Monday, November 8, 2010

Why are liberals so down on Social Security reform?

Writing online for the New York Times, former Obama administration budget director Peter Orszag suggests that better prospects for Social Security reform might be the "silver lining" around an otherwise bleak election outcome for Democrats. The reason, Orszag points out, is well known to anyone on the right who's worked on Social Security reform: most liberals really don't have much interest in fixing the program. If pushed they'd favor raising taxes, particularly on high earners, but in general Social Security reform just isn't high on their policy agenda.

Orszag is legitimately puzzled by this:

The left, though, seems adamantly opposed to restoring actuarial balance to Social Security now. I have trouble understanding this reluctance for several reasons: the key issue progressives had been concerned about—individual accounts within Social Security—has been definitively won in their favor (for now); they have a president from their party in office, which will not always be the case; acting now would allow changes to take effect more gradually, cushioning the blow; and establishing some credibility on out-year fiscal problems by enacting Social Security reform could open up (admittedly limited) running room to pass necessary additional stimulus legislation in the short run.

This unwillingness to act manifests itself in claims that Social Security's actuaries (and the Congressional Budget Office) are overly pessimistic—or worse, deliberately underestimating the system's financial health; that benefit cuts from insolvency wouldn't be so bad, even if they would be far larger than the cuts involved with a gradual restoration of the plan to financial health; and so on. Most of these arguments don't hold much water and are transparent attempts to make the issue go away.

But why? That's the question that puzzles Orszag and I admit the answer isn't clear. But here are some possibilities:

  1. The natural desire to procrastinate: liberals are human, too (really!) and, like everyone else, often put off difficult tasks in favor of ones that capture their imagination, such as healthcare reform. The idea of fixing the entitlement you have before starting a new one often goes against human nature, at least on the left.
  2. Reform won't be pretty: Most liberals would prefer to fix Social Security by eliminating the $107,000 payroll tax ceiling, which would apply the 12.4 percent tax to all earned income. But doing so would tack an additional 10 points onto marginal tax rates. Combined with increases in federal income tax rates and state taxes, the top marginal tax rate would approach 60 percent. That's unlikely to pass, meaning that liberals would have to start considering things they really don't want to think about: benefit cuts, raising the retirement age, and raising taxes on lower earners.
  3. Time is on their side: If we knew the share of the Social Security deficit that must be filled with higher taxes, it would make sense to apply those tax increases immediately. Spreading a tax increase (or benefit cut) over as many people as possible lowers the necessary increase on each person. But delaying reform puts more people into the system, after which point their benefits are effectively sacrosanct, and tilts the political calculus toward tax increases and away from benefit cuts. It's like the conservative "starve the beast" strategy in reverse.

Orszag closes on the following note:

Given the left's strident opposition to any serious discussion of Social Security reform, the issue will provide a key early indicator of the administration's response to the election results.

He's certainly right, but, having heard some of the administration's pre-election rhetoric on Social Security, I'm not confident they'll come down on the right side.

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