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May 15, 2005

Senate Hearing on Social Security Proposals

Mark Thoma finds the CSPAN video link to last Friday morning's Democratic Policy Committee Social Security hearing:

Economist's View: CSPAN Video: Senate Hearing on Social Security Proposals: Testimony of Shiller, DeLong, Max, Orszag, and Kobliner on Social Security Reform Before the Senate Democratic Policy Committee: Link to CSPAN page listing video file. Link to Real Player

Approximate starting times of segments:

Shiller: 11:00 min.
DeLong: 23:00 min.
Max 32:00 min.
Orszag 41:00 min.
Kobliner 49:00 min.
Q&A (Dayton and Lincoln) 57:00 min.

I thought that Beth Kobliner and Bob Shiller were highly effective, and that Peter Orszag was awesome. Derrick Max has the hard problem of being a convinced small-government Republican who must show considerable loyalty to the current Republican Party line or else he will simply be unable to function. He must confine his dissent to secondary points and footnotes as he tries to push the Republican Party in a constructive direction.

It is always a pleasure to testify before the Senate: they know their issues very well.

As for me?... Well, see for yourself: I cannot judge. To the extent that I was effective, the credit should go to Jack De Vore and Michael Levy, who ran a talking-to-senators minicourse on the third floor of the Treasury's west wing in 1993.

My written statement: http://delong.typepad.com/sdj/2005/05/statement_on_so.html#more.

My spoken statement is in the extension...

Statement on Social Security Reform

J. Bradford DeLong
U.C. Berkeley and NBER

Democratic Policy Committee
192 Dirksen
May 13, 2005, 10 AM

3385 words

Thank you.

Mr. Chairman, Members of the Committee:

America has three fiscal policy problems:

  • The current 5% of GDP on-budget deficit--its risks of economic crisis, recession, and slowed long-run growth.
  • The explosion of federal health-care costs over the next two generations--whether we are going to find a way to provide all Americans with future medical miracles, or retrict them to those with thick wallets.
  • The likelihood--not the certainty--that the Social Security system as currently structured will be in deficit by mid-century.

Of these three problems, Social Security is both the least urgent and the smallest. The Trustees' projected 75-year deficit in Social Security is 0.6% of GDP. The projected 75-year deficit of the U.S. government as a whole is roughly 4.8% of GDP.

I think what is going on is that the administration (a) has no idea what to do with health, and (b) is unwilling to talk about the current on-budget deficit because it made the mess, and would rather pretend the mess doesn't exist. It's the three-year-old approach: "What broken jelly jar on the kitchen floor?"

Is this the best use of our collective time. The government's limited decision-making capability should be focused on dire and urgent problems, not less dire and far-off ones.

Nevertheless, we are focusing on Social Security. And in my view a plan needs to clear five hurdles before it is worth considering:

  1. If it offers private accounts, they must be a good deal.
  2. The plan must raise national savings.
  3. The plan needs to restore long-run solvency.
  4. The plan must preserve the valuable defined-benefit nature of the current program.
  5. The plan must be competently implemented.

Robert Shiller says that at a 3% offset private accounts are not a good deal. He's right. I find this distressing. I am, in one of my hearts-of-hearts, an Eisenhower Republican, a believer in private accounts. I agree with Marty Feldstein that the equity premium tells us that the stock market does not mobilize America's risk-bearing capacity, and we need to broaden and deepen stock ownership. I agree with former Bush II Treasury Deputy Assistant Secretary Kent Smetters that it is an outrage that the poorest half of Americans do not make automatic, straightforward, and trustworthy low-fee investments in diversified portfolios of stocks. But private accounts that are a bad deal cannot be a good idea.

You know that Alan Greenspan is worried that the Bush plan will not raise but might lower national savings. In his view, arguments that it will neither help nor harm national savings and interest rates--are based on what we guess, not what we know. As he said: "If indeed the financial markets do not distinguish... you could go... without any response in interest rates.... But we don't know that. And if we were to go forward in a large way and we were wrong, it would be creating more difficulties than I could imagine."

You know that the Bush administration does not restore expected fiscal balance. Robert Pozen's progressive price indexing proposal envisions funding some of Social Security out of income tax revenues, but the Bush administration has been very careful to say that its plan is not Pozen's plan--merely that Pozen's is "directionally consistent."

Most important, however, is the defined-benefit nature of Social Security: it returns a certain, inflation-adjusted, stable monthly benefit check that replaces a reasonable (although sliding-scale) proportion of your pre-retirement income. Defined-benefit retirement programs are very valuable things: people like them a lot. Thes days defined-benefit programs are very hard to get elsewhere than Social Security: Businesses are hesitant and unwilling to assume the risks. And, indeed, businesses are not large and stable enough to be able to bear the risks: ask the steelworkers or the employees of United Airlines about their defined-benefit pensions.

The government, however, is large enough to bear the risks of defined-benefit pensions. And when there is something that people value very much that only the government can provide, I think the government's business is to provide it, for in another of my hearts-of-hearts I am a social democrat who believes that government should be a good servant of the American people. Thus I am very skeptical of progressive price indexing, for over the long-run it (a) cuts average benefits relative to current law by about 40%, and (b) changes Social Security from a defined-benefit program to which you contribute a share of your income to a simple flat benefit check equal to roughly 22% of the average wage.

It is important to register the magnitude of the benefit cuts relative to current law that Pozen is proposing. Medicare premiums are already deducted from your Social Security check. Deduct the claw-back for private-accounts as well, and by late in this century Social Security would no longer be a universal program. A great many Americans, they would have lost a key element of what Social Security provides them: a defined-benefit pension program. And I do not see anything they could do to compensate for and replace it.

Let me make one more point: competence in implementation. It is very hard to have trust. Let me give one example: the staffwork underlying George W. Bush's Social Security statement on April 28. The President said that because: "some Americans have reservations about investing in the stock market... I propose that one investment option consist entirely of treasury bonds.... Options like this will make voluntary personal retirement accounts a safer investment that will allow an American to build a nest egg that he or she can pass on to whomever he or she chooses."

But on April 28, the twenty-year inflation-protected Treasury bond yielded a real rate of return of 1.87% per year. Under the Bush plan, money diverted into private accounts is charged against the normal Social Security benefit at a real rate of 3% per year. If interest rates stay where they are now, if you were 25 now, if you made an average of $80,000 a year over your career, if you diverted 4% of your wages into your private account, if you followed the President's advice for those wanting safe investments and and invested them in inflation-protected Treasury bonds, then when you retired your Social Security benefit--normal plus the annuitized check from your private account balance--would be $514 a month less than if you had said "no thanks" to private accounts.

This isn't building a nest egg. This is taking $514 a month of your Social Security eggs and rolling them out of the nest so they fall and smash on the ground.

Did nobody inside the White House bother to run the underlying numbers? Did nobody care?

And this is also heartbreaking, for in another of my hearts-of-hearts I am a technocrat who who believes that it is important to have an executive branch that cares to get the details and the numbers right, for if it does not it cannot be a good servant to the American people.

Thank you.

Posted by DeLong at May 15, 2005 07:49 PM