Saturday, August 23, 2008

When is a cut not a cut?

The Economic Policy Institute released a short report on the latest CBO Social Security projections, highlighting (as does the CBO report) that even if Social Security were forced to cut benefits when the trust fund became insolvent that real benefit levels would be higher than those paid to today's retirees. (Hat tip to Ramesh at The Corner.)

"The fact that future retirees will receive higher benefits than current retirees, even if no changes are made to the program, is common knowledge among Social Security experts, but may come as a surprise to the average American, and even to many policy makers. This may be why the CBO, headed by respected economist Peter Orszag, decided to make that point in the first page of the new report."

This is one reason EPI argues that Social Security's shortfalls aren't a particularly big deal.

But if we rewind back to when reformers proposed price indexing initial benefits – a step that would restore long-term solvency while paying all future retirees higher benefits than today's – EPI wasn't nearly so keen. "Proposed Social Security price indexing would slash benefits," they said. In that document, EPI never compares benefits under price indexing to current benefit levels, but always to the much higher benefits that Social Security promises to pay.

In other words, if Social Security became insolvent but future retirees would still receive higher benefits than today's, that's proof that Social Security isn't really a big problem. But if someone actually proposes fixing solvency in a way that still pays future retirees more than today, well, that would "slash" benefits.

The bigger point is that there are two ways you can talk about "benefit cuts." One is whether future beneficiaries would receive less than today's. We can see that even in a worst case – Social Security goes insolvent – that these types of cuts are unlikely. The second type of "cut" is relative to scheduled benefits, or more broadly, cuts in replacement rates (initial benefits as a percent of pre-retirement earnings). In downplaying the Social Security funding shortfall EPI refers to the first kind of cut, but in attacking reforms like price indexing it refers to the second.

Update: Paul Krugman's gotten the talking points as well...

5 comments:

Bruce Webb said...

Andrew magnitudes manner. If the scheduled benefit is 160% in real terms than the current benefit, and if Social Security under current projections can pay out 78% of that for a 125% benefit, that doesn't mean we should jump on board price indexing that delivers say a 110% real benefit on the logic 'more is more'.

This isn't black or white, it is a perfect illustration of a sliding scale. I don't see that EPI is being at all dishonest here, not once you attach actual numbers.

John Thacker said...

OK, Bruce, but how about attaching other actual numbers. You just made some up there. Would you support a plan to slightly decrease indexing so that 2049 benefits would be 90% of currently promised for 144% of current benefits?

It seems to me that it's easier to slightly reduce the rate of growth now than to suddenly slash benefits by 22% in 2049, as both you and the EPI seem to regard as the better plan.

Jim Glass said...

The Economic Policy Institute released a short report on the latest CBO Social Security projections, highlighting (as does the CBO report) that even if Social Security were forced to cut benefits when the trust fund became insolvent that real benefit levels would be higher than those paid to today's retirees....

This is one reason EPI argues that Social Security's shortfalls aren't a particularly big deal.

Gee, why weren't these people saying such things in 1983?

Dollar benefits being paid then were a lot larger than 30 years earlier, and if the retirees then had been happy to take modest haircut -- not a buzz cut, just a nice trim -- most of the later funding and inter-generational equity problems could have been resolved right then.

But Congress then felt overwhelming pressure from those retirees to protect their benefits to the dollar, and did so.

Well, I'm sure the politics of the future will be entirely different... (with liberals like EPI being the first to stand up for benefit cuts).

Andrew G. Biggs said...

All I can say is that when the same dollar benefit level is simultaneously characterized as "higher benefits than current retirees" and as a "slash" -- not a reduction versus scheduled benefits, or a cut, but a "slash" -- then I suspect that definitions are being used situationally. I won't deny that folks on the right do the same thing, but this doesn't seem straight up to me.

Bruce Webb said...

Thacker I left some extensive replies to your comments at EV. I don't want to waste Andrew's time here. To answer your explicit question, the answer is 'maybe'. Because your question as formulated doesn't allow me to calculate benefits foregone prior to depletion in 2049. You have whole economic cohorts that would be dead losers (often literally) under price indexing who would be exchanging many years at 100% for some reduced benefit so as to get only 6% better result than CBO projections. If you would like to supply a model then please submit it to Rdan and AB and we can let it rip. Otherwise you are just talking theoreticals.

And BTW I didn't make up any of those numbers. I took the 160% number from Prof. Rosser from JMU and have used it many times here and on other sites without having it challenged. I will gladly recalibrate my equation to a different number. But it seems that the CBO is conceptually in the same ball park, adjusting benefits for real wages does work out as a better real retirement later on.

The 78% number comes right from the 2008 Social Security Trustees Report and is up from 75% in the 2007 Report. Doing nothing resulted in a 12% improvement in outlook for a net real benefit up from 120% to 125%.

Speaking of intergenerational equity why is it appropriate to start cutting benefits for workers approaching retirement when the system is actuarial sound through most of their projected retirement simply to avoid some sticker shock in 2041 or 2049? Particularly when the date of depletion has been retreating by more than a year per year on average since 1997? Gen Y has 30 or so years to prepare for this adjustment, an adjustment that is not much different than any worker faces when planning retirement. Presumedly the annual Social Security statement will be adjusted to show the potential reset years in advance, this will only come as a surprise to people who are not paying attention.

If you like feel free to drop by my next Angry Bear post tentatively scheduled for tomorrow where I explain that under current Trustees projections that 2027 is the right starting point for Social Security planning on both technical and economic grounds.
____________
Andrew: without knowing the numbers it is hard to evaluate whether a phase in benefits cuts starting in 2010 or so with an ultimate level of whatever represents a 'slash' when compared to a potential reset of 16% or 22% at some time in the indefinite future. It certainly would be a slash for me, I don't expect to be around in 2049. (But oddly not everything is about me). But the pure facts is that much of the privatizing/PRA folk have allowed the meme 'Social Security won't be there for me' in the sense 'checks stop' to circulate without challenge as part of their effort to sell crisis. I can't tell you how many times I have encountered middle aged couples who are simply convinced that they will not get any check, and certainly not understanding the result of adjusting initial benefits to real wages coupled with a potential income shortfall might mean a better deal than their own parents are getting even after a possible cut. That most or all of the privatization/PRA plans out there buffer current and near retirees from those cuts has not stopped some rather hysterical language in the MSM. Which is why the CBO emphasis on real benefits came as such a surprise, it just didn't fit into the Butler/Germanis narrative.