Sunday, July 13, 2008

Feulner: “A Social Security deluge?”

Ed Feulner, head of the Heritage Foundation, has an op-ed on Social Security reform in today's Washington Times. The highlights:

(1) First, it's time to start raising the retirement age. Social Security started in 1935, and at that time slightly more than half of workers lived to reach the retirement age of 65. These days, though, lifespans are much longer. Our government needs to encourage people to work longer or, at least, not tap their benefits at age 62. The best way to increase the retirement age would be to increase it over time (say two months per year until it reaches, say 68) and then index it for longevity after that.

(2) Lawmakers should ensure that Social Security and other entitlements only go to those who need help. Bill Gates, for example, recently stepped down from Microsoft. In 10 years, this multibillionaire can start collecting Social Security and Medicare. That's absurd. Reducing payments to wealthy seniors would leave more available for lower-income retirees.

(3) Finally, our government needs to shore up Social Security with personal retirement accounts. The concept is simple, and would work similarly to an individual retirement account (IRA) or 401(k). All workers would be able to invest a small percentage of their Social Security taxes in an account that they would own. The money would go into a few simple, low-cost investments that would grow over time, just as other retirement plans do. These accounts would not replace employer-sponsored retirement plans but increase the ability of Social Security to pay benefits to them.

No problem with number 1. Number 2 is more problematic; while Bill Gates doesn't care about his Social Security benefits, to make a real dent in the shortfall you have to cut benefits pretty significantly for the upper middle class on up. (If you didn't want to raise taxes at all, you'd effectively have to price index benefits for everyone, rich and poor, which implies an approximately 1 percent reduction in scheduled benefits per year.) Number 3 is fine by me, but – as with numbers 1 and 2 – he should explain why he wants personal accounts.


Jim Glass said...

"...while Bill Gates doesn't care about his Social Security benefits, to make a real dent in the shortfall you have to cut benefits pretty significantly for the upper middle class on up..."

Here's a crude estimate, based on the most obvious data, of how much of a benefit cut from the top would be needed to keep SS's cash flow covered by the payroll tax -- which, if one believes CBO's projetion of a >50% income tax hike needed by 2030 to keep entitlements running, with 16% of that for SS, I imagine would keep many people around then happy enough.

About 1.2% of GDP to service the trust fund (from the Trustees report) ... with 6.1 % of GDP being spent on SS overall. (from CBO, table 1) OK. Working my calculator, ah, 1.2/6.1, ... umm ... 19.7%.

The 6.1% seems stable for a long time after that, so if this was adopted as a fix it looks like it could be permanent.

The well-off generally have the highest benefits because of their higher earnings record, but I don't have at hand how benefits are distributed.

If it was a means-test straight cut, cold-turkey "richest x% out now!" how many from Bill down would have to lose benefits for a 19.7% expenditure saving? Maybe 12%, 15%?

I mention this type of means-test adopted abruptly-and-late because off of my view of history it seems politically entirely likely and credible. A "slow glide path" adjustment to cut benefits and/or raise taxes may have many advantages, but the politicians have done absolutely zip nada towards it since the need for it has been clearly seen, at least since 1994. And nobody's exactly rushing to embrace it now.

OTOH, when the need for a tax hike is finally forced to meet cash flow, the fur suddenly flies (see 1983).

If no more than say the richest 10% must have their benefits eliminated (with maybe another 10% having them reduced by some scale) -- voting-wise this looks like it could be a stable solution.

That is, the bottom 90% say "We don't want to have to pay a significant income tax increase (on top of the huge one for Medicare) to pay benefits to Bill Gates and the richest 10%!" While Bill Gates and the richest 10% say "We don't want to pay a significant income tax increase on all our business and investment income to protect our piddling SS benefits!"

Where's the dissent? It's not going to come from corporations that don't want to pay the income tax increase, or the young who don't want to, or all the groups from the Agriculture Dept on that get their money from general revenue and want that tax money for themselves.

If there was a futures market on "political fixes", I'd be placing a fun bet on this one right now. If that percentage of cuttees isn't too high.

Bruce Webb said...

Jim why not just assume that everyone gets a cut to 78% of a benefit that is scheduled to be 160% compared to the one similarly situated retirees get today?

The implied narrative that underlies 'crisis' assumes that the cutbacks in Social Security will be considered so dire that action will have to be taken to fill the gap. That narrative seems implausible to me but even if some need was felt to do so it would be more likely to come in the form of a cross the board payroll tax hike rather than what would be essentially a confiscatory means test. Per the Trustees the current payroll gap is 1.7%. If nothing is done that is projected to rise to 3.54% under Intermediate Cost assumptions. If we took that 3.54% of wages and instead proposed to pay for it out of all income, including business and investment income, then you get even a smaller increase in rates. To call that a "significant tax increase" is kind of overstating the case, like a lot.

For that matter I wasn't much impressed with the CBO analysis to start with. The notion that overall health care costs will simply be allowed to grab bigger and bigger shares of GDP via a straight line extrapolation may be a great way to scare the rubes but is not a particularly likely outcome. Instead recent history suggests that you instead would have more and more people simply priced out of the market via loss of insurance. And if society won't tolerate that to the degree necessary you can fully expect some stricter rationing and gatekeeping.

In any event means testing is simply a backdoor way of undercutting political support for Social Security. It seems to be the popular new talking point now that 'crisis' kind of lost its punch, but I don't think supporters of Social Security are going to be so stupid as to elevate Social Security into a form of class warfare and in so doing reduce it to a welfare plan subsidized by the top 10, 12 or 15%. That would be bad politics as well as bad policy.

Jim Glass said...

"... why not just assume that everyone gets a cut to 78% of a benefit that is scheduled to be 160% compared to the one similarly situated retirees get today?"

Of course, the argument that people in the future will be a lot richer than their predecessors and so happily accept any cost dropped on them can be applied to any point in history. Yet we all know it's never been true in the past...

Seniors today are whole lot richer than in the 1960s. If you were a politician and went to this year's AARP convention and announced: "The gov't has serious fiscal challenges, and you are its biggest payees, so we are cutting you 20% across the board -- but think how much richer you all are than seniors were in the 1960s!" ... would you be expecting a happy "A OK!" response, or be hoping you aren't allergic to tar and feathers.

For that matter seniors in the 1940s and '50s were a lot richer as a group than in the '00s and '10s. (Yes, even after the Depression.) So why'd they need Social Security at all?

In 1993 Bill Clinton put through a tax increase less than half the size of the one needed just for Social Security by 2030 (forget Medicare) according to CBO. It passed the House by one vote and Senate on a tie-breaker. Would it have been easier for him if he'd addressed America: "Think how much richer you all are compared to the 1950s, pony up and be happy!" Apparently he didn't think so.

... so why would voters' attitudes be so different in the future?

Jim Glass said...

Jim why not just assume that everyone gets a cut to 78% of a benefit that is scheduled to be 160% compared to the one similarly situated retirees get today?

An across-the-board benefit cut is highly regressive -- it hurts the poor relying on Social Security for their entire income vastly more than the rich who use their benefits to pay for sailing their yachts like the First Boomer, not to mention the likes of Bill Gates.

The entire avowed purpose of Social Security is to be progressive social insurance. A regressive benefit cut like this is about as far from progressive social insurance as one can get (short of reverse-means testing the poor out of benefits to let Bill get 100% of his).

Especially considering that in this scenario the gov't will have had the revenue collection process to fund full promised benefits in place for a good 30 years -- progressive income taxes paid disproportionately by the rich to service the trust fund -- it seems rather unlikely that the progressives of the future will endorse a tax cut on the rich / regressive benefit cut for the poor. (What would Paul Krugman say?)

It also fails to pass the voter self-interest test. Why would all the seniors in America vote to suddenly cut their own benefits 22% cold-turkey when they could keep their benefits with everything running just the same as during the prior 30 years?

Consider the Medicare trust fund, which nobody ever mentions for some reason. It will be exhausted long before the SS trust is. Will the Medicare benefits it pays for then be cut? How many people expect that?

This is a nice test of whether the intra-governmental trust fund bonds are "real debt" of the US, as so many claim, or are merely just tally markers used for an accounting purpose in social spending programs, as explained in the Analytical Perspectives and by the Treasury and other sources.

If the trust fund bonds are debt "just like bonds owned by the Chinese" then when all the Medicare trust bonds are paid off that debt to seniors will be marked "paid" and corresponding Medicare benefits will be cut with nobody objecting -- just like the Chinese and other T-bond holders get no more payments from the Treasury when their bonds are paid off, and nobody objects to that. The general revenue used to fund those Medicare bonds/benefits until then will afterward be applied to other uses, or eliminated via tax cuts.

Just like you are proposing to happen with SS, with the 22% benefit cut at the end of SS trust's life.

But if before then the politicians fix things so that all Medicare benefits will continue to be paid the day after the last bond is redeemed, just like the day before, using the same general revenue, then we'll all know that the bonds were never real debt, and that all Medicare spending is just social program spending, directed by social program politics.

If Medicare spending isn't cut when the Medicare trust bonds run out in 2019 or so, then I don't see any reason to believe SS spending will be cut when the SS trust fund bonds run out. And who today is proposing that Medicare benefits be cut in 2019?

Bruce Webb said...

Jim long answer tomorrow.

78% of 160% = 125%.

Look under current projections Social Security falls out of Short Term Acturial Balance in about 2027, a date that has been slipping. The notion that we need to do something NOW is not supported by the evidence.