Monday, June 2, 2008

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.


Derrick Max said...

Ground breaking -- raise the retirement age and cut benefits for those with longer life expectency and those that are wealthy. Gee, why hadnt I thought of that? Penalize the healthy and the wealthy -- I guess i would have applauded a bit if he had at least been honest enough to call his new program "welfare."

If the metric for success is just how it impacts deficits in the 75th year, one could play all kinds of games in the out years...and not make much of an impact in the 74 or 76th years.

I think you were too kind on your colleagues. I agree that one should consider incremental steps, and I even support moving traditional SS more towards a welfare model, but, I would have expected them to be more creative in what steps they propose and more careful about how they determine success.

Assuming welfare isnt the goal, shouldnt some kind of honest prefunding be one of the first incremental steps to reform? I agree that IRAs and 401ks are critical, and applaud his work in these areas...but, when Social Security and Medicare take alomst 1/5th of your paycheck, there isnt enough left to set aside in such tax advantaged accounts.

Why dont you go down the hall and see if you can get the Honorable Mr. Thomas to think just a bit harder...

Bruce Webb said...

What an odd response to a 2008 Report that showed an incremental improvement in payroll gap from 1.95% to 1.7% over the 75 year actuarial window with the former number down from 2.02% in 2006.

"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."

The Hail Mary metaphor is grossly inappropriate when the actual data shows that Social Security is grinding its way to the goal line. Certainly we were thrown for a small loss in 2005 and a bigger one in 2006, but we regained most of that yardage in 2007 and ripped out a huge gain in 2008. Now some would argue that the big gain in 2008 was the result of an obscure play from the back pages of the playbook, we won't be able to pull that Immigration play off in quite the same way. On the other hand it is relatively unlikely the other side will be able to blitz us again with that Assumed Interest move from 2006. Didn't see that one coming.

The argument here builds in the false premise of "We can't afford to wait". Bill Thomas certainly knows more than practically anyone in the country about the difficulty of moving this kind of legislation through Congress, but he seems to have not quite grasped the necessity of actually examining the data tables in time sequence. Because in point of fact we are achieving incremental improvements with that power play up the middle called Nothing.

Bruce Webb said...

Although unstated in the piece incremental reform equates to death for privatization. The actual combination of benefit cuts and/or tax increases needed to put the system into long term actuarial balance under intermediate cost assumptions is quite small. And once actuarial balance is achieved on paper much to all of 'crisis' evaporates leaving private accounts needing to be sold on a pure cost/benefit basis. Something I don't see as being numerically possible.

Privatization is symbiotic with crisis. I would personally accept a pure tax/benefit fix, particularly if it was phased in (as both sides admit would be a practical necessity, cutting benefits for current retirees being a political nightmare) simply because it takes crisis off the table. The economy will move where it does. Personally I believe that outcomes better than Intermediate Cost are likely, which would allow us to revisit the schedule of planned tax/benefit cuts, but in any event incremental change puts paid to certain sectors' 75 year dream of killing Social Security outright.

Which kind of puts me in the position of Brer Rabbit crying out "Don't throw me in that briar patch!" In this affair if privatizers blink I win.

Arne said...

And Bruce another advantage of 'fixing' SS now (which still depends on educating people about the numbers):
If you make the series of small adjustments contingent on performance and the performance is better than IC, then the adjustments become automatically delayed. If it comes somewhere between IC and LC, then the adjustments automatically become smaller (than IC).

Bruce Webb said...

Arne exactly right. I have outlined the beginnings of such a plan both at AB and my site called the 100/100 plan which would replace the current projection method with a more explicit targeting one with the ultimate goal of producing a system in equilibrium at 100% of scheduled benefit and a 100 Trust Fund ratio using exactly the kind of contingent series of adjustments you suggest.