Peter Orszag, Social Security Benefit Cutter? Not really.

A short article in The Progressive caught my eye through its headline "Obama's OMB Head Would Cut Social Security," which refers to the CBO director Peter Orszag who will soon take up a post in the Obama administration. The article reads:

“On Tuesday, Obama picked Peter Orszag to direct the Office of Management and Budget (OMB). Orszag believes that Social Security benefits should be cut back to help balance the Social Security Trust Fund over the next 75 years.”

This is potentially interesting, in that Orszag's Social Security reform proposal – developed with MIT Prof. Peter Diamond – took what they called a "balanced approach" between tax increases and benefit reductions. This would seemingly put Orszag at odds with President-elect Obama, whose idea of a balanced approach is apparently 100 percent tax increases, zero percent benefit reductions or increases in the retirement age. (Think I'm joking? I'm not.)

This says something about the popular left, where even being open to some benefit reductions for high earners is considered heresy. In any case, though, there's a lot less to this than meets the eye. The reason is that the Diamond-Orszag proposal was actually much less balanced regarding tax increases and benefit cuts than you'd think.

The following table is derived from the SSA actuaries analysis of the Diamond-Orszag proposal, with some additional cost breakdown by me. It divides the effects on the program's actuarial balance of the different components of the plan. In total, the plan improved the system's 75-year actuarial balance by 2.46 percent of payroll, which is equal to 128 percent of the total deficit. The Diamond-Orszag plan seemingly "overshoots" but in fact this is because, like many other plans, it aims to be "sustainably solvent" beyond 75 years.

Diamond-Orszag Provision	Effect on actuarial balance	Type	Percent of 75-year deficit
Legacy tax above cap	0.550	Tax increase	29%
Legacy benefit reduction	0.323	Benefit reduction	17%
Legacy tax rate increase	0.323	Tax increase	17%
Legacy tax rate increase above cap	0.323	Tax increase	17%
Benefit reduction for longevity	0.297	Benefit reduction	15%
Rate increase for longevity	0.253	Tax increase	13%
Raise taxable maximum	0.250	Tax increase	13%
Interactions between provisions	0.200	N/A	10%
Add state/local workers	0.190	Tax increase	10%
Reduce top bend point factor	0.180	Benefit reduction	9%
Inflation adjustment near retirement	0.000	Neutral	0%
Widows benefit enhancement	-0.080	Benefit increase	-4%
Low earner enhancement	-0.140	Benefit increase	-7%
Disabled benefit provisions	-0.210	Benefit increase	-11%
Total	2.460		128%

I've categorized each provision as either a tax increase or a benefit reduction. One provision is neutral with regard to cost, while interactions between different provisions improve the actuarial balance by around 0.2 percent of payroll. Since interactions can't easily be attributed to either tax increases or benefit cuts, I've ignored them here.

Around 84 percent of the Diamond-Orszag plan's 2.26 percent attributable improvement in the actuarial balance can be ascribed to tax increases and 16 percent to net benefit reductions. In other words, "balanced" doesn't imply 50-50, or really anything even close to that. The tax increases by themselves are almost enough to fix the 75-year shortfall. While certain people get benefit cuts, there are also a lot of benefit increases in the plan as well.

Now, I'd guess that Orszag would be open to reasonable compromises that differ from his preferred approach, and I'd hope that President Obama would listen to the advice that Orszag gives to him. But the good news for readers of the Progressive and others of that inclination is that Peter isn't nearly as gung-ho on benefit cuts as the article would imply.