Wednesday, November 26, 2008

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


Percent of 75-year deficit

Legacy tax above cap


Tax increase


Legacy benefit reduction


Benefit reduction


Legacy tax rate increase


Tax increase


Legacy tax rate increase above cap


Tax increase


Benefit reduction for longevity


Benefit reduction


Rate increase for longevity


Tax increase


Raise taxable maximum


Tax increase


Interactions between provisions




Add state/local workers


Tax increase


Reduce top bend point factor


Benefit reduction


Inflation adjustment near retirement




Widows benefit enhancement


Benefit increase


Low earner enhancement


Benefit increase


Disabled benefit provisions


Benefit increase





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.


shoffy22 said...

Cool analysis of the Diamond-Orszag proposal! I'd be interested to see more proposals analyzed this way. I wonder if this points to a possible merit of many reform proposals that were scored by the actuaries a few years ago.

Since the actuaries now project a 75-year gap of 1.70 percent of payroll while a few years ago it was closer to 2 percent of payroll, many earlier proposals could now be changed to reach bipartisan consenus and still achieve solvency.

Like the Diamond-Orszag proposal, for example, could be changed to not have the first provision, the legacy tax above the cap, and it would still be solving 1.91 percent of payroll, probably enough of an overshoot to ensure sustainable solvency as well. And with this change, the mix of tax increases to benefit cuts would move to about 78 v. 22 percent, a little bit closer to balancing the two.

Andrew G. Biggs said...

Good points, Shoffy. The decline in the defict from a little under 2% of payroll when Diamond and Orzag developed their plan to 1.7% today is sometimes treated as a problem, in that the urgency for reform may decline, but really it's an opportunity to craft solutions that have a better chance of actually passing.

I don't know how D-O or folks on that side of the issue would feel about getting rid of the surtax above the cap, in part because my gut is that they wanted it for distributional purposes as well as for the extra revenue. I don't think that distributional argument has a ton of weight, but clearly others disagree. Nevertheless, the smaller deficit makes life easier on the reform side.