rather than the traditional goal of 75-year solvency or the more recent goal of sustainable solvency.

Second, Paul van der Water's argument that rising earnings inequality justifies increasing the payroll tax cap to maintain coverage at 90% of total earnings (around $208,000) is a reasonable one. What's strange about Obama's plan is that folks earning between the current cap $102,000 and around $250,000 would be exempt from the tax increase. I'm not keen on raising taxes, but it's hard to see why – other than for political reasons – you'd leave these people out. They're not exactly middle class, plus by doing so you're exempting from taxation a good chunk of income even for people who do earn more than $250,000.

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Social Security and Global Warming

Arnold Kling posts on the comparison at EconoLog, discussing a post from Megan McArdle's blog. (As usual, Kling is thought provoking and worth reading.) At any rate, this reminded me of some past thinking comparing the Social Security issue to how people think about global climate change. I discussed this as part of a luncheon speech to the 2007 annual conference of the Retirement Research Consortium sponsored by the SSA. The whole text is available here and includes some discussion of the politics of reform that might be worth reading, but in any case I've excerpted the global warming parts below.

The short story is that Social Security (and broadly entitlement) reform and global warming are similar in three ways: first, the costs are potentially large, but also uncertain; second, the costs differ significantly across time, requiring us to make judgments about how to treat different generations; and third, the costs of policies today are inevitably passed on to future generations.

What I would like to do here is put forward two additional areas in which the existing toolbox available to economists may help policymakers better understand Social Security financing, its impact on the public, and the choices we face in coming years.

Interestingly, both of these areas derive from a methodological parallel between Social Security policy and the debate over whether, how and when to confront the challenge of global climate change.

Policy questions over Social Security and other entitlements are in important ways similar to questions of how to tackle global warming. But for those with their political antennae up, there is a certain irony in how climate change and entitlement reform are treated in the political process.

Stereotypically, at least, those on the right claim there is an imminent crisis in entitlements that should have been solved yesterday, while arguing for caution regarding global warming, and waiting until a consensus is reached. Those on the left do the opposite, mentioning the long time horizon and considerable uncertainty regarding Social Security projections but citing the precautionary principle in arguing for immediate action on climate change. Now, it may be that both sides are right – or wrong, for that matter – for reasons going beyond the similarities between the issues. But it is worth pointing out those similarities since the two fields may inform each other.

Both climate change and entitlements are a relatively benign issue for current generations but potentially severe for future ones, with considerable uncertainty regarding the potential effects. These lead to both philosophical and technical questions, which the people in this room are among the best equipped to inform policymakers and the public.

For anyone who follows debate over the economics of climate change, last year there was considerable discussion over the role of the discount rate in the U.K.'s Stern Commission report, which concluded there were large costs to global warming and large gains from averting it. A typical person hearing about this would assume the conclusions derived principally from scientific projections regarding how temperatures would change or how sea levels would rise. Someone in this room, on the other hand, would probably just mutter "low discount rate."

And, in fact, these results were generated in large part from utilizing a low discount rate of around 1.4 percent for intergenerational welfare comparisons, and much debate ensued over whether that was the proper discount rate. What's important here is that few typical policymakers, much less ordinary people outside this room, realize the dominant role the discount rate can play in these very long-term calculations.

For Social Security's internal finances we utilize the trust fund interest rate, which seems appropriate given the important legal role the trust fund plays. And in cases where we're actually transferring assets or debts over time, it also makes sense to think in terms of market rates.

But for calculations balancing intergenerational well-being – which, after all, is what Social Security reform ultimately comes down to – it's not clear to me that the government bond rate is necessarily more appropriate than the rate of wage growth, per capita GDP growth or some such measure. This seems to me to be an area that's both ripe for academic investigation and potentially very useful for presentation to policymakers. People in Washington, and throughout the country, have a gut feeling that entitlement reform comes down to balancing the well-being of your grandparents and your grandchildren, but lack a rigorous framework within which to think these questions through. I'm not saying that we should send every American an index card with the Ramsey formula on it and ask them to fill in their pure rate of time preference and return to Washington for tabulation.

Nor would such a formal framework guarantee success. After all, economists do have a rigorous framework and still they disagree. But they have a much clearer idea about what it is they disagree about, and better knowledge on how these disagreements determine their conclusions. This can only help as we think more about these problems.

There's a second way in which Social Security projections resemble those for climate change, which is the considerable uncertainty inherent in both. A literature survey undertaken by the Congressional Budget Office showed a wide range of estimates for the potential effects of global warming, with the possibility that the net effects on GDP would actually be positive. Of course, there's also the possibility of a – literal – meltdown scenario.

Likewise, as I mentioned previously, since 2003 the Social Security actuaries have included a stochastic analysis of system financing in the annual Trustees report. While some seize on this uncertainty as a reason not to act, in fact uncertainty isn't an argument for delaying action so much as an argument for acting even sooner. There is an insurance value in protecting against an unwanted outcome, even if the chance that this outcome will occur is small.

Remember, the Trustees don't project that either there will a Social Security deficit of roughly 2 percent of payroll or there won't be a deficit at all. Rather, the Trustees projection is the median outcome, with about as much chance the deficit will be double the current project as that there won't be a shortfall at all. So in our policy minds, outcomes in the worst 1 percent of the distribution should play more heavily than those in the best 1 percent.

Finally, like climate change, Social Security policy is effectively permanent. It is difficult to undo changes to the global environment, which is why advocates argue that action should be taken immediately. Likewise, the below market returns to future generations are a function of subsidies to past and present ones. While technically we can change the benefit formula however we wish, we cannot change the underlying financing constraints of a pay-as-you-go program which effectively "invests" in the growth of aggregate wages via labor force growth and productivity increases. The decisions we make about the treatment of participants in the present and near future constrain the treatment of cohorts in the more distant future, just as choices we make about the environment today may dictate outcomes for generations who will follow us.

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Thomas and Brill argue for incremental Social Security reform

My AEI colleages argue in Roll Call for an incremental approach to Social Security reform:

Tackle Social Security Reform in Small Steps

In 1984, Boston College quarterback Doug Flutie won a football game with a last-second desperation pass called a “Hail Mary.” It was a miraculous event that sports fans will never forget. But the next day not one football coach in America changed his playbook. Why? Because a coach’s game plan is never about last-second gambles. It is about executing smart, achievable plays to advance the ball, make first downs and eventually score.

The Social Security trustees have issued their 2008 report on the financial soundness of the Social Security Trust Fund. The primary conclusion to be drawn from this report is that the federal government has made promises it cannot keep — expected payroll taxes are insufficient to pay for promised benefits. What politicians and voters need to appreciate is that the longer we delay formulating a game plan, the more likely a Hail Mary will become our only choice.

This year, as in the past, a few brave Members of Congress along with experts from the Washington think tank community and some academics will offer solutions to the Social Security system’s projected deficits. These solutions will all claim to eliminate the projected funding shortfall and return the system to fiscal soundness by employing one of three techniques: a reduction in the growth of benefits, an increase in payroll tax collections or a bet on stock market returns by investing payroll tax collections in the market. The two common traits among these proposals are that they will all be heralded as “complete solutions” and that none will be enacted.

While the debate over how to reduce the growth of benefits and/or increase the payroll tax will continue unabated for years, the best next step forward is to reorient the objective of the debate toward incremental change rather than a wholesale fix. Years have been wasted while valiant advocates for fiscal soundness have proposed radical change. In 2001, President Bush convened a Social Security Reform Commission to study the problem and in 2005 he urged Congress to fix Social Security “permanently.” Yet the system has not been changed.

Lawmakers should focus on achievable reform that shrinks, rather than eliminates, the funding gap in Social Security. As in the debate over permanent solutions, there will be controversy about how to define honest partial success verses gimmicks to mask the problem. We would argue that the best, while imperfect, metric would be to measure the difference between projected payroll collections and projected benefits in the 75th year. Narrowing that gap is progress toward a sustainable solution. While policymakers seeking to take a bite out of the problem face the same basic options as those seeking a total solution, the options will be more politically palatable because the changes will be smaller.

There is an additional reason beyond politics for stepping, not leaping, toward a solution: While it cannot be denied that there is a problem, the precise size of the problem is uncertain. Total-solution proposals risk both “over-solving” the problem and conversely, solutions that are expected to create long-run solvency may turn out to be insufficient, as was the case with the changes made in 1977. Incremental reforms allow us to learn the precise impact of policy changes and fine-tune future changes.

What precisely should be on the table to get us toward a solution? Changes such as adjusting the hiatus in the rise in retirement age and moving toward longevity indexing of benefits would help. Another step would be to peel back benefits for those workers with the very highest lifetime incomes.

And, along with any change in Social Security, Congress must continue to strengthen ordinary retirement savings by simplifying and expanding retirement accounts and encouraging participation in retirement savings plans, through means such as expanded “auto-enrollment” policies in 401(k) plans and employer- provided IRAs (auto-IRAs). Retirement security — strengthening Social Security while also encouraging individuals to start saving sooner, to save more and to be adequately diversified in their retirement portfolio — is the comprehensive approach that will best assist future retirees.

Right now that old saw, “We should not let the perfect be the enemy of the good,” should be our guide, and we should accept that even small steps forward toward a reasonable restructuring of Social Security would be progress. Only then will lawmakers be free to sit down and hammer out a plan that moves the system toward sustainability. The alternative is to sit on the sidelines, wait down the clock and hope to complete a Hail Mary pass.

Former Rep. Bill Thomas (R-Calif.) was chairman of the Ways and Means Committee. Alex Brill served as senior adviser and chief economist to the committee. They are now a visiting fellow and research fellow, respectively, at the American Enterprise Institute and are consultants to Buchanan Ingersoll & Rooney PC.

Thomas and Brill know as much as anyone about how Social Security policy can and can't translate into Social Security law, and so their views need to be taken seriously. My question is whether incremental reform, though less painful to enact than comprehensive reform, also allows for fewer trade-offs and thus fewer avenues for compromise. Read more!