Wednesday, August 6, 2008

IPI Advice for McCain

Tom Giovanetti, president of the Institute for Policy Innovation, posts with some political advice for Sen. McCain on how to handle Social Security reform questions:

This "nothing is off the table" business is getting to me. It's a politician's way of saying "I have an open mind, and I'm a reasonable person."

But, in fact, for people of integrity, there is always a whole list of things that are "off the table," and there's no reason why a conservative politician shouldn't be able to say that certain policy positions, such as raising taxes to fix Social Security, are also "off the table."

…Now, specifically to Social Security: When you say "nothing is off the table," what you are saying is that there is no way a voter can predict what you are going to do. What a ridiculous way to run for office--to tell voters that there's essentially no telling what you might do on Social Security.

Let's learn from the mistakes of President Bush on Social Security. Personal accounts were polling very high when the President started talking about them. But then some fool made a major strategic miscalculation and persuaded President Bush to stop talking about personal accounts and to start telling people that "nothing was off the table."

It was right around the time that Bush started saying "nothing is off the table" that public support for Social Security reform collapsed. And why not? What he was telling people was that not only did he not have a clue how to solve the problem, but that there was no telling what he would end up endorsing. The deal might include benefit cuts. It might include tax increases. "Who knows--nothing is off the table."

From a purely political standpoint Giovanatti may have a point. People like and respect hard promises.

From the perspective of governing post-election, however, I'm not sure how much sense it makes to refuse to talk to people who disagree with you. I'm not keen on raising taxes myself, but it's hard to say a reasonable case can't be made for doing so. (E.g., a) people are living longer, which would increase the cost of any pension plan; b) Social Security provides the only CPI-adjusted, actuarially fair annuity on the market; should people want less of it?; c) Social Security will soon be the only defined benefit pension most Americans have; should we reduce it?) You don't have to be a raving lefty to believe that revenues should play some role in a solution. (If you think they should play the whole role, though, you might be a raving lefty…)

What Giovanetti is essentially arguing isn't simply that McCain shouldn't support a tax increase, but that he shouldn't even talk to people who do. That's as unproductive as the Democratic stand in 2005 that they wouldn't even talk reform with anyone who supported personal accounts. They came out ok politically, but notice that nothing actually got accomplished. In our system of government compromise is inevitable; neither side can win an outright victory on Social Security reform. Given that delay only makes the problem larger – and, very likely, only increases the political strength of people who favor tax increases, as more baby boomers enter the rolls – I'm not sure that refusing to talk is a recipe for success.

(As a note, I'm sure Gionavett's reply would be that they possess a plan, penned by Peter Ferrara, that is all things to all people – full benefits for everyone, no tax increases, no risk to the individual. If so, that would be great. In practice, though, I don't think the plan would be viable once the details were known. So we're all in the same boat.)


Bruce Webb said...

Giovanatti is to some extent rewriting political history here. In Nov 2004 I had already been following Social Security closely for seven years and I started my own SS blog that month in direct response to President Bush's 'proposal'. I put proposal in quotes because for the first few months there wasn't one, instead the President set out on a deliberate campaign to get everyone to agree that there was a crisis. The plan was familiar, first get everyone on board, then ram your plan through while blaming anyone who resisted of being in denial and opposing 'reform' that they had previously acknowledged was needed. (You can ask Max Cleland how this works, you grab a Homeland Security plan originally proposed by Democrats, use it to bust federal employee unions and then blame opponents of being un-American.) And that still seems to be the game plan today.

Bush was clearly signaling support for something close to the Posen Plan. The problem is that Posen really didn't deliver on 'Ownership society', not for lower income workers. Instead it required a fully annuitized pension with no rights of inheritance. And far from owning your extra returns Posen required a 'clawback'. It just wasn't a good deal for most workers.

The reason personal accounts were polling well is because the politicians (though not always the economists) pushing them were promising a free lunch in place of a bankrupt 'it won't be there for me' Social Security system. When Posen finally got put on the table its weaknesses became apparent, meanwhile the 'There is no Crisis' folk were able to get our message out and the effort to present personal accounts as a replacement (as opposed to a supplement) for Social Security collapsed under its own weight.

Gionavatti's argument essentially rests on the assumption that people would have coalesced around a specific plan. It is not like such plans didn't exist, it is just that their 'free lunch' ended up being kind of dry and tasteless. In each case some aspect of the transition cost made lunchers choke, whether that be progressive indexation, simply borrowing the dollars needing, or imposing an annuitization plan that ended up looking much like Social Security with an extra helping of risk.

If there actually exists a plan that works without a tax component and scores a better result than simply setting Social Security go on its present path then we need to get it on the table for discussion. But my suspicion is that there is not such a plan in existence. We know what an honest plan looks like, we have LMS for example. The authors could not make the plan work with a tax neutral path. Maybe there are people enough smarter than Liebman, MacGuineas, and Samwick that they can magically squeeze out a plan that does not rely on 2.5% in payroll equivalent of tax increases (as LMS does), but in this case we are all from Missouri: Show Me.

Let Gionavatti meet the 'Show Me' challenge and produce a plan that backfills the current gap without raising taxes. But until then he is complaining about something that was the result of careful political calculation: the Bush team decided that the only viable way of pushing a Social Security plan through was to sell the sizzle ('ownership society') prior to letting people see the steak. Given the numeric hand they were dealt that was actually a pretty sound decision. Complaining because it didn't work while meanwhile applying some sort of purity test on taxes is just Monday morning quarterbacking.

Bruce Webb said...

Andrew Biggs: "In practice, though, I don't think the plan would be viable once the details were known."

The Ferrara Plan

Peter Ferrara: "The future spending reductions raised by the Bipartisan Commission on Entitlement and Tax Reform and proposed in legislation by Sens. Bob Kerrey (D-Nebr.) and Alan Simpson (R-Wyo.) would bring future benefits in to balance with steady-state revenues.[24] They involve primarily delaying the retirement age to 70 and reducing the growth in benefits by indexing them to prices rather than wages during working years. The changes would have no effect on anyone already in retirement."

Bruce Webb: In my view any plan which starts its scoring AFTER implementation of price indexing is automatically suspect and certainly does not equate to "full benefits for everyone".

The office of the Chief Actuary of SSA tells us that left untouched Social Security will return 78% of the scheduled benefit in 2041. They equally tell us that an immediate payroll tax increase of 1.7% would return 100% of that benefit through the 75 year actuarial window. Like it or not that is the budget within which Giavanotti is working. Can he or anyone produce a better result at equivalent cost? If not what is the positive case to convince workers to sacrifice the future utility of those benefit dollars in favor of achieving goals like 'sustainable solvency'?

(Plus as always we have the question of whether you can really get a pre-tax gain of 9.3% (as Ferrara assumes) using the economic and demographic assumptions of Intermediate Cost. If not what is the assumed rate of growth used by the plan designer? And what happens if we rescore traditional Social Security under those new assumptions? These inconvenient questions are not going away, at some point each will need to be answered.)

Andrew G. Biggs said...


A quick note: Ferrara's current plan is very different from the one he wrote for Cato in the 90s. He now condemns people who agree with things like price indexing, raising the retirement age, etc. You can find Peter's more recent work at