Tuesday, July 15, 2008

Paul Ryan and David Walker on Entitlement Reform

Here's a new clip from CNBC featuring Rep. Paul Ryan talking about his proposals for Social Security and Medicare reform, and David Walker of the Peter G. Peterson Foundation talking broader entitlement issues.

More info on Ryan's plan is available at www.americanroadmap.org while more information on the Peterson Foundation is available here.


Bruce Webb said...

Well I read through the Social Security stuff and it was another case of bait and switch. Ryan promises a minimum return equal to the one recipients would get from the "current system" but then turns around and redefines "current system" as "current system after we get done setting up a three tier change in the way we compute initial benefits and an indexing of retirement age to increasing mortality".

Why do I suspect that would all score out higher than 1.7% of payroll equivalent?

Plus the Health Savings Account plan seems to misunderstand the difference between 'average' and 'typical' in proposing that people whose medical coverage fell under the average would get the difference between their premium and the cost of care fully refunded. How would the insurance company possibly fund care for people costing more than the average?

And some of the calls for budget controls was pretty weasally. It calls for caps and mandatory cuts but only for "fast-growing programs" and then suspends this in times of "Low Growth or War". I would bet big money that "fast-growing" will be defined in a way that excludes Homeland Security and Defense programs on the basis that given changing threat assessments such programs are not in fact growing fast enough.

Anyway I was not impressed. It is mostly just a standard right economic laundry list promising free lunch for all.

Paul Lawin said...


You didn't make any comments on this proposal. I'll give you mine anyway. I found the SS Actuaries' "scoring" at: www.ssa.gov/OACT/solvency/index.html

The provisions with larger financial impacts make these changes in actuarial balance:
+1.13 Index PIA to prices
+0.34 Index NRA to longevity
+1.20 Tax group health premiums
+1.30 Transfer from general fund
-0.45 Net loss on PA carve-out less benefit reduction
-0.47 Put option on PA benefit

The first two benefit reductions nearly cover the 1.70 long term actuarial deficit. They more than cover the annual shortfall at the end of the 75 year projection (4.66 vs. 4.20).

So I characterize this as another two part program.
Part A (the first two benefit reductions) balances the current SS program on a paygo basis.
Part B uses additional taxes and borrowing to fund the Personal Accounts.
It appears that A and B are totally seperable. We could do neither, either, or both.

Now, for an opinion.
Part A looks like a reasonable proposal for achieving long term balance in the paygo format. It's one of the proposals that make sense to me.

Part B is an unnecessary complication.
It includes a carve-out that has the gov't borrowing money in the bond market so individuals can invest in stocks. From a macro perspective, there is no gain in that game.
It also includes higher taxes to fund an add-on mandatory saving program. I don't see any benefits in that. People who don't want to save will offset with borrowing, others would have saved anyway.

Regarding Part B, I could use stronger words than "unnecessary complication", but I think I'll quit here.

Andrew G. Biggs said...


Good points, and your breakdown of the components isn't an unreasonable one. Ryan's plan has two goals: to make the system sustainably solvent without increasing payroll taxes, and to convert Social Security at least in part from a DB to a DC structure. Part A mostly accomplishes the former, Part B the latter.

One could easily argue that Part B is unncessary, but you could also argue that giving low earners the opportunity to diversify into equities makes sense, and also that ownership of DC accounts has non-financial benefits that differ from an income stream from the government. But that's all debatable.

One other point: you note that there's a cost to what's effectively a put option on the personal accounts. Note that SSA doesn't use risk neutral pricing for projecting the cost of these options, so the true market cost is 2-3 times higher. I wrote a paper on this illustrating with an earlier version of the Ryan plan, available here: http://www.nber.org/books/brow08-1/

Jim Glass said...

I wrote a paper on this illustrating with an earlier version of the Ryan plan, available here: http://www.nber.org/books/brow08-1/

That was interesting too, as were a number of the other contributions there.

Thanks again -- and keep the links to these good things coming!

Bruce Webb said...

Well thank you Paul.

In the end we have workers taking a hit of 1.47% in be edit cuts plus whatever share of the 2.5% tax increase false on wage workers as opposed to an immediate 1.7% payroll gap or 3.54% at projected TF depletion.

It still seems to me that a couple of generations of people currently in the work force are being asked to sacrifice the utility of their payroll dollar simply to achieve essentially ideological goals of having a PRA component along with 'sustainable solvency'.
Plus on my brief reading it seemed that Ryan was using CBO assumptions which show years of improvement over SSA projections. I don't know that scores in payroll terms but off the top of my head would make it seem that 1.7% is not the right comparative number.

Plus while I have to assume that OACT scored returns on PRAs under Intermediate Cost economic assumptions this point never seems to be made explicitly. Because as most of us know that 1.7% gap is pretty sensitive to initial assumptions.

Andrew G. Biggs said...


I'm not sure why you like to compare the costs of a 75-year fix to the costs of a permanent fix and then complain that the permanent fix costs too much. Well, it costs what it costs. I could devise a very nice-looking reform plan if I only focused on 25 year solvency rather than 75 years, but most people would regard that as a misleading comparison. You're doing pretty much the same thing here.


Paul said...


Interesting paper.

I'm somewhat aware of a similar progression of analysis in the private variable annuity market. VAs frequently have side guarantees provided by the insurer. I believe that actuaries originally priced them on a "mean" basis, but over time realized that the market value was the correct cost.