January 01, 2005
David Wessel Does His Social Security Grading
He looks at the Democrats' attitudes toward Social Security. But, first, he points out that George W. Bush has no clothes--the Republicans get an F:
WSJ.com - Capital: The president's private accounts aren't really intended to fix Social Security. Rather, they are a way to advance his deeply held belief in the value of a more individualistic "ownership society." The president measures Social Security liabilities not over the actuaries' usual 75-year horizon but over eternity -- which generates a frightening $10 trillion in unfunded promises. But when he measures the cost to the Treasury of his tax cuts, he prefers the five-year horizon. The president has, at least rhetorically, discovered fiscal rectitude, but bets the bond market will absorb hundreds of billions in new Treasury borrowing without pushing up interest rates...
It would have been even nicer if Wessel had pointed out that this--a "fix" that isn't a fix at all--is standard operating procedure for the Bush administration: Al Qaeda threatens our national security, so they attack Iraq; the economy needs a fiscal stimulus, so they cut taxes on dividends; there are real worries about nuclear proliferation, so deploy an anti-missile system that doesn't work.
He goes on to give the Democratic left a D-:
Democrats... divide into three camps. The first says flatly: There is no big Social Security problem. As the left-leaning Economic Policy Institute puts it, "Social Security is not going broke anytime soon." It's true that Social Security actuaries say that taxes earmarked for the program will more than cover promised benefits until 2018, that taxes plus interest on the trust fund's Treasury bonds will cover promised benefits until 2028 and that the trust funds won't run dry until 2042. Social Security isn't on fire; another year of inaction won't destroy it.
But that hardly argues for deferring repairs. Waiting to slash benefits or raise taxes until the bulk of the baby-boom generation is collecting checks is imprudent and politically impossible.... Others say Social Security actuaries are overly pessimistic. The actuaries actually make optimistic, pessimistic and "intermediate" 75-year projections; the latter gets all the attention. It assumes that growth in productivity, or output per hour of work, will fall below recent encouraging trends and that immigration will abate. Tweak the assumptions, and projected Social Security revenue grows so much that it hardly needs a bandage.... But hoping for the best hardly seems prudent....
I think they deserve a B+. What the EPI gets is that Social Security's long-run fiscal problems are way, way, way down there on the list of high-priority fiscal problems. The wreck the Bush administration has made of the General Fund's balance is the most immediate problem, and it is a big one: bringing the General Fund back into near-term balance is priority number one. Exploding health care costs are priority number two. Further strengthening the General Fund so that it can pay back the money it owes Social Security between 2018 and 2042 is priority number three. And dealing with the post-2042 Social Security shortfall is priority number four.
For the Bush administration, "fixing" Social Security is a way of avoiding dealing with the three bigger and higher-priority fiscal problems that America has, two of which the Bushies have managed to generate all by themselves. They're getting a pass in the press on this: the press doesn't seem to get that the focus on Social Security is a way of evading responsibility for more serious problems. The Bushies' feet need to be held to the fire on this.
He then gives Peter Diamond and Peter Orszag an A on policy substance and a D on political savvy:
The second camp says: There's a problem, but the fix isn't private accounts or radical surgery.... Peter Diamond of the Massachusetts Institute of Technology and Peter Orszag of the Brookings Institution show how. They'd rely heavily on raising taxes, both the payroll tax rate and income subject to tax, but also would reduce benefits for those born after 1949 to reflect lengthening life expectancy. Reflecting their political druthers, they'd take more from higher-income workers and give more to lower-income workers. Their numbers add up, and don't hide the pain. They'd lift today's 12.4% payroll tax, split between worker and employer, to 13.7% by 2045 and 15.2% by 2075. Don't like that? They suggest reinstating the estate tax as an alternative. (Watch for Democrats to float that.) "The upside is that taxes would have to rise only relatively slowly," says Jeff Lemieux of centrists.org, a think tank. "The downside is that the tax increase would be permanent. But the authors are to be commended for their honesty. This is the first Social Security reform proposal that is fully 'paid for.' "
All this honesty has given the Diamond-Orszag plan few advocates in Congress....
I think that this is unfair: Diamond and Orszag's plan is the kind of thing that an honest Social Security Reform Commission would produce, and Congress would get behind it if they had a commission report to grab onto. The important thing for Wessel to stress is that Diamond and Orszag is the right thing to do--and that the fact that it does not have political traction this year is an indictment of the White House and the Congress, which need to be pressured to act like grown-ups.
Then Wessel gives a C+ to the Democratic right:
The third camp says: There's a problem, and Democrats needn't be allergic to private accounts. "By anathematizing privatization plans but not offering a progressive alternative, Democrats risk ceding the initiative entirely to the Republicans who have what purports to be a reform even if it's flawed," says Will Marshall, president of the centrist Democrats' centrist Progressive Policy Institute. After all, even Sweden has private accounts, though -- unlike Mr. Bush's -- they're mandatory.
Mr. Marshall doesn't have a fleshed-out proposal. Democrats of his persuasion are casting about for one. He would "retool" Social Security so it encourages and helps Americans to save more and build wealth. Edward Gramlich, before he joined the Federal Reserve Board, crafted a plan to tack private accounts on top of existing Social Security. He got few takers. Gene Sperling, the former Clinton aide, talks up a "universal 401(k)," a private savings account, perhaps structured so the government would match savings by low-income Americans, alongside Social Security.
This C+ is much too high. Diamond and Orszag are serious: they have a plan. Gramlich is serious: he has a plan. Will Marshall isn't serious: he doesn't have a plan. People without a plan have no business complaining. Marshall thinks Democrats should be "offering a progressive alternative" other than Diamond-Orszag? Fine. He should offer one. Then I would give him something higher than a D.
If Marshall wanted to get behind Thrift Savings Plan for everyone--letting everyone in America, if they wish, contribute to the low-overhead relatively low-risk Thrift Savings Plan by checking a box on their tax returns--that would be constructive. And I would like to see it.
Posted by DeLong at January 1, 2005 05:24 PM
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I think anyone mentioning Social Security and the 2018 situation in any context whatsoever of a Social Security "problem" should be branded with a red 'L' on their forehead. Even using the two in the same sentence (as in 9/11 and Iraq) should qualify. They should be forever remembered for it.
2018 is not a Social Security problem. Not even a little bit. It is a Bush tax cut problem.
Saying it is Social Security's problem is like saying your bank should ay people off so they don't need your mortgage payment this month (because you gave your paycheck to a con man).
Posted by: Dave Johnson at January 1, 2005 06:05 PM
"For the Bush administration, 'fixing' Social Security is a way of avoiding dealing with the three bigger and higher-priority fiscal problems that America has, two of which the Bushies have managed to generate all by themselves. They're getting a pass in the press on this: the press doesn't seem to get that the focus on Social Security is a way of evading responsibility for more serious problems. The Bushies' feet need to be held to the fire on this."
I don't think this is the press's job, except that they need to stop being a conduit for lies. It is damn well the job of the Democratic Party, that still hasn't figured out it's the opposition, now.
Posted by: Randolph Fritz at January 1, 2005 06:17 PM
They are too busy pandering for "good grades" from Republicans.
Posted by: Stirling Newberry at January 1, 2005 06:39 PM
I, personally, would set the FICA cap at UNDER $20,000 instead of OVER $88,000. Along with a completely tax free $10/hour minimum wage (indexed for inflation and maybe for average wage growth) we could permanently insure adequate income for most working and retired Americans forever.
Not affordable?: we had an almost $9/hour minimum under LBJ! -- would add all of 3% direct costs to GDP output. And the payroll tax could drop a few points immediately with the new cap and could contiune to do so even while benefits were raised gradually.
Not doable?: all we need is a Democrat with enough of LBJ's megalomanaia to push for an all in one solution -- as LBJ hoped for in the Great Society legislation -- but we had only half today's per capita output then.
Some say liberal Democrats put themselves out of the social solution business by raising too many to the middle class. In a workforce which mostly hasn't seen a raise in their hourly pay for 30+ years even as productivity grew 70 percent -- because of a uniquely American vacuum of labor power -- most should be ready to listen to the message again.
Posted by: Denis Drew at January 1, 2005 06:55 PM
"That part of that party that does have a plan, let’s call them the Nords, has posited a model that requires purchase of ticket to ride. Distribution will be in accordance with investment. While their model appears to serve them and theirs well, there’s no mention by the Nords of how those without coin can buy a ticket. So, we can but assume that under the Nords’ scheme many are to be left behind."
Posted by: Ken Melvin at January 1, 2005 07:22 PM
"Peter Diamond ... and Peter Orszag ... would reduce benefits for those born after 1949 to reflect lengthening life expectancy ... They'd lift today's 12.4% payroll tax, split between worker and employer, to 13.7% by 2045 and 15.2%"
Cool. So the '83 reform, to protect the highest positive returns on contributions ever paid in the history of the program in dollar terms, to workers retiring about then, drove return for *future* workers -- today's -- into starkly negative territory, up to 50% negative, by cutting their benefits and hiking their taxes.
And since that wasn't enough now the remedy is more of the same -- make the even younger workers pay even more tax for further reduced benefits and even more negative returns.
Why would Wessel think that anyone would ever object to that politically? ;-)
"Diamond and Orszag's plan is the kind of thing that an honest Social Security Reform Commission would produce."
Would an *honest* reform commission mention the explicit promise made by FDR, Altmeyer and SS's other founders that SS would always pay a positive "fair return" on contributions and preserve "intergenerational equity" to participants?
It looks like some promises made regarding SS are more important to remember than others. When some promises once made by Democrats about SS become politically inconvenient, overboard and into the drink they go. Plop!
BTW, who is the *honest* defender of the status quo who is willing to say out loud to the voters: "I propose an historic change to SS to save it -- starting from now on it will give everyone less back than they put into it, making them poorer on a lifetime basis, instead of richer as it made all prior generations of participants. With this change we will save SS as we have always known it!"
Who's going to say this? Ted Kennedy? Krugman? ...?
"Will Marshall isn't serious: he doesn't have a plan. People without a plan have no business complaining ... He should offer one. Then I would give him something higher than a D."
Excellent criticism. But it leaves me wondering how EPI earns a B+ when its position is: Medicare is *much* worse than SS so don't do anything about SS, and as to Medicare we have no plan at all ... so we have no plan for anything. B+?
Now, do any Democrats -- even one? -- have *a plan* for SS that addresses intergenerational equity? Even so much as to say "we're ending it"?
You know, even if you think FDR and Altmeyer & Co. were a bunch of delusionals whose promises should be ignored, just as a matter of *practical politics*, if you bequeath to the young a SS scheme based on the principle of screwing them the most, what do you think they are going to do to it when they grow up and get the votes?
So wouldn't it be best to consider their interests now? To at least acknowledge the existence of intergenerational equity as a consideration?
Has preserving the current structure of SS for near-term political advantage become more important to Democrats than having SS meet its purpose as spelled out by its founders?
Or, do Democrats just think the young are just so stupid they'll never notice?
The first Democrat in this debate who openly, publicly, says...
"Yes, FDR declared intergenerational equity a basic principle of SS upon its founding, and until now SS has always paid each cohort of retirees much more than they paid in, but I think we should deep-six that promise and history now because *something* has to give to keep SS as much as possible as it is, and that's the least important thing..."
... will be the first Democrat honest enough to deserve more than a D, IMHO.
Posted by: Jim Glass at January 1, 2005 07:26 PM
How about a Pareto chart for fiscal problems? A few charts with different timeframes (10, 25 and 75 years) would illustrate the problem.
Obivously the highest priority is the General Fund deficit, followed by unfunded healthcare issues. Social Security wouldn't even show up on the 10 year and 25 year charts!
Posted by: CalculatedRisk at January 1, 2005 08:27 PM
3 q's for economists:
a. how many Americans would have to be added to workforce by increased birthrate, immigration, or converting illegal workers into legal payroll taxed workers in order to make the social security shortfall go away...over and above assumptions social security trustees now use? are we 10m short? 50m short? 100m short?
b. exactly why do productivity gains assumptions matter to social security? what if we changed social security to be linked to productivity gains and not wage rates? so that it would pay more if economy were more productive and vice versa? then what would happen; i.e., what is range of outcomes?
c. what if current bush projections for general treasury fund deficit being halved over five years were projected out for as long as social security? would there then be any shortfall in social security? do they have, in short, two sets of books in this government?
Posted by: red at January 2, 2005 06:40 AM
What of course, nobody at all is mentioning, is the fact that the population bump that is the supposed reason for the "crisis", will have other effects on the economy.
First of all, it's going to result in a massive 401k selloff, dropping prices like a rock storm. So any investment strategy past 2020 or so involving stocks?
On the other side, there's going to be a lot of jobs opening up, which will drive down the unemployment rate, making a more competitive labour market, raising wages. Which is a good thing.
Frankly, any analysis of this "problem", without discussing the OTHER effects of the mass retirement gets a NC from me...NOT COMPLETED
Posted by: Karmakin at January 2, 2005 07:37 AM
And who has a plan? Some do, some are better and more realistic than others. BUT
THERE IS NO BUSH PLAN!! NO BUSH PLAN AT ALL!!
Can somebody put this into the articles? Why is everybody doing Bush's work for him? If he wants to do something, let him make a proposal.
Posted by: pragmatic_realist at January 2, 2005 09:53 AM
Red, I am not an economist, but I do have access to tables. Your question a is answered here: http://www.ssa.gov/OACT/TR/TR04/V_demographic.html#wp159501 1.3 million immigrants a year (legal and illegal)
But the answer to your larger question is simpler. The Social Security Trustees annually present three Alternatives combining a whole package of economic and demographic assumptions. Although they don't describe it this way, one package, the Low Cost Alternative( I ) has for years produced an identical graph: a fully funded Social Security with a flatline multi-year reserve. Direct links to the appropriate figures for the last nine Reports can be found here:
The point is that you don't need to be smart to figure out whether Social Security has a problem, you simply have to measure up the Low Cost Alternative against readily available economic numbers, most notably overall productivity.
And we are crushing those numbers. We needed 2.8% to match the 2004 Low Cost number. We got 4.0%. We need only 2.1% for 2005, we never need a number going forward above 2.2%, we can do that.
The real measure of the phoneyness of the "crisis" is to be found in this mini-chart on the EPI website:
In 1997 the Trustees reported that they needed 2.23% boost in payroll to fill the gap. They didn't get it, that 2.23% stayed in my wallet. Each year between then and now they have admitted they really didn't need THAT year of tax increase, indeed they only needed a smaller increase going forward. Every year, they leave the money in my pocket, and every year the cost of the fix goes down.
Simple math (and the Cato Institute) suggest that if there was a fundamental problem the cost of the fix should be more expensive for every year that went unaddressed. The opposite is true. The Trust Fund gap is healing itself, because the economy continues to outperform the truly dismal predictions of the Intermediate Cost Alternative.
It is not broke. It just isn't.
Posted by: Bruce Webb at January 2, 2005 10:13 AM
> Do any Democrats have a plan for addressing intergenerational equity?
Bush's plan - well, we don't know for sure, since Bush doesn't want to negotiate with himself. But the idea floated is to switch to price indexing from wage indexing.
Under that plan, someone retiring 75 years from now would have their benefits cut by about 75%, probably plus some additional cut if they opt to put 2% of their FICA into a private account.
Any plan that indexes benefits to prices rather than wages is an explicit plan to grandfather benefits for current retirees at the expense of future retirees.
Never mind that Bush wouldn't be able to preserve benefits for current and near-term retirees if we divert 20% of funds from the trust. The trust would go bankrupt around 2020 if we divert 20% of funds, so we'd have to make a pretty big cut in CURRENT benefits, or float $Trillions more debt than Bush has acknowledged to date, even to pay out benefits that are eventually "price indexed" rather than "wage indexed".
The intergenerational shift of benefit cuts for future retirees would eventually pay back the debt we might rack up to fund the transition, but that's only if things go well. If we make a margin loan equal to 20% (or more likely, 50% over a 30 year period) of US stock market valuation, and that's backed up by the US treasury, and things DON'T go well, the USA could end up looking a lot like Argentina twenty years from now.
Posted by: Charlie at January 2, 2005 12:21 PM