What would FDR do to fix Social Security? Maybe not what many of today’s Democrats might think.

With the Social Security Trustees Report to be released today, the question of how to fix the program gains new visibility on the national radar screen. Sylvester Schieber, a noted expert on retirement policy and former head of the Social Security Advisory Board, asks “What would FDR do?” The answers, I thought provide some real insight. Writing for the Progressive Policy Institute, Syl begins:

"In recent months, Jack Lew, director of the White House Office of Management and Budget, and Senate Majority Leader Harry Reid have asserted that Social Security is not part of the federal budget problem. The federal government’s biggest program, they say, has ample resources to cover legislated benefits over the next 25 years. Therefore, lawmakers need be in no hurry to tackle Social Security’s long-term funding gap."

"As a long-time analyst of U.S. retirement policy, I believe these claims are fatally flawed. In fact, Social Security’s financing costs already are adding to the federal government’s overall debt burden. Moreover, the longer we wait to rebalance the program, the higher the economic and political costs of the adjustments that must be made."

"From a progressive perspective, I find it disconcerting that, instead of strengthening Social Security for future generations, leading Democrats are instead finding excuses not to deal with the system’s real but quite manageable fiscal gap. Having studied and written about Social Security’s history, I can’t help but compare such evasions with the rigorous sense of fiscal responsibility and intergenerational justice shown by the system’s creator, Franklin D. Roosevelt."

Schieber then illustrates how Roosevelt might have felt about our current situation:

"In the early 1930s, Roosevelt openly criticized and opposed two popular national retirement plan proposals because they included financing that would create significant future liabilities for taxpayers and the federal government. In early 1935, as FDR reviewed the initial draft of the legislative package which established Social Security, he discovered the plan would result in projected cash deficits beyond 1960 and that the system would require outside funding beyond the payroll tax by 1980. He felt that it would be “dishonest” to set up a program that would create burdens for future congresses and presidential administrations to deal with, burdens that would limit their ability to manage the government’s fiscal operations or other obligations. He understood the fundamental truth of any publicly-financed, universal retirement system: the government’s costs ultimately would have to be borne by workers. FDR therefore demanded that his own administration’s Social Security proposal be altered so the program would be fully financed through the end of the projection period, then 1980, and be balanced at that time."

The whole article is really well worth checking out – very good stuff.

I myself asked what FDR would do, in the context of President Obama’s proposals to address Social Security, here. A common thread of both articles is how contexts have changed over time, even for those who see themselves as inheritors and protectors of FDR’s vision. Read more!

Did Reid say that Social Security reform is “off the table”?

A number of press outlets are reporting on comments by Senate Majority Leader Harry Reid that Social Security reform is "off the table." Given the President's flaccid discussion of Social Security in the SOTU I don't really doubt that conclusion, but it's worth bearing in mind what Reid actually ruled out: "privatizing or eliminating" the program, which to most readers would leave a fair amount of policy options on the table. (E.g., do the recommendations of the President's fiscal commission fit under "privatizing or eliminating"? If proposed by a GOP Member of Congress they probably would, but given they came from the President's own appointees I'm hoping they'd get a pass.) In any case, here's the video of Senator Reid so you can watch for yourself.

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Social Security in permanent deficits

According to the CBO. The Associated Press gives the details. Read more!

Video of Chuck Blahous Social Security book event

On Monday the Heritage Foundation held an event based on the release of Chuck Blahous's excellence new book, Social Security: The Unfinished Work, available from fine booksellers everywhere (here's a link to Amazon).



You can watch the video of the event online here or over at Heritage's website.
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Coons and O'Donnell Debate Social Security

From the Wall Street Journal, Delaware Senate Candidates Chris Coons and Christine O'Donnell talk Social Security reform:

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Now THAT'S what I call taking Social Security reform "off the table"

I usually kind of like Russ Feingold. He's about a dozen notches to the left of me, but seems like an honest guy and doesn't pretend he's something he isn't (until recently, being a Senator from Wisconsin allowed you that luxury).

But today he's down in the polls relative to his challenger, businessman Ron Johnson, and Feingold's new ad on Social Security reform goes just a little bit over the top.


So you'd really take everything off the table? Given that the system is going insolvent -- just in time for the retirements of people like, say, me? -- doesn't rejecting everything seem a bit extreme? Probably, but that's what happens in the end of a campaign when someone is far behind.

But Feingold's opponant Johnson isn't pulling any punches either. His own ad doesn't back down at all from his claim that Social Security is a "ponzi scheme." Check him out.


Say what you will about either of these guys, these are both pretty good ads. Sure beats the usual "Congressman [insert name] voted with [disliked party leader] 96% of the time..."
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Bloomberg poll on Social Security/Medicare reform options

Hot Air points to a new Bloomberg poll regarding the budget deficit, highlighting several results that seem to indicate that – despite everything Americans have been through regarding the economy and financial markets – that they want "privatization" of Social Security and Medicare to be "on the table." For instance, Bloomberg says:

Almost three in five say privatization of the Medicare program, with assistance for low-income seniors, should be considered when lawmakers discuss how to close the budget gap. A majority, though, oppose raising the age at which people can start receiving Medicare benefits. Americans are narrowly against lawmakers considering Social Security privatization as a means to reduce the deficit. Forty-eight percent say that should be off the table versus 44 percent who want the possibility looked at. Almost three in four favor lawmakers studying removal of the Social Security tax cap so wages over $107,000 a year are taxable.

Some caveats. First, as Hot Air points out, the most popular option is to have someone else pay for it all, through an increase in the maximum taxable wage for Social Security. But since that won't be enough to fix the whole problem and comes with some pretty negative side effects, it's worth considering other options. But second, "privatization" of Social Security won't fix the program's funding gap. It might better help us build assets to pay for future benefits and it would allow low-earners to better diversify their retirement savings, but the underlying funding gap for Social Security is the same whether you have personal accounts or not. "Privatization" of Medicare – if it means shifting to a premium support model in which the government supplements the purchase of private health insurance -- has more potential because it would shift incentives to increase cost-effectiveness and, in any case, the government could place a limit on the growth of the supplements it pays.

And third, the poll's options – "strongly considered," "considered" and "off the table" – may not be the optimal ones for getting at these choices. But it is fair to say that if someone says a given option should be strongly considered or considered that it's at least "on the table."

Better measurement of public opinion would be really helpful in figuring out how to fix the entitlement funding gap. The government and the budget don't really "care" how these programs are balanced so long as it's done. But individuals care a lot about whether to pay higher taxes, receive lower benefits, or work longer. The more we know about what they want, the better we can tailor reform plans to meet their needs.

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Is American’ lack of faith in Social Security due to conservative scare tactics?

Over at AEI's Enterprise Blog…

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What Americans think about raising the Social Security retirement age to 70 (Courtesy of The Onion)

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Department of Selective Charts: Social Security Tax Cap Division

Over at AEI' Enterprise Blog…

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New CBO Analysis of Options to Strengthen Social Security Financing

The Congressional Budget Office released a new analysis of a number of options to improve Social Security's long-term financing. What's really helpful about the new paper is that it shows how policy options affect both the program's solvency and the level and distribution of taxes paid and benefits received by different types of individuals. Without knowing both the financing end and the effect on participants it's hard to put together a plan that reflects your priorities for the program.

It's definitely worth checking out for anyone interested in reform, particularly in light of the possibility that President Obama's fiscal commission may recommend changes to Social Security.

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Orszag calls for Social Security reform

Outgoing OMB director Peter Orszag, himself the author of a book on Social Security reform, is urging policymakers to take on the challenge, according to Dow Jones:

"Despite the fact it is not the most substantial contributor to our long-term fiscal gap, we also need to restore solvency to Social Security," he said at an event on the topic at the National Press Club.

"Not only will putting Social Security on sound footing help to some degree with our overall long-term budget picture, making adjustments sooner rather than later...will provide greater certainty to future Social Security beneficiaries and also allow us to make adjustments that are both gradual and fair."

For those interested, the provisions of Orszag's proposal, co-authored with economist Peter Diamond (currently headed to the Federal Reserve Board), are available here. While the proposal contains a number of benefit reductions, principally for higher earners, most of the leg-work toward solvency is done on the tax end, both in terms of raising the payroll tax rate, the tax ceiling and imposing a surtax on earnings above the ceiling.

The chart below shows system costs relative to GDP for the Diamond-Orszag proposal relative to current law.

While there are cost reductions toward the end of the period – and, importantly, Diamond-Orszag differs from current law in that it can actually afford to pay what it promises – my own view is that we need to restrain Social Security costs given the other pressures on the budget. An extra couple of percent of GDP might not be a huge deal if it were the only costs we were looking at. But Medicare and Medicaid don't look as if they're going to be fixed anytime soon, and it's much harder to substitute individual saving for those kinds of benefits relative to Social Security, where a modest benefit reduction could be compensated for by a modest increase in 401(k) contributions.

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Alice Rivlin video on Social Security reform

From CNBC, an interview with the Brookings Institution's Alice Rivlin, a member of President Obama's fiscal responsibility commission, where she discusses rising entitlement costs and possible solutions.


Rivlin points to Social Security reform as the most promising avenue for the commission, discussing specifically raising the retirement age, reducing benefits for high earners and potentially raising taxes. Read more!

How Social Security’s cash flows have worsened

The Mercatus Center's Veronique de Rugy compares CBO's latest projections of Social Security's income and cost rates to those it made in 2008. What's interesting is how long it takes to recover from a short-term hit to program finances.

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Social Security in Deficit; Will It Ever Rebound?

The New York Times reports that the Congressional Budget Office (CBO) projects that Social Security will run a cash deficit of around $29 billion this year, something that hadn't previously been predicted to occur until 2016. This isn't huge news, as the program was only barely in surplus this past year and the demographics aren't getting any better.

But here's one thing I wonder about: will the program ever come out of deficit again, or is this it? The CBO projects that Social Security will return to small surpluses (in blue) of $5 billion in 2014 and $4 billion in 2015, before again going into deficits—this time permanently—in 2016.

But as far as I know, the CBO's "current law" projections assume that the Bush tax cuts are repealed in their entirety when they expire at the end of 2010. If, however, the cuts are retained for low- and middle-income households—as President Obama has promised—then Social Security revenues from income taxation may be slightly reduced. This could be enough to tip the balance.

In 2014, for instance, Social Security's own actuaries predict that the program will receive around $31 billion in revenues from income taxes levied on retirement benefits. If that amount is reduced slightly, then the chances of a surplus are reduced.

In the end, the difference between a small surplus and a small deficit isn't a big deal substantively. Over the next 10 years, CBO projects that Social Security will run a total cash deficit exceeding $200 billion.

But it may be a big deal in influencing if and when Americans and their representatives in Washington come to terms with the fact that Social Security and other entitlement programs aren't going to fix themselves. As long as Social Security has been in surplus, it has been easier for policy makers to forget that fact.

Update: Marc Goldwein over at the Committee for a Responsible Federal Budget caught this first -- I'm losing my edge as I get older...

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U.S. News: 8 Possible Changes to Social Security Benefits

U.S. News & World Report's Philip Moeller reports on potential benefit changes that could improve treatment for low earners under Social Security, discussed in a recent GAO report. Here's the short list with some of my comments on each – you'll have to read the article for the details (which are good).

• Guaranteeing a Minimum Benefit.
  
  • Most benefit guarantees, for instance, don't do a heck of a lot because not many people are eligible. The problem for an earnings-based system like Social Security is that as you move to ensure a minimum income for truly low earners you end up shifting much closer to a "welfare program" that breaks the earnings-benefit link. That already occurs to some degree already through Social Security's progressivity, but to reach the truly poor in retirement you have to target people with very spotty work records. That's a tricky path, both in policy and political terms.
    
• Reducing Work Requirements for Eligibility.
  
  • I wrote on this subject for NASI last year and was a bit disappointed in the results. There aren't a ton of non-immigrants who benefit from reducing the current 10-year work requirement to qualify for retirement benefits. I'm all for lowering the work requirement, since this doesn't result in any sort of giveaway since Social Security doesn't really have a minimum benefit, but I don't think it will produce all that much.
    
• Supplementing Benefits for Low-income Single Workers.
  
  • I'd rather reduce spousal benefits, which are an unearned (and often unneeded) subsidy for married couples, then use the savings to boost benefits overall at the low end. We need less complexity rather than more.
    
• Adopting Earnings Sharing.
  
  • I'm very interested in this idea, in which total household earnings would be split evenly between spouses each year for the purposes of calculating their future benefits. I've not seen it modeled very closely, so there may be some things that I haven't thought about, but in the big picture the household is the relevant unit so I think that's what we should be looking at.
    
• Reducing the Marriage Duration Required for Spousal Benefits.
  
  • I ran some numbers a few years ago on lowering the current 10-year marriage requirement to be eligible for divorced spouse benefits and it seemed like a cheap but pretty well targeted reform; that is, it increased benefits principally for people with very low lifetime earnings. Since the typical divorce takes place before 10 years of marriage this might make sense, although I'd probably prefer something like earnings sharing.
    
• Providing Caregiver Credits.
  
  • I've read differing accounts of how well caregiver credits would work; one problem is that low-income people have to work and can't afford to stay home, so the targeting may not be great unless it's limited to low earners. It would also weaken the earnings-benefits link, although it's often pretty weak in any case.
    
• Increasing Survivor Benefits.
  
  • When one spouse dies total household Social Security benefits are reduced by one-third to one-half, depending on the distribution of benefits between spouses. Using a standard approach for calculating efficiencies of scale in household size, a household of one has costs equal to around 63% of a household of two. A benefit reduction of one-third may be ok, but one-half seems too much.
    
• Providing Longevity Insurance.
  
  • Social Security already provides significant longevity insurance, particularly for low earners who derive most of their retirement income from the program, but higher earners may desire more. Increasing benefits later in life might help compensate for the fact that most non-Social Security sources of income aren't indexed to inflation and thereby help smooth income better over the course of retirement.
    

I'm ok on pretty much all of these, at least in some form, although some would work better than others.

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Washington Post Partnership With Peterson-Funded Fiscal Times Draws Fire From Left

Politico reports on protests against a new partnership between the Washington Post and the Fiscal Times, a newsgroup focusing on public finance issued funded by the Peter G. Peterson Foundation.

Critics are calling on The Washington Post to stop printing news articles from The Fiscal Times, a new "independent digital news publication" funded by Peter G. Peterson, a former Wall Street financier and longtime advocate of changes to Social Security.

The Post and the new publication announced an agreement last month to jointly produce content "focusing on budget and fiscal issues," and the first article from The Fiscal Times appeared in The Post on Thursday. Headlined "Support grows for tackling nation's debt," it described growing momentum for "a special commission to make the tough decisions that will be required to dig the nation out of debt."

In a letter to The Post's ombudsman, 14 academic and public-policy experts on Social Security said the newspaper should "rescind the partnership, "reserve opinion pieces for the op-ed page, and not allow itself to be a propaganda arm for ideologues who use fiscal distress as a stalking horse to destroy social insurance."

On one hand, the letter of protest is overblown: a letter from Dean Baker, Nancy Altman, Roger Hickey and others from the left complaining of ideologues is a bit much, particularly since Fiscal Times advisory board includes former CBO director and current Urban Institute president Robert D. Reischauer. If the Urban Institute is a hotbed of ideologues looking to destroy social insurance then I think we'd better just hang it all up.

That said, the writers do have a point: Peterson and those who are funded by him don't take strong views on how to fix Social Security and Medicare, but they are forceful in arguing that entitlements are a big problem – a view on which I agree – rather than a small one. The "big versus small problem" disagreement is a pretty defining one between right and left and I'm not sure how comfortable I'd feel if the shoe were on the other foot.

The first Post article from the Fiscal Times doesn't seem to show any bias, but then again, people on the left don't notice any bias in the New York Times so I'm not sure my judgment is exactly balanced.

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Video from recent AEI conference, "Keeping Granny On the Job."

I've managed to embed video of the recent AEI event at which Estelle James and I discussed incentives to delay retirement in the U.S. and Chile. Take a look.

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Updated Social Security Fix-It Book Available

The Center for Retirement Research has updated their very nice Social Security Fix-It Book. Check it out here.

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The Today Show Discusses Social Security Reform

Money Magazine writer Janice Revell discusses Social Security reform on the Today Show. Here's the clip, much of which is quite good, but there are a couple items on Social Security reform I think are worth fact-checking.

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Revell first says, "The truth of the matter is the Social Security system is not going broke, it is in far better shape, really, than you probably expect … I think what makes it safe, if you look at the actual numbers if the government did absolutely nothing and said you're on your own people for the next 30 years there would be enough money in the system to pay full benefits. Even after that, there would be enough money for decade and decades to pay very high benefits."

In a sense she's clearly correct: the program is current solvent through the late 2030s and will be able to pay around three-quarters of promised benefits thereafter. But the problem of paying for Social Security – which is a problem for the government, and therefore a problem for you and me – begins in just a few years. And that burden will be large: by 2025 Social Security will run a deficit equal to around 1 percent of GDP; the deficits will continue and increase in perpetuity thereafter. This means that, in addition to tackling the even larger cost of fixing Medicare, the government will need to dedicate an extra 5 percent of its resources to Social Security. Entire cabinet departments don't take up that much money, so unless we want to raise taxes even more we'll need to make some changes.

Revelle then says that there is plenty of time for the government to get on top of the problem and that reform will probably constitute some minor increase in payroll taxes and some taxation (meaning, presumably, reduction) of benefits. Let's think about this:

If we wanted to fix Social Security permanently today by raising taxes, we'd need to increase the payroll tax rate from 12.4 percent to around 15.8 percent, a 27 percent increase in what is already the largest tax paid by most workers. Again, that's the amount if we acted today and if we wanted with reasonable certainty not to have to raise taxes again in the future. If we put reform off, as Congress has a tendency to do, then the costs get even bigger.

It's all in the eye of the beholder, but the numbers seem a bit more sobering than Ms. Revelle's description of them should warrant.

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