The Bipartisan Policy Center invites you to Unprecedented Federal Debt: Putting Our Fiscal House in Order Hosted by Senator Pete Domenici, BPC Senior Fellow and Former Chairman of the U.S. Senate Budget Committee Luncheon Keynote Speaker: Congressman Steny Hoyer, U.S. House Majority Leader Keynote Address and Panel Discussion to be followed by Q&A Panelists: Wednesday, May 6, 2009, 9:00AM – 2:00PM St. Regis Hotel, Astor Ballroom, 923 16th Street NW Washington, D.C. RSVP to jonsurez@bipartisanpolicy.org or 202-637-1463
Thursday, April 30, 2009
Event: “Unprecedented Federal Debt: Putting Our Fiscal House in Order”
Obama Delves Into Social Security
Roll Call reports that President Obama raised Social Security reform at a townhall meeting in Missouri, where he reiterated his support for imposing new payroll taxes on workers earning above the maximum taxable wage, currently $106,800: President Barack Obama on Wednesday marked his 100th day in office at a townhall meeting in Arnold, Mo., where he said raising the payroll tax cap is the best way to help secure the future of Social Security. Obama, who spoke about the nation's retirement system in answer to a question from the audience, appeared to rule out accepting an increase in the retirement age, arguing that this would be a burden for workers. He added that "you could" cut benefits or "raise taxes," but then he said "the best solution" would be to increase the payroll tax cap. "For wealthier people, why don't we raise the cap?" he said. Obama indicated that he may have another of his White House summits — which have included experts, lawmakers, and stakeholders in various issues — on Social Security. But he noted that problems with Medicare are more urgent, using Medicare's financial shortfalls as a hook to promote his drive to overhaul health care. "We've got to have health reform this year, to drive down costs and make health care more affordable," he said. Obama's trip to Missouri, a presidential battleground state, shows that, after some foreign travel earlier this month, he is continuing his practice as president of scheduling events in "purple" states he will need for re-election. Obama last week held an event in Iowa, another important state on his electoral map. Bloomberg touches on Obama's comment's here.
Wednesday, April 29, 2009
New releases from SSA Office of the Actuary on rates of return, money’s worth, and immigration methodology
The following recurring notes based on the 2008 Social Security Trustees Report are now available on the Office of the Chief Actuary's internet site (http://www.ssa.gov/OACT/NOTES/actnote.html): In addition, a new non-recurring note (number 148) has been added. This note discusses the new projections of immigration for the 2008 Social Security Trustees Report.
CBO director’s blog: Projections of the Income and Spending of the Social Security Trust Funds
CBO director Doug Elmendorf has a nice explanation of where his group thinks Social Security finances are going, at least in the short term as the program recovers from the hit it has taken from the economic recession. Here's a clip: Over the 10-year period from 2009 through 2018, projected income and outlays have both declined significantly from our projections of a year ago—income is down by about $1.2 trillion (about 11 percent) and outlays are down by about $250 billion (about 3 percent) for that 10-year period (see Chart 1). Nearly all of the adjustments stem from changes in CBO's economic forecast: our projections for inflation, real GDP, and interest rates have all declined relative to those underlying our March 2008 baseline. Lower inflation affects both revenues and outlays through lower payroll taxes and smaller cost-of-living adjustments (COLAs). Similarly, lower real GDP would imply lower real wages—and therefore less revenue from payroll taxes and, over time, a lower initial benefit amount for new beneficiaries. Finally, because projected interest rates are lower, the trust funds are expected to earn less interest income. Outlays projected for the first few years are now higher than we estimated in 2008 because of the larger-than-expected COLA (5.8 percent) that took effect in January 2009. (For a discussion of CBO's projected COLA increases, see my recent blog. ) The decline in projected income and outlays has affected our projections of the trust funds' annual surpluses and balances (see Charts 2-4). Click here to read the whole blog post.
Wednesday, April 22, 2009
CBO director’s blog on effects of low inflation on Social Security benefits and financing
CBO director Doug Elmendorf has a new entry on the director's blog titled "Why CBO Projects No Social Security COLA for 2010 to 2012 Under Current Law." The background on projected inflation and COLAs is interesting and worth reading. But here's one point I hadn't thought of until he raised it: in any year in which there is no COLA there is also no adjustment in the Social Security maximum taxable wage, currently just under $107,000. Interestingly, the "tax max" isn't indexed for inflation, but for the generally higher rate of wage growth: The absence of COLAs will affect payments of Social Security taxes and the base for calculating benefits for new beneficiaries because it will affect the maximum amount of wages that are subject to Social Security, known as the taxable maximum. The Social Security Act specifies that the taxable maximum increases only in years in which a COLA occurs. Thus, under CBO's forecast, that maximum will be frozen until 2013. At that time, the contribution and benefit base will increases by the change in the national wage index since the last time a COLA was triggered. Following those current-law rules, CBO anticipates the base will hold steady at $106,800 for 2009 through 2012, and then jump to $118,200 in 2013, reflecting the cumulative change in the national wage index during the period of no COLAs. Inflation has only very small effects on system financing; a failure to adjust the tax max would have somewhat larger effects. For what it's worth, this aspect of the Social Security Act makes little sense. While I'm not particularly keen on raising the tax max, you want whatever rule is used for adjusting the cap to make policy sense. Adjusting the ceiling annually to maintain a constant percentage of total earnings subject to taxes makes sense to me; this would account not only for the growth of average wages but for changes in the distribution of earnings, such that if more earnings go toward the top then the cap would rise somewhat faster.
Chuck Blahous: Social Security myths are vanishing along with the surplus
Chuck Blahous, senior fellow at the Hudson Institute and the Bush administration's main man on Social Security reform, corrects some long-standing Social Security myths in the new issue of National Review. Well worth a read. 'When something is unsustainable," so goes the aphorism, "it tends to stop." Usually invoked about tangible phenomena, the old saw is equally true about unsustainable arguments. If a conception is unsustainable in the face of overwhelming evidence, it must die. Sometimes it dies with a whimper, sometimes with a bang. Mr. Blahous, a senior fellow at the Hudson Institute, formerly served as deputy director of the National Economic Council and executive director of the President's Social Security Commission. He is currently writing a book titled Social Security: The Unfinished Work.
In recent years a fashionable myth took hold on the left end of the American political spectrum: the myth of overly conservative Social Security projections. Social Security didn't really face a shortfall, it was said in these quarters. The supposed threats to the system amounted to a "manufactured crisis," based on faulty projections of the Social Security trustees, hyped by conservatives (and their enablers in the scorekeeping agencies) who wanted to destroy the treasured program.
The myth is exploding into pieces before our eyes, done in by evidence that can no longer be brushed aside. Yet such was its power that it continued to be invoked even as Social Security's projected near-term surpluses were disappearing. While some were renewing their efforts to deny the coming Social Security shortfall, the Congressional Budget Office was quietly providing updated projections for congressional staff. The new numbers showed that the FY2010 Social Security surplus would be almost wholly eliminated: a mere $3 billion, a pale shadow of the trustees' projection, last year, of $88 billion.
To the extent that things are turning out far worse than the trustees previously envisioned (to say nothing of the persistently more optimistic CBO, whose projections we will discuss later), this was primarily due to factors that no one could precisely have foreseen. Social Security this year faced the programmatic equivalent of a perfect storm: the recession depressed payroll-tax revenues at the same time that Baby Boomer benefit claims were surging, and the program was paying out its largest cost-of-living increase (5.8 percent) since 1982.
Even before the recent downturn, however, the myth was groundless and should never have gained traction. Those who bothered to look could see that there was never a plausible chance that the projected shortfall would vanish. The myth was sustained by various fallacies. Among them were:
Conflation of aggregate and per capita growth. The "National Jobs for All Coalition," in a typical example of this mistake, recently stated that the Social Security projections "assume that in years to come real GDP will grow much more slowly than it has over the past century or more, when it has averaged around 3.2 percent per year." The implication — indeed, often the overt statement — of this line of argument is that without this inexplicable projection of a growth slowdown, the problem would be much smaller.
But total growth depends on a number of factors, and some of those factors are changing. The Social Security projections were not arbitrarily assuming a decline in productivity growth per worker — they were taking into account a very realistic projection of a decline in the number of workers added to the labor force every year, as the Baby Boomers head into retirement. From 1963 to 1990, annual labor-force growth was never lower than 1.2 percent, and reached as high as 3.3 percent. Now, net labor-force growth is expected to drop to 0.5 percent by the end of the next decade and stay there.
If the workforce grows by less than one-third the rate it used to, we can quite reasonably expect the economy to grow more slowly as well. This demographic reality was glossed over by some, to create the misimpression of arbitrarily conservative future economic assumptions.
Overstatement of the relative impact of economic growth. In a closely related example, a recent MarketWatch column titled "Why Social Security Isn't Going Broke" stated: "The actuaries' own low cost projection assumes an average annual growth rate of 2.9 percent between now and 2085. . . . Guess what? Under the actuaries' low cost projection, the Social Security system never runs out of money!"
This rather makes it sound as though faster growth by itself will eradicate the problem, doesn't it? But this "low-cost" projection of the trustees isn't only about faster economic growth. Rather, it's a hypothetical illustration of what could happen if virtually every variable improbably breaks in the direction of a smaller Social Security deficit. The "low-cost projection" assumes that fertility rates permanently return to levels not seen since the 1970s. It assumes that longevity grows less over the next 75 years than it has over the past 30. It assumes that inflation after 2010 never rises above 1.8 percent. And so on. The scenario is a compendium of every rosy outcome (from a fiscal perspective) that one can dream up. It is, in short, not plausible.
Misrepresentation of the projection record of the Social Security trustees. Another longstanding myth is that the trustees' past projections have proven too conservative. In a typical statement from a 2005 budget hearing: "They [the trustees] have been wrong because they have consistently understated economic growth. I believe, in all likelihood, they are wrong again."
This allegation has developed in direct contradiction of the facts. As I pointed out in a 2007 paper, the trustees' projection record since the last major reforms is one of impressive accuracy, although they have been slightly too aggressive — that is, they have, to date, somewhat overstated the program's fiscal health.
The myth of excess past conservatism has been fed by cherry-picked references to the few, unrepresentative trustees' reports that were in fact too conservative: those of the mid-1990s, made just before an unexpected surge in economic growth caught all government forecasters (not only the trustees) by surprise.
Amazingly, if the CBO's projections are off by a mere $3 billion and the program enters cash deficits next year, the deficit date will have arrived sooner than predicted in every single trustees' report since the 1983 reforms. In other words, not a single projection over all that time will have been conservative enough. If the projections' critics haven't been 180 degrees off of empirical reality, they've been 179.9.
The acceleration of Social Security's difficulties is leaving egg on many a face — not only those of the most vocal problem-deniers, but on those of other forecasters as well. Just last year, CBO, on the eve of this sudden downturn, inexplicably revised the long-term Social Security assumptions to be more optimistic. CBO's projection changes were mysterious at the time, and look startlingly ill-timed now. One assumption they made was that 2001/03 tax policies would expire, along with relief from the AMT, and that federal income-tax collections would be allowed to grow to exceed permanently the historic highs. However defensible as a literal application of "current law" in the near term, no responsible agency should have adopted such an implausible basis for lowballing, in its communications to legislators, the estimated size of the long-term shortfall.
Even stranger was CBO's sudden decision to increase its long-term real-wage-growth assumptions to 1.4 percent annually — more than 50 percent higher than the historical average over the last 40 years. This put CBO's latest estimate near the faulty 1983 assumption of 1.5 percent, which proved to be far too aggressive. CBO's change was never adequately explained, and its implementation on the eve of current economic difficulties has turned out to be a masterpiece of mistiming.
Whatever the explanations for these various missteps, one thing is now clear: Not only have the trustees' projections not been too conservative, we now face a bigger problem even than previously projected. The refutation of the mythmakers has arrived in the form of an economic crisis that will exact a heavy price: from all of us, including those who saw the problem coming, those who denied it, and those who were innocently oblivious. People from every camp will need to work together to fix the problem that now faces us. Reality can sometimes be an unforgiving teacher. Let's hope that enough of her pupils learn and respond.
Public versus private pension stewardship
The recent market downturn and financial crisis has seen many argue that the private sector cannot be trusted to manage things like pensions and the government is a far better steward of these long-term commitments. The state of Social Security, which has gone unaddressed despite years – actually decades – of warnings from the program's Trustees, speaks against this. But here's another interesting example documented by the Financial Times and Megan McArdle comparing the funding status of private sector defined benefit pension plans to pensions for public sector employees. McArdle points out: According to the Pension Benefit Guaranty Corporation, which regulates and insures pensions, the total deficit in private plans covering about 34 million workers was a little over $10 billion as of September 2008. That's almost certainly multiplied quite a bit since then. But the current underfunding in public plans, which cover about 22 million workers, seems to be something north of a trillion dollars. In other words, private plans are underfunded by around $295 per employee. Not a good thing, but could be worse. A lot worse, as it turns out, if you compare to public sector plans where per employee underfunding amounts to around $45,500. No wonder, as I commented yesterday, public sector funds aren't so keen on honest accounting.
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