The Nation's campaign blog gives the latest on the 2008 Democratic platform position on Social Security: The truth, as honest financial analysts have always argued, is that Social Security is secure -- and will be for decades if Congress agrees to minor reforms, such as requiring wealthy Americans to pay their fair share. In a major victory for progressives -- and for real-world economics -- the draft Democratic Party platform acknowledges this reality. "We recognize that Social Security is not in crisis and we should do everything we can to strengthen this vital program, including asking those making over $250,000 to pay a bit more," reads the draft language. If that line survives the platform-writing processes final stages and becomes a major theme of the fall campaign, America may finally have a real and responsible debate about preserving Social Security. As written, I have no problem with the platform: the government can "ask" high earners to pay more Social Security taxes, and high earners can answer as they choose. In reality, though, the government isn't in the asking business: it tells people what to do, and if they don't do it the government makes them. Moreover, many of those making over $250,000 won't regard an extra 4 percent of their earnings as "a bit more," which is precisely why they can't be given a choice.
Friday, August 8, 2008
The real crisis is in grammar: asking vs. making
Thursday, August 7, 2008
New from SSA’s Actuaries
Social Security's Office of the Chief Actuary (OCACT if you're inside the agency; OACT if you're outside – don't ask me why…) has two new publications that may be worth a look. First is a number of illustrative reforms to Social Security, with their effects measured relative to the 2008 Social Security Trustees Report. As the 2008 Report showed a significantly lower deficit based on some big changes in immigration methodology, it's great that the actuaries re-scored these policy provisions. Click here to take a look. Second is an updated actuarial note on unfunded the obligation and transition cost for the OASDI program. This has played into some of our discussions of the so-called $17 trillion 'back transfer' to early participants in the program and is an interesting document for adding new information not contained in the Trustees Report. Also worth a look, here.
Upcoming event: How Bill Clinton and Newt Gingrich Almost Saved Social Security
This should be very good. Gillon's book looks very interesting, Marc Goldwein is an up-and-coming analyst, and Chuck Blahous and Ed Lorenzen are old (ok, not so old) pros. Register here: http://www.newamerica.net/events/2008/lessons_entitlement_reform Lessons in Entitlement Reform How Bill Clinton and Newt Gingrich Almost Saved Social Security On October 28th, 1997, House Speaker Newt Gingrich and President Bill Clinton held a secret meeting where they reached a groundbreaking deal to create a centrist political coalition to reform Social Security and Medicare. Although the Lewinsky scandal ultimately undermined their agreement, the efforts of these men, and others in Congress, might serve as a model for members of both parties interested in addressing the long-term shortfalls in the nation's entitlement programs. Start: 09/08/2008 - 12:15pm End: 09/08/2008 - 1:45pm New America Foundation 1630 Connecticut Ave, NW 7th Floor Washington, 20009 United States See map: Google Maps Participants Featured Speakers Moderator
Steven Gillon will discuss the details of how this secret agreement came to be, as first revealed in his new book, The Pact: Bill Clinton, Newt Gingrich, and the Rivalry That Defined a Generation. Gillon will be joined by Charles Blahous and Ed Lorenzen, who were involved in bipartisan reform efforts during Clinton's presidency, working on opposite sides of the aisle. The panelists will discuss what can be learned from the reform efforts of the 1990s, and address the question of whether, and in what political environment, entitlement reform is possible.
Resident Historian, The History Channel
Professor of History, University of Oklahoma
Author, The Pact
Deputy Director, White House National Economic Council
Author, Reforming Social Security: For Ourselves and Our Posterity
Senior Policy Advisor
Office of Congressman Steny Hoyer
Read more!
Policy Analyst
New America Foundation
Wednesday, August 6, 2008
IPI Advice for McCain
Tom Giovanetti, president of the Institute for Policy Innovation, posts with some political advice for Sen. McCain on how to handle Social Security reform questions: This "nothing is off the table" business is getting to me. It's a politician's way of saying "I have an open mind, and I'm a reasonable person." …Now, specifically to Social Security: When you say "nothing is off the table," what you are saying is that there is no way a voter can predict what you are going to do. What a ridiculous way to run for office--to tell voters that there's essentially no telling what you might do on Social Security. From a purely political standpoint Giovanatti may have a point. People like and respect hard promises. From the perspective of governing post-election, however, I'm not sure how much sense it makes to refuse to talk to people who disagree with you. I'm not keen on raising taxes myself, but it's hard to say a reasonable case can't be made for doing so. (E.g., a) people are living longer, which would increase the cost of any pension plan; b) Social Security provides the only CPI-adjusted, actuarially fair annuity on the market; should people want less of it?; c) Social Security will soon be the only defined benefit pension most Americans have; should we reduce it?) You don't have to be a raving lefty to believe that revenues should play some role in a solution. (If you think they should play the whole role, though, you might be a raving lefty…) What Giovanetti is essentially arguing isn't simply that McCain shouldn't support a tax increase, but that he shouldn't even talk to people who do. That's as unproductive as the Democratic stand in 2005 that they wouldn't even talk reform with anyone who supported personal accounts. They came out ok politically, but notice that nothing actually got accomplished. In our system of government compromise is inevitable; neither side can win an outright victory on Social Security reform. Given that delay only makes the problem larger – and, very likely, only increases the political strength of people who favor tax increases, as more baby boomers enter the rolls – I'm not sure that refusing to talk is a recipe for success. (As a note, I'm sure Gionavett's reply would be that they possess a plan, penned by Peter Ferrara, that is all things to all people – full benefits for everyone, no tax increases, no risk to the individual. If so, that would be great. In practice, though, I don't think the plan would be viable once the details were known. So we're all in the same boat.)
But, in fact, for people of integrity, there is always a whole list of things that are "off the table," and there's no reason why a conservative politician shouldn't be able to say that certain policy positions, such as raising taxes to fix Social Security, are also "off the table."
Let's learn from the mistakes of President Bush on Social Security. Personal accounts were polling very high when the President started talking about them. But then some fool made a major strategic miscalculation and persuaded President Bush to stop talking about personal accounts and to start telling people that "nothing was off the table."
It was right around the time that Bush started saying "nothing is off the table" that public support for Social Security reform collapsed. And why not? What he was telling people was that not only did he not have a clue how to solve the problem, but that there was no telling what he would end up endorsing. The deal might include benefit cuts. It might include tax increases. "Who knows--nothing is off the table."
Tuesday, August 5, 2008
Academy of Actuaries: Fix Social Security now (and do it by raising the retirement age)
The Academy of Actuaries yesterday released a position paper on Social Security reform. First, they say, whatever is done should be done as soon as possible: Public policymakers sometimes wait until the last minute to take necessary action. But in the case of Social Security, waiting will limit the available options — and tend to force solutions that emphasize sudden changes that are more likely to involve tax increases. The last two times Congress made significant changes to Social Security, in 1977 and 1983, the legislation included near-term and long-term provisions involving both tax increases and reductions in the growth of benefits. Regardless of the kinds of changes ultimately enacted into law, the sooner policymakers act, the more options they will have. Tax increases could be phased in more gradually, and reductions in benefit growth could be spread across a much larger population of beneficiaries, making individual reductions relatively smaller and less painful. Enacting legislation sooner would also allow individuals sufficient time to modify their own financial planning —adjusting to changes in Social Security. The American Academy of Actuaries believes that delay will only make the changes ultimately needed to restore Social Security's financial soundness less attractive, more painful and more precipitous. Timely action can make the solutions more acceptable to all concerned. It always struck me a strange that a good number of people opposed reforming the system on the logic that it wasn't yet a "crisis," as if waiting until it is a crisis would make for better policy. Apparently the actuaries see things the same way. Second, the Academy argues that increasing the normal retirement age could play a useful role in a reform plan, although other options would likely be added to it: The American Academy of Actuaries believes that a financially sound Social Security system must accommodate future increases in longevity. The most direct way to do that would be to extend the currently scheduled increases in Social Security's retirement age. The time to enact this change is now. Read the whole paper here. Update: Marie Cocco, a generally lefty columnist (at least when it comes to Social Security) apparently agrees with the actuaries, calling a retirement age increase a "fair, long-term solution." Consensus is in the air!
Monday, August 4, 2008
Trailer for IOUSA
So this weekend I found myself at the theater watching the new Batman film – a bit dark for my tastes; I prefer my non-stop action and senseless violence to be more optimistic and life-affirming – but before the movie started we got to see the trailer for the new documentary IOUSA, which focuses on the work of the Concord Coalition and former GAO head David Walker in promoting long-term entitlement reform. The Peter G. Peterson Foundation, which Walker now heads, is promoting the film which will open across the country later in August. Here's the trailer: Several weeks ago my wife and I were lucky enough to attend a pre-screening here in Washington, which we enjoyed very much. It doesn't have as many explosions as Batman, but it's twice as scary.
Sunday, August 3, 2008
Responding to Angry Bear: Where does the $17 trillion deficit come from?
Over at Angry Bear, Bruce Webb has a post on the so-called $17 trillion "legacy debt" inherited from early participants in the program. I've argued here, as has Jim Glass in the comments, that the future "infinite horizon" shortfall is basically caused by "over-generosity" to early cohorts of Social Security participants. It's a bit hard to summarize Bruce's argument, and harder for me to respond in the comments section at Angry Bear, so here I'll try to lay out what the legacy debt means and how it affects the system's financing going forward. Ordinarily, we think about Social Security's finances in cross-section – e.g., how do all taxes paid by all workers in a given year compare to all benefits owed to all retirees or disabled in that year? That's obviously very relevant. But another way of measuring things is by birth cohort: how did all the taxes paid by individuals born in a given year compare to all the benefits they have or will receive? This approach, best known as "generational accounting," was first proposed by Gokhale, Auerbach and Kotlikoff (see this backgrounder by the Tax Policy Center) and has become a standard way of analyzing how the program treats individuals in different birth cohorts. It's through a generational accounting approach that we can see where the long-term shortfall comes from. So for each birth cohort taking part in Social Security, we can calculate (or, for future beneficiaries, project) how their total taxes will compare to their total benefits. If we discount all these values to 2008, add them up and then subtract the current value of the Social Security trust fund, we get the total infinite horizon shortfall for the program. Currently, that amount is projected at $13.6 trillion in present value. Now, how does the claim come about that these future shortfalls are due to over-generosity to past generations? How can this make sense – the system is still in positive cash flow, and it still has a significant trust fund balance? One way to illustrate is purely mechanically:Based on data from Dean Leimer, an economist at SSA who's probably the leading expert on these issues, the 1885 birth cohort – who retired at 65 in 1950 – received an average rate of return on their taxes of around 25% above inflation. This translates to their receiving roughly 15 times more in benefits than they paid in taxes. As late as the mid-1980s, a typical retiree received returns equaling those paid on stocks, but with none of the risks. (If you want an answer why Social Security was so popular for so long, there it is.) Now think about future retirees: even if we could pay full scheduled benefits – that is, even if the Low Cost projections came true and we had no solvency problem – future retirees will receive less in benefits than they paid in taxes. I can sum up the argument in this way: Now let's give a little more detail and tackle some questions. Some will argue that since Social Security is still solvent today, and has a large trust fund balance, that it's not possible that we gave large net transfers to early generations. This is confused. A fully funded pension program – on in which each cohort saves while working, earns interest on its savings, and draws them down to pay their retirement benefits – will always have a running trust fund balance. But it would be a lot larger than the one we currently have. Look at it this way: if early cohort hadn't been paid returns so far above the trust fund bond rate, what would have happened to that extra money? It would have gone into the trust fund and earned interest. How much larger would the trust fund balance be today if those early cohorts hadn't gotten such larger returns? Around $17 trillion larger. That extra balance today would be enough to pay full benefits forever (since future cohorts will receive returns below the trust fund bond rate even if we paid full scheduled benefits, they're effectively adding to the trust fund balance in any case). Bruce Webb also raised the question of the tables in the Trustees Report. These break down Social Security's unfunded obligations between past/present participants and future participants. This isn't the greatest distinction (and I'll see if I can get a better break-down from the actuaries) because it includes in one group everyone from the first retiree in 1940 to the youngest worker participating in the system today, with the second group being people who will start working and paying taxes in the future. The better breakdown would be between past and current beneficiaries (i.e., people who have already died plus those already collecting benefits) versus future beneficiaries. As we saw in the chart, until relatively recently, retirees tended to get returns above the trust fund bond rate and thus were net beneficiaries of the system (benefits > taxes); going forward, most retirees will tend to be net taxpayers (taxes > benefits). Now, as Bruce warned in his Angry Bear post, some will suspect this formulation of being some sort of right wing trick. Hardly. The first people to stress the importance of the legacy debt for policy questions were actually Democrats, Peter Diamond and Peter Orszag. Here's how they put it: The benefits paid to almost all current and past cohorts of beneficiaries exceeded what could have been financed with the revenue they contributed, including interest. This history imposes a "legacy debt" on the Social Security system. That is, if earlier cohorts had received only the benefits that could be financed by their contributions plus interest, the trust fund's assets would be much greater today. If those expanded assets existed, they would be earning interest that could contribute to benefits. I believe this is an important concept for thinking about how to formulate Social Security policy for the future, and I'll be working on it more. But hopefully this at least starts to explain where the idea of the "back transfer" comes from. I'm sure this will provoke some push back, and I'm also sure I haven't addressed everything, so happy to answer objections either here or at Angry Bear. 
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