Upcoming AARP event: What Happened To My Social Security COLA?

What Happened To My Social Security COLA? Dealing with the Impact on Beneficiaries and Budgets During a Period Without COLAs

An AARP Solutions Forum

Monday, September 21, 2009
9:30 - 11:30 AM

Union Station Columbus Club
Washington, DC

Government officials are expected to announce in October that for the first time since 1975 — when Social Security benefits were indexed to inflation — there will be no cost-of-living adjustment (COLA) next year. Projected low inflation means that no COLAs are expected as well for 2011 and 2012. But, Medicare premiums — which are deducted from beneficiaries' Social Security checks — will continue to rise. Under current law, most beneficiaries will be protected from increases in the Medicare Part B premium but others will bear a disproportionate share of rising Medicare costs. Join us for an expert discussion of:

• How the Social Security COLA works and how the Medicare Part B premium is affected.
  
• How inflation is measured for the COLA, and how the measure might be improved.
  
• The impact of no COLA's on state budgets.
  
• Policy options to address the hardships Social Security beneficiaries may face.
  

Register Early — Seating is Limited!!

9:15

Continental Breakfast available

9:30

Panel Discussion / Audience Q and A Stephen C. Goss, Chief Actuary, Social Security Administration How the COLA is calculated and alternative measures of inflation Tricia Neuman, Vice President and Director of the Medicare Policy Project, Kaiser Family Foundation The Social Security COLA and the Medicare Part B Premium: issues and options Matt Salo, Director, Health and Human Services Committee, National Governors Association The Impact on State Budgets

Read more!

Hubbard (Not Mankiw!) on Social Security Accounts and the Public Option

Update: An unfortunate attribution error led to me treat Bush CEA chairs as interchangable. My apologies to all involved.

Glenn Hubbard writes in the New York Times, hitting a point that's occurred to me at various times during the health debate: the "public option" is to liberals today what Social Security personal accounts were to conservatives back in 2005, when President Bush promoted Social Security reform. From one point of view, neither the public option nor personal account are really all that important: many of the health reforms people wish to accomplish, such as broadening coverage or cutting waste, can be done without the public option; likewise, personal accounts don't reduce the need to raise taxes or cut benefits as part of Social Security reform.

At the same time, the public and personal accounts are the most important elements for many of the most energetic proponents of reform. The liberal base strongly desires the public option just as the conservative base desired personal accounts. Liberals have a philosophical belief that health care is a right that shouldn't be subject to markets and profit motives. Likewise, conservatives believe that individuals should have more control over their retirement savings, and government less. This "ownership society" viewpoint was a strong motivator for President Bush and others, including myself.

Glenn argues that for the good of reform, President Bush should have put aside personal accounts if doing so would have allowed him to accomplish reform of the rest of the Social Security program. Likewise, he says, Democrats should set aside the public option in order to accomplish health care reform. Despite my strong support for accounts over the years, I think Glenn is right on both counts.

Read more!

Wall Street Journal on the Social Security Diet COLA

The Wall Street Journal followed upon my "Diet COLA" post from several days back on the prospects for a Social Security Cost of Living Adjustment this year. The Journal's editors said:

AARP and other self-styled senior lobbies are raising a ruckus over the news that in 2010, for the first time in 35 years, Social Security recipients won't be getting a cost of living increase in their monthly checks. Members of Congress are calling for an investigation into the way COLAs are calculated. But the only real scandal here is the opposite of what Congress, the press and AARP are moaning about. The recent fall in prices has served up a windfall for seniors and a real $600 average increase in their Social Security payments this year.

The Journal piece is available here.

Read more!

Gokhale and Erickson on the COLA

The Cato Institute's Jagadeesh Gokhale and Angela Erickson discuss the Social Security COLA at National Review Online's "The Corner":

 

Social Security benefits are determined at the time when workers first apply for those benefits (they must be age 62 or older). Once benefits are determined, they are automatically increased every year to keep pace with the general increase in prices — this is known as the Cost of Living Adjustment (COLA), and it prevents the purchasing power of retirees' monthly benefit checks from declining over time due to inflation.

The COLA is determined each year by the Social Security Administration based on observed inflation over the previous year. For example, the COLA applicable to Social Security benefits payable in January 2009 was 5.8 percent, calculated on the basis of inflation observed between 2007 and 2008.

This year, however, incoming data suggest that inflation will average about negative 5 percent. Because nominal benefit amounts will remain unchanged, retirees will experience a 5 percent increase in the purchasing power of their Social Security checks. This is expected to happen next year, too, given forecasts of continued economic sluggishness. Assuming that next year's inflation rate also comes in at negative 5 percent, the cumulative two-year increase in the purchasing power of retirees' Social Security benefits will exceed 10 percent. A quick calculation shows that seniors' real purchasing power (or the amount of additional consumption) from their Social Security benefits will increase by about $1,280 over those two years.

On the other hand, with low consumer demand, high unemployment, and poor business profitability in most sectors, workers are unlikely to see any wage increases this year or next year. Indeed, with continuing layoffs, average wage growth is probably negative. Yet while workers are in a worse situation, we don't hear as much about their plight. Retiree lobbies are much more organized and employ clever rhetoric to make us feel guilty about retirees' difficulties in a down economy.

The complaint that seniors' living costs are rising because they spend so much more on out-of-pocket health-care costs and premiums also rings untrue. What's the story here? Medicare Parts A, B, and D require enrollees to pay premiums to finance a minor part of the government's total expenditure on those benefits. According to the Centers for Medicare and Medicaid Services (CMS), the Medicare Part A premium will increase by 4.3 percent — in line with increases in the costs of inpatient hospital, skilled nursing, and other services covered under Part A. However, 99 percent of seniors do not pay Medicare Part A premiums because they are "fully insured" under Social Security.

The premium for Medicare Part B was not increased in 2009 and probably won't increase next year despite positive health-care inflation in 2008. According to the Bureau of Labor Statistics, medical-care prices rose by 3.2 percent over the past 12 months. However, Part B's 2009 premium was not increased because the Supplementary Medicare Insurance (SMI) trust fund presently has a "more-than-adequate" reserve. This means that, for the same premium on Medicare Part B this year and next, seniors will receive medical benefits of larger value compared with non-medical goods and services.

According to the CMS, Medicare Part D premiums will increase only slightly (by $2, on average) in 2009. However, the CMS notifies beneficiaries about how they can avoid paying more by shifting to alternative plans that provide the same or similar coverage at more competitive rates. Thus, the average cost increase per Part D beneficiary should turn out to be much smaller.

A recent study by Dartmouth economist Alan Gustman and his colleagues suggests that those who are likely to be most dependent on Social Security — those whose total wealth is below the national median — have at most 7 percent of their wealth tied up in stocks. Considering that few seniors sell or borrow against their homes, the recent decline in home values is also unlikely to reduce their consumption.

In summary, the failure of Social Security to increase COLAs at a time when medical inflation is positive, stock and housing markets are down, and the economy remains sluggish is unlikely to worsen the economic condition of today's retirees.

— Jagadeesh Gokhale is a senior fellow and Angela Erickson a research assistant at the Cato Institute.

Read more!

Shouldn’t the government just have sent them cartons of cigarettes?

The Boston Herald's Laura Crimaldi reports that the SSA mistakenly sent prisoners $250 checks as part of the recent economic stimulus package. Prisoners are generally ineligible to receive Social Security benefits and now the government wants the money back.

Read more!

Chuck Blahous on the COLA controversy

Dear Angry Seniors,

This guy Chuck Blahous really thinks you shouldn't have a COLA this year. Just read him and you'll know. So stop emailing me and start emailing him. He's a really bad guy.

Yours in capitulation,

Andrew Biggs

Read more!

Yet more on the Social Security Diet COLA

Over at AEI's Enterprise Blog.

Read more!

How much would it cost to pay a Social Security COLA this year?

I've received a lot of what I'll euphemistically call 'feedback' with regards to my comments in Sunday's AP story on the Social Security COLA. I've explained my views a little more fully here – short story, the COLA is to adjust for inflation; no inflation means there should be no COLA – but wanted to follow up a little more given the enthusiasm with which my emailers have expressed their desires for a COLA in 2008.

Let's assume we did what my emailers and many on Capitol Hill want to do: pay an ad hoc COLA in 2010, despite the fact that levels of inflation don't under current law warrant a COLA. How much would it cost?

Well, let's assume we pay a 3 percent COLA. That's pretty typical of inflation levels historically. That would imply a 3 percent increase in all Social Security benefits. But here's the problem: unless you want to not pay a COLA in the future – which is exactly what people are so worked up over today – then all Social Security benefits will be 3 percent higher than they'd otherwise be, both for current retirees and future ones. If we try to re-coup the costs later by not paying a COLA in some future year we'll have exactly the same problem that we're now so intent on buying our way out of. And if we limit the benefit increase to current retirees and cut off future ones, then we'll create a "notch" that will generate political headaches for years to come.

So under reasonable expectations of the political process, a COLA fix today implies a permanent increase in Social Security costs. What would a 3 percent increase in costs do to Social Security's long-term deficit? Well, under the latest Social Security Trustees Report, 75-year Social Security revenues average 14.02 percent of taxable payroll while costs average 16.02 percent of payroll. The difference is what produces the 75-year actuarial deficit of 2 percent of payroll.

Now, if we increase costs by 3 percent, then the cost rate rises to 16.5 percent of payroll while income stays at 14.02 percent of payroll, producing a 75-year shortfall of 2.48 percent of payroll. That's a 24 percent increase in the long-term Social Security deficit, just to address the fact that people want a benefit increase to adjust for inflation even when there's been no inflation to adjust for. Go figure.

Read more!

Why seniors get upset when there isn’t a Social Security COLA

This Associated Press article gives a good idea of why seniors are so upset about the lack of a Cost of Living Adjustment (COLA) to Social Security benefits this year.

As I explained in a recent LA Times op-ed, in 2009, Social Security received a 5.8 percent COLA, the largest since the 1980s, due to large increases in energy prices in 2008. By the end of 2008, however, energy prices had dropped significantly, so much so that the entire increase in overall prices has been erased. The result is that the purchasing power of Social Security benefits is now significantly higher than it was in 2008: benefits rose, but overall prices didn't. Put another way, if prices decline but the Social Security COLA can't be negative, the real purchasing power of benefits increases. Likewise, if Medicare spending increase but those costs aren't reflected in higher Medicare premiums, that's like giving free money to Medicare beneficiaries. That's pretty much what we're experiencing now.

The problem is, most press reports – including this one – don't explain this very clearly. As a result, it plays as a story in which seniors are being hurt when that's really not the case.

I was quoted in the AP story saying,

"Seniors may perceive that they are being hurt because there is no COLA, but they are in fact not getting hurt," said Andrew G. Biggs, a resident scholar at the American Enterprise Institute, a Washington think tank. "Congress has to be able to tell people they are not getting everything they want."

Judging from the emails I've been receiving in response to this quote, the basic story regarding COLAs isn't being conveyed to the public.

Update: While the AP story correctly states that Social Security checks could fall because of rising Medicare Part D (drug benefit) premiums, it doesn't say by how much these premiums would rise. The answer, according to the Center for Medicare and Medicaid Services, is around $2. This covers about one quarter of the total increase in Part D costs, the rest of which are covered by the government. In addition, the rule against a negative COLA implies that Social Security benefits in 2009 were higher in real terms than in 2009 by around 5 percent. Since the average Social Security benefit is around $1,061, this implies an increase in purchasing power of around 53 dollars. On top of this, most retirees will receive increased Medicare Part B benefits without having to pay higher premiums, since premiums don't rise if there is no COLA.

Read more!

Poll: Americans favor Social Security opt-out, oppose tax increases

Ok, since I was a little critical of last week's NASI poll, let me be clear that the results of a new Rasmussen poll are more nuanced than my headline. But it does show how hard it is to really get on top of public opinion – polls taken at the same time can show very different results based on how questions are worded.

Here are the topline results from the new Rasmussen poll, followed by some comments:

1* How confident are you that the Social Security system will pay you all promised retirement benefits during your lifetime?

13% Very confident
25% Somewhat confident
36% Not very confident
24% Not at all confident
3% Not sure

2* One of President Obama's top economic advisors says the president will attempt to reform Social Security before the end of his first term. Should reforming Social Security be one of President Obama's top priorities?

36% Yes
41% No
23% Not sure

3*Should working Americans be allowed to opt out of Social Security and provide for their own retirement planning?

49% Yes
37% No
15% Not sure

4*Should Social Security taxes be increased to insure that all promised benefits are paid?

27% Yes
54% No
20% Not sure

5* Is Social Security a good deal for working Americans today?

47% Yes
38% No
15% Not sure

NOTE: Margin of Sampling Error, +/- 3 percentage points with a 95% level of confidence

Opinions aren't uniform across age categories, as Rasmussen's commentary on the polling shows. Older folks are more likely to say that Social Security is a good deal – probably in part because for them the system is more likely to be a good deal – and younger people are more likely to lack confidence in the program and to want to opt out.

More broadly, you can easily produce different results by framing the question differently, as the NASI poll shows. Some of the questions here are a bit simplistic and I suspect additional pro/con information would alter things. Nevertheless, it's interesting to see what you get when you simply ask people some questions.

Read more!

Ezra Klein: Democrats would do Social Security reform better. Why? Because I’m a Democrat.

The Washington Post's Ezra Klein takes a break from health care to talk about Social Security reform, spurred by a post by Brad DeLong in which DeLong argues for fixing Social Security by eliminating the cap on payroll taxes and raising the retirement age. Klein opposes raising the retirement age, citing the usual reasons of stress on workers, although not wrestling with the question of whether current workers face the same physical stresses as those in the past – who tended to work to the full retirement age or beyond, not retire at 62 or 63 as most workers today do. (See this post for some background.) In any case, nothing much new here.

But one thing struck me in Klein's post. Klein says:

There is an argument out there that if Social Security needs to be changed, it's better that a Democratic president makes the changes alongside a Democratic Congress. Any other configuration -- a Republican president dealing with a Democratic Congress, a Republican president working with a Republican Congress, or a Democratic president cutting a deal with a Republican Congress -- is likely to be substantially worse.

That's interesting, except that Klein doesn't actually make such an argument in the sense of marshalling facts or logic, but merely declares that Democrats would do it better than Republicans. Let me guess who that argument is "out there" with: Democrats.

I personally find it hard to believe that Democrats alone – or at least the Congressional Democratic leadership, which has shown precisely zero interest in fixing Social Security and just about the same level of willingness to deliver bad news to Democratic constituencies – would be willing to make the tough choices needed to fix the program. After all, remember Nancy Pelosi's reply in 2005 when asked when Democrats would put forward their own reform plan? "Never. Is never good enough for you?" For most Democrats, apparently it was good enough.

As of today, the sum total of Democratic reform proposals is President Obama's plan to levy a 2-4 percent tax on individuals earning over $250,000, which would fix around 15 percent of Social Security's long-term deficit. Republicans, by contrast, have put forward a number of Social Security reform plans that take on the tough choices, and many reformers have paid a political price for it. (Here's a list of reform plans on SSA's web site.)

Moreover, it seems pretty easy to construct a plausible counterargument to Klein, based simply on what we're seeing today regarding health reform, in which all the talk of restraining costs has fallen victim to traditional Democratic priorities of expanding coverage and increasing federal control over private sector health care. When faced with Social Security reform, Democrats consistently argued that Medicare was the real entitlements crisis. So what have they proposed to actually fix Medicare? Zip.

Read more!

PBGC Website Removes Critical Material

Over at AEI's Enterprise blog, I posted about an interesting discovery on the Pension Benefit Guarantee Corporation's website…

Read more!

Will health reform hurt Social Security?

Ed Morrissey thinks so and has some smart folks backing him up. Morrissey refers to a new paper by Syl Schieber and Steven Nyce, which argues that health legislation is likely to increase rather than reduce health costs, and could do so significantly. If so, these costs are in part borne by workers through reduced wages, and these reduced wages mean less tax revenue for Social Security. Morrissey says "The Nyce-Schieber study's scenario that uses the Medicare experience shows that the reform will increase SSA deficits by as much as 25 percent in the aggregate over the next 75 years, hastening insolvency or massive taxation and benefit cuts."

Morrissey's conclusion, backed by Chuck Blahous of the Hudson Institute, is that senior group AARP is being foolish in backing health legislation, which would both reduce funding for Medicare and hurt Social Security's financing.

Read more!

Comparing Medicare taxes and benefits

Over at AEI's Enterprise Blog I look at whether current retirees have "paid for" their Medicare benefits. Answer: not even close. Here's the original post, plus a follow-up.

Read more!

A cure for Social Security's ills?

A friend emails me this picture from the BBC.
As it happens, these are Turkish coffee shop owners protesting a new ban on indoor smoking.
Read more!

Yglesias, Krugman get it wrong on Social Security reform

Paul Krugman, playing off another post by Matt Yglesias, brings up an interesting, but I think ultimately wrong, argument against President Bush's plans for Social Security reform in 2005. He says:

If the Bush scheme goes through, the same thing will eventually happen to Social Security. As Mr. Furman points out, the Bush plan wouldn't just cut benefits. Workers would be encouraged to divert a large fraction of their payroll taxes into private accounts - but this would in effect amount to borrowing against their future benefits, which would be reduced accordingly.

As a result, Social Security as we know it would be phased out for the middle class. "For millions of workers," Mr. Furman writes, "the amount of the monthly Social Security check would be at or near zero."

The policy background is this: Bush proposed "progressive indexing," which would reduce benefits on a sliding scale for middle and upper earners. In addition, Bush proposed voluntary personal accounts; those choosing a personal account would then give up an additional portion of their traditional benefits. We called this second-stage reduction an "offset." Jason Furman's argument at the time was that the combination of reduced traditional benefits for everyone plus an additional reduction for account holders could mean that many middle and upper earners would "zero out" their traditional benefits. This, Jason argued, would weaken such individuals' support for Social Security, as they would continue to pay taxes but not receive any traditional benefits from the program.

A couple thoughts: First, Jason's calculations were done using the SSA actuaries' stylized workers, which presume that individuals work every year of their life. Doing so produces higher account contributions, and thereby larger reductions to traditional benefits. In a more realistic context, in which many people take years out of the workforce, far fewer people would zero out their traditional benefits. We checked into this at the time using the SSA's MINT microsimulation model, which uses a realistic sample of the population to simulate Social Security reform. If my notes from the time are correct, our simulation of President Bush's proposal resulted in around 2 percent of retirees zeroing out their benefits by 2050 and around 6 percent by 2061. This shows that zeroing out can happen, but it's a lot rarer than Krugman would have you believe.

Second, I'm not sure how big the sentiment effect would be on people who zeroed out their benefits. These folks would actually receive higher rates of return overall than had they not chosen to open an account – because the offset to their traditional benefits was only incompletely realized – so they were getting a decent deal under the circumstances.

And third, it's not as if plans favored by Krugman and the like would treat high earners any better than the Bush plan did. The only difference would be that instead of high earners receiving lower benefits, these folks would pay higher taxes – much higher taxes, most likely. To assume that the Bush plan would turn high earners against the program while, say, President Obama's proposals wouldn't, assumes either that high earners care about their benefits but not their taxes (I'd think the opposite is more likely to be true) or that they're simply very bad at math.

I recently ran some numbers on how high the tax rate on earnings above $250,000 would have to be to balance Social Security's finances while keeping Obama's promises to not cut benefits or raise the retirement age while raising taxes only on high earners. My guestimate is that the surtax would have to be around 25 percent, not the 2-4 percent President Obama has talked about. My challenge to Mr. Krugman: find some rich folks and ask them how they'd feel about this.

Bonus point: Matt Yglesias says that Bush's plan

was a proposal to destroy Social Security, not a proposal to reduce its project deficit. And it certainly wasn't "any attempt to contain the cost of entitlements." It was a very specific and narrow set of proposals; the administration said they wouldn't consider any ideas that didn't involve privatizing Social Security. The Diamond-Orszag balanced approach to Social Security was an effort to contain the cost of entitlements. Bush didn't propose anything of the sort.

The first part of the quote is basically nonsense, but the latter regarding the Diamond-Orszag plans "balanced approach" caught my eye. As I showed in this post, the claim that Diamond-Orszag is balanced is just plain wrong. Around 84 percent of the plan's improvement to Social Security's finances comes through tax increases, with only 16 percent deriving from benefit cuts. How's that for balanced? The Greenspan commission's recommendations, by contrast, were much closer to 50-50, depending on whether you considered income taxes levied on retirement benefits as a tax increase or a benefit cut.

Moreover, even these benefit cuts don't actually reduce overall Social Security costs, Ygelsias's claims to the contrary. Again referring back to my notes from the time, Diamond-Orszag's total costs over 75-years were almost exactly the same as current law Social Security. (In present value terms, D-O's costs were around 0.2 percent higher). So Diamond-Orszag didn't really contain entitlement costs, it simply raised taxes to meet them. In health care terms, the cost curve was pretty much "unbent."

Read more!

What FDR’s experience passing Social Security could teach Barack Obama on health care

On Social Security's birthday, Nancy Altman writes in the Los Angeles Times that FDR's model for passing Social Security in 1935 is something Barack Obama should emulate today. While I don't agree with everything she says – and some of the concerns mounted at the time of Social Security's passage, such as that it would push aside private saving, have come true – it's a good look at a historic moment and how its lessons can be applied today.

I wrote on FDR's vision for Social Security – and how it clashes with some on the left today – here.

Read more!

New polling on Social Security reform

The National Academy of Social Insurance released a new poll on Social Security reform, conducted in conjunction with the Rockefeller Foundation. The main takeaway from the poll is that people place a lot of value on Social Security and they'd be willing to pay higher taxes in order to keep benefits flowing (although, as it turns out, they'd much rather have other people pay higher taxes.) While I have some criticisms, which I'll discuss below, overall this is well worth checking out.

I became involved with polling on Social Security while I was at the Cato Institute, as well as some focus group work since then, and came to the conclusion there are two general varieties: polls performed for public consumption, designed to shift public opinion through their reporting of, well, public opinion; and polls designed as tools for better understanding the strengths and weaknesses of your own positions. Cato conducted a number of polls that highlighted public support for personal accounts and these polls generated good press. As time went on, however, I became more interested in testing this position. So, for instance, we added questions asking people who did not support accounts why they felt as they did. I also found that a number of arguments that were attractive from a philosophical perspective – for instance, that personal accounts gave you personal ownership while the current system did not – weren't particularly effective with people who didn't already agree with us.*

In any case, I suspect that the NASI poll lies in the former rather than the latter category of polls. I don't find it hard to believe that many folks would rather pay higher taxes for Social Security than receive lower benefits, and I find it very easy to believe that they'd rather have other people pay higher taxes than receive lower benefits themselves. (For instance, even delayed payroll tax rate increases, which would affect everyone, are favored much less than current tax increases on high earners.) But I'm not sure that true public opinion is nearly as cut-and-dried as the NASI poll seems to show.

For instance, you might simply ask people, "Social Security faces a financial shortfall. To meet it, would you rather pay higher Social Security taxes or receive lower Social Security benefits." You could flesh that out, if desired, with pros and cons of each. While I can think of a number of reasons people might be willing to pay more – e.g., they don't trust financial markets, they expect to receive a good return on their current contributions – I can also think of reasons why ordinary people would prefer lower benefits coupled with increased personal saving: they want to build assets, they don't trust that higher taxes today would be saved to pay benefits tomorrow, or they simply don't want to depend on one source for most or all of their retirement income. I'm not sure that the NASI poll really gets at these kinds of choices – but these are the choices people will have to make as they consider Social Security reform.

A further thought: the NASI poll, and others I've seen, put a lot of emphasis on increasing tax revenues from high earners, such as through raising the payroll tax ceiling, imposing a surtax on high earners, or dedicating estate tax revenues to Social Security. This emphasis strikes me as slightly odd coming from NASI, given how alien it is to the ways in which social insurance has generally functioned here and abroad. The link between contributions and benefits was deliberate from the beginning of the program and has been portrayed as a source of Social Security's ongoing political support. While every program should be open to change, I wonder how well the longer-term effects of breaking the contribution-benefit link have been thought through by folks on the left. (I discussed some of these issues in this article.)

 

*The reason, for anyone interested, is that highlighting the lack of ownership rights under current law scared current beneficiaries, who became more concerned that their benefits might be cut under reform plans. The "ownership argument," which had a ton of appeal for philosophical libertarians, weakened support for accounts more for seniors than it strengthened support among younger individuals.

Read more!

AP: Social Security facing “mountain of debt”

Tom Raum writes for the Associated Press on financial troubles facing Social Security:

As Congress agonizes over health care, an even more daunting and dangerous challenge is bearing down: how to shore up Social Security to keep it from burying the nation ever deeper in debt.

What to do about mushrooming government payments as millions of baby boomers retire? How about a giant federal Ponzi scheme? That might work for a while.

But wait. That's pretty much the current system. Social Security takes contributions from today's workers and uses them to pay the old-age benefits that were promised to retirees. But there are serious concerns how long that can last.

President Barack Obama has said he'll tackle Social Security and related "entitlement" programs when the health care overhaul is resolved. But the anger and intensity of that debate could complicate his effort.

Failure on health care could make it harder, if not impossible, for Obama to successfully tackle overhauling Social Security, Medicare and Medicaid.

One thought occurred to me in reading the first line: Hey, isn't Medicare a bigger problem than Social Security? Indeed it is. But since the current health reform debate – which originated in rising costs of Medicare and Medicaid – will do next to nothing to restore those programs to solvency.

Click here to read the whole article.

Read more!

Larry Summers comments on Social Security reform, New York Times comments on Larry Summers

President Obama's chief economic advisor, National Economic Council director Larry Summers, spoke yesterday to the annual Retirement Research Consortium conference sponsored by the SSA and held in Washington. In his comments, the New York Times
reports, Summers touched on prospects for Social Security reform:

"Over the course of the president's term, the president will, I am confident, address Social Security," Mr. Summers said in a response to a question at a conference of the National Bureau of Economic Research.

Mr. Summers said the top priority in overhauling Social Security would be to make sure that people could rely on their benefits. President Bush tried and failed to overhaul Social Security, in part by letting people divert some of their payroll taxes into individual retirement accounts and by scaling back the growth in future benefits.

Mr. Summers seemed intent on signaling that Mr. Obama's idea of "reform" would be to strengthen the program rather than to partly privatize it.

While these remarks are welcome, I object a bit to the New York Times characterization of the Obama administration's likely approach to Social Security: "strengthen the program rather than … partly privatize it."

Strengthening the program is obviously in the eye of the beholder – one might say that reforms that buttressed the program's finances, targeted its resources better on people in need, added an element of funding to boost the system's pay-as-you-go financial base, and gave individuals the opportunity to diversify their retirement savings – would strengthen it. But obviously that's not what Times reported Edmund Andrews is thinking: he's thinking, rightly I'm sure, that Obama would focus on raising taxes to fix Social Security. But if you want to convey accurate, unbiased information to readers, why not just say that: "Mr. Obama's idea of 'reform' would be to raise taxes rather than partly privatize it." Raising taxes is what would actually happen; the Times should leave it to readers to decide whether doing so would be positive or negative.

Read more!

CBO releases new Social Security projections

The Congressional Budget Office yesterday released its projections for the future of Social Security. Like the annual Trustees Report, which in May showed a worsening in the program's financial outlook due to the recession and a projected increased in life expectancies, the CBO also shows the program's deficits growing larger. The long-term actuarial deficit is projected at 1.3 percent of taxable payroll, or 1.5 percent using (to my mind) more realistic assumptions regarding the growth of income taxes. (I discussed these baseline issues when last year's CBO report was released). Like the Trustees Report, CBO's projected shortfall grew by 18 percent from the 2008 through the 2009 projections.

Click here to read the full report and here to read a blog entry by CBO director Doug Elmendorf. CBO continues to do terrific work in this area, both on the technical end as well as presenting the material in an understandable way.

Read more!

Thoughts on the 2009 Healthcare Reform Town Halls, From a Veteran of the 2005 Social Security Reform Town Halls

Cross posted from AEI's Enterprise Blog:

As members of Congress return home to their districts for the August recess, they will conduct more "town hall meetings" with their constituents. And if recent town halls are anything to judge by, these could be raucous affairs. (Click here for video, via the Weekly Standard's blog, of a meeting featuring Sen. Arlen Specter and HHS Secretary Kathleen Sebelius.) Individuals opposed to the Obama administration's proposed health reforms are voicing their opinions, often very loudly.

Yet, while I think it's somewhere written that Americans have a right to petition their government—oh, here it is—Democrats and much of the press are treating these protests skeptically. I have some experience in these kinds of things, as in 2005 I took part in a number of town hall meetings with President Bush discussing Social Security reform. These events were generally fairly smooth, at least inside the meetings, since like the recent events President Obama has conducted, attendees were by invitation. Town halls conducted by members of Congress, by contrast, are generally open to the public—and the public at large is far less easily controlled.

An exchange Tuesday morning on Fox News Channel with liberal commentator Bill Press sums up the left's judgment on these healthcare town halls. Press condemned the protesters, saying that "Americans want serious discussion" regarding healthcare reform. Yet, under the administration's original timeline, under which legislation would already have been passed by Congress, all discussion on health reform would have ended by now. The administration's push to pass reform before August was clearly geared toward suppressing discussion, not encouraging it.

Press then went on to demand that those who protest the Democratic health legislation produce their own reform plans:

The people who are there to protest—what are they for? Are they for the status quo? There's no other plan on the table. The Republicans haven't put any other plan on the table, so they're just against anything, or for the status quo, which I think most Americans accept is unacceptable.

As it stands, there are a number of alternative approaches on the table, from the Wyden-Bennett bipartisan plan, to Rep. Paul Ryan's comprehensive entitlement reform proposal, to Sen. Jim DeMint's plan for allowing sales of insurance across state lines.

But just as importantly, in 2005 Republicans pushed Democrats to put their own Social Security reforms on the table so the public might make a choice, but Democrats almost universally refused to do so. They argued that until personal accounts were taken off the table, they would refuse to even begin negotiations on reform. Given that, is there any reason Republicans should feel compelled to put forward their own health plans until the "public option"—the equivalent of personal accounts in the healthcare fight—is taken off the table?

Finally, Daily Kos editor Greg Dworkin writes:

The idea that hired, organized disruptors are playing 'ordinary spontaneous citizen' when they are planted to disrupt and that the media isn't always covering them as such is rather horrifying, as is the amount of money being spent to defeat health reform.

Poor thing. During the Social Security reform debate, I recall seeing busloads of paid union activists unloading at town hall meetings and millions of dollars in ads run by unions and AARP opposing Social Security reform. If Mr. Dworkin was equally outraged at the time, I can find no evidence of it. The difference between then and now is that we on the reform end of the Social Security debate simply took it for granted that unions and seniors groups would organize against us. In the health debate, conservative opposition is being generated far closer to the grassroots level, yet is being treated as a conspiracy.

Read more!

New paper: “Should Social Security rely solely on the payroll tax?”

The Center for Retirement Research at Boston College has released a new paper by Alicia Munnell, "Should Social Security rely solely on the payroll tax?" Here's the summary, followed by some comments:

It's no secret that Social Security is facing a long-term financing shortfall.  This problem can be solved only by putting more money into the system and/or by cutting benefits.  There is no silver bullet.  So the following discussion is not to suggest that there is an easy way out, but rather to explore whether the entire financing of the Social Security system should rest on the payroll tax.  The payroll tax may be a perfectly reasonable way for current workers to pay for their benefits.  But is it the right tax to finance the costs left over from paying benefits far in excess of contributions to early generations?  

This brief explores the question of the appropriate tax, or combination of taxes, to finance Social Security.  Since the need for more revenues gives the question increased currency, the first section briefly describes Social Security's financial outlook.  The second section then describes the payroll tax.  The third section explores whether the whole cost of the Social Security system – the contributions necessary to generate current benefits and the contributions required to make up for giving early participants benefits far in excess of their contributions – should be financed in the same way.  The fourth section concludes that perhaps a portion of Social Security financing could be transferred from the payroll tax to the income tax.  It would mean higher income taxes, but the burden of the "legacy debt" would be borne more broadly.  

My thoughts: Alicia rightly differentiates between the future costs of paying benefits and the "legacy costs" leftover from the fact that Social Security paid most early participants significantly more in benefits than those participants paid in taxes. (Here's a chart, generated from SSA research by Dean Leimer, showing rates of return by birth cohort. When the rate of return is above the trust fund bond rate, then from Social Security's pleasant of view that person or birth cohort is a money-loser.)

I also agree that there are merits to financing these legacy costs separately from the rest of Social Security. This would, in effect, create two forms of Social Security taxes: the "legacy tax," upon which no benefits would be paid, and the "Social Security contribution," which would be repaid in full through future benefits, including interest.

Where I'm not sure I agree with Alicia is on her argument that these legacy costs should be financed according to the "ability to pay," which she interprets as meaning through the income tax system. This would involve increasing income taxes by around 15 percent, depending on the period over which we wished to repay the legacy debt.

But from a point of equity, the legacy costs of overgenerous benefits were generated according the Social Security tax and benefit schedule and it's not clear to me that simply levying a payroll tax to finance the legacy costs is particularly unjust. Low and medium earners did and do benefit from Social Security's progressivity and there's no reason they shouldn't play a part in financing the costs of putting the system on a sustainable track. A payroll tax is based on the ability to pay – the higher your earnings the more you pay. Income taxes would primarily hit people earning over the Social Security tax/benefit cap, which seems a somewhat tenuous relationship to how the legacy costs were generated.

More broadly, I'm not sure the financing of the legacy debt should be decided based on fairness criteria rather than questions of efficiency. At the margin, the most efficient means of raising new revenue may well be a consumption tax such as a sales tax, VAT, carbon tax, and so on.

In any case, though, this paper presents interesting and useful new ideas and is worth checking out.

Read more!

What’s the least we can do to fix Social Security?

Over on AEI's American blog.

Read more!