Why not wait to fix the deficit?

Greg Mankiw explains what the future might look like.

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New working papers from the Center for Retirement Research

The Center for Retirement Research at Boston College has released seven new working papers:

• Why Aren't More Families Buying Life Insurance? by Matthew S. Chambers, Don E. Schlagenhauf, and Eric R. Young
  
• Changes in Firm Pension Policy: Trends Away From Traditional Defined Benefit Plans by Kandice A. Kapinos
  
• Interdependent Durations in Joint Retirement by Bo Honoré and Áureo de Paula
  
• Health and Retirement Effects in a Collective Consumption Model of Elderly Households by Arthur Lewbel and Shannon Seitz
  
• Age Differences in Job Displacement, Job Search, and Reemployment by Richard W. Johnson and Corina Mommaerts
  
• The Earnings and Social Security Contributions of Documented and Undocumented Mexican Immigrants by Gary Burtless and Audrey Singer
  
• How Important are Intergenerational Transfers for Baby Boomers? by Alicia H. Munnell, Anthony Webb, Zhenya Karamcheva, and Andrew Eschtruth
  

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New paper: The Case against Raising the Social Security Tax Max

I have a new paper in AEI's Retirement Policy Outlook series titled "The Case against Raising the Social Security Tax Max." Here's some background:

With Social Security deficits increasing and the US population aging, policymakers today face a choice. If they raise Social Security's maximum taxable wage--a common proposal--individuals will respond by working and saving less, which weakens the economy and does not fix the problem. Instead, we should reduce Social Security benefits for middle- and high-income earners to encourage more working and saving--and free up the government to focus on the daunting challenges of Medicare and Medicaid.

Key points in this Outlook:

• Eliminating Social Security's maximum taxable wage ("tax max") is an alluring solution to Social Security's problems, promising to restore long-term solvency with few effects on the typical worker.
  
• But a higher tax max discourages work and saving and fixes Social Security's long-term problems only on paper.
  
• A better solution is to reduce Social Security benefits for middle and high earners while encouraging greater individual saving and longer work lives.
  

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White House to sit out Social Security debate

Talking Points Memo reports that "The White House will not prominently inject itself into congressional negotiations on Social Security reform until after key legislators in both the House and Senate unveil their plans to reduce projected long-term deficits, according to administration officials." This isn't surprising, given the political risks involved with engaging on Social Security reform and the desire of some Democrats to use Social Security as an issue in the 2012 elections.

TPM reports that

At a roundtable meeting earlier this month, a senior Treasury official described the landscape to about a dozen reporters and bloggers. The optimal moment for President Obama to substantively weigh in on Social Security reform proposals, the official said, will come when House Republicans unveil their budget resolution for fiscal year 2012 and a bipartisan working group in the Senate unveils its deficit reduction package, assuming they reach an agreement.

Those two proposals will force Republicans to grapple with the tensions between their broad opposition to increasing federal revenues and their professed goal in these discussions of reducing the deficit. It's put them in a bit of a box, the official said, and it's possible they may abandon their efforts, and lay the blame at Obama's feet, before unveiling anything. But if their efforts are serious, Obama's economic team sees an opening -- to take pressure off the non-defense discretionary portion of the budget, and to send a signal to markets that the U.S. government isn't so paralyzed that it can't address larger, looming fiscal challenges.

While it's understandable that the administration would wish to wait to gauge the lay of the land before engaging, this forgets the President's ability to shape the lay of the land by showing leadership on the issue. If the administration makes clear its seriousness to both Republicans and Democrats in Congress – a large group of whom now seem intent on trying to make progress on entitlements and the budget – that may spur these groups on toward compromise and harden their resolve against the inevitable pressures to kick the can down the road.

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Gokhale and Schoenbrod : OMB must release budget numbers

The Cato Institute's Jagadeesh Gokhale and AEI's David Schoenbrod write for Politico that the White House should release the data behind its long-term budget projections:

President Barack Obama says he wants an "adult conversation" about the budget. He also wrote that the "administration is committed to creating an unprecedented level of openness in government." This commitment was in his first official action as president: a memorandum on "transparency and open government."

Yet the White House's Office of Management and Budget is keeping secret the detailed and long-term budget projections and parameters that it uses to forecast the deficit in future years, unlike the previous administration--which divulged this information yearly.

I think they have a point. Last year, I argued that – for the first time – OMB was ignoring the health care cost growth estimates made by the Medicare actuaries and trustees in favor of numbers that favored their arguments for health reform. The FY 2011 budget assumed that Medicare costs would grow at a rate 2 percent faster than GDP, versus the Medicare Trustees figure of "GDP plus 1." The FY 2012 budget assumes a Medicare growth rate of GDP plus 0.3 percent, far lower than the historical rate. This obviously results in a far more favorable long-term picture.

There's a difference between these two numbers, however: the first is essentially an estimate of the growth of health costs in the economy as a whole, which is then projected onto Medicare to determine the increase in program outlays. The second, lower cost growth estimate is the result of constraints placed on Medicare outlays as part of the health care reform act. In other words, it doesn't imply that we've actually solved the problem of rising health costs – that we've "bent the cost curve," as they say – so much as simply assumed that Medicare will no longer pay for them. As the Medicare actuaries have pointed out many times, this leads to significant problems down the road as providers find that Medicare compensation rates won't be sufficient to cover their costs. If providers start refusing to give Medicare coverage – a problem that already occurs for Medicaid recipients – that would truly lower costs, since retirees wouldn't get the care they need, but I don't think that's what anyone, including the administration is looking for. So in the end, health reform is sure to need to be revisited.

But I think this issue buttresses Gokhale and Schoenbrod's argument for the administration to release more data rather than less. Past administrations have done so and there seems little reason this one should not follow suit.

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Should Social Security continue to be funded only by the payroll tax?

At Salon.com, the New America Foundation's Michael Lind makes the argument that the current practice of funding Social Security only through payroll taxes is a major impediment to enacting reform:

The almost certain lack of political support for major benefit cuts and/or major payroll tax increases means that the shortfall in Social Security revenues cannot be solved according to the assumptions underlying today's bipartisan debate. The assumptions of the debate must therefore be changed. At some point in this century, Social Security must be funded by both the payroll tax and another stream of tax revenue.

Although the architects of Social Security in the 1930s assumed that general revenues would become necessary at some point, most liberals and conservatives today oppose the idea of making up the future Social Security payroll tax shortfall with other taxes. Liberals are afraid that weakening the link between payroll tax contributions and benefits would undermine the legitimacy of Social Security. Conservatives don't like the notion of shoring up Social Security with non-payroll tax revenues because they would prefer to abolish Social Security altogether, for reasons of right-wing ideology. Failing that, they prefer to use the inadequacy of the payroll tax as an excuse to shrink the program as much as they can, in the name of "saving" it. 

There is, of course, the possibility that – in addition to conservatives "right-wing ideology" – they actually share some liberals concerns that shifting away from the payroll tax will make Social Security appear more like a "welfare" program, as well as undermining the financial discipline that a dedicated tax provides. But Lind nevertheless makes a good point. Whether the pros of shifting away from solely payroll tax funding outweigh the cons, I don't know, but it's something worth thinking about.

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Coburn: “We Will Need Honesty to Solve Debt Problem”

Sen. Tom Coburn (R-OK) over at RealClearPolitics.com:

I voted to force the Senate to take up the Deficit Commission's recommendations along with Senators Kent Conrad (D., N.D.), Mike Crapo (R., Idaho) and Dick Durbin (D., Ill.) because we all looked at the same demographic problem and agreed Congress cannot keep kicking the can down the road.

Democrats are right that there are other areas of the budget that have a greater impact on the deficit. But if we can't talk honestly about Social Security, how will we ever deal with Medicare, which is facing a far more serious shortfall?

Check it out here.

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