Monday, January 12, 2009

Social Security: 'Crisis' and 'Reform'

In a rational world there would be no need to talk about Social Security. The combined OASDI program is currently running a surplus and is projected to be in Short Term Actuarial Balance (the legal test for solvency) until at least 2028. Yet Dean Baker at Beat the Pressis constantly having to stamp out fires lit by people at the NYT and the WaPo. Fires which are serving to light up the blogosphere. The other day their was a dKos diary on Obama and Social Security that had nearly 600 comments. And David Sirota had a similar thing up on Open Left. And just this morning Digby talks about CNN bloviation on 'Entitlements'. To understand why they are so persistent you have to start with the language. So in this post I want to talk a little about the various definitions of 'Crisis' and 'Reform' as they apply to Social Security.

Social Security 'crisis' has typically been framed as crisis at Trust Fund Depletion. Rarely are the specifics spelled out, instead there is a lot of loose talk using terms like 'bankrupt' and 'flat broke' which naturally has led many, many people to translate as 'no check', 'Social Security won't be there for me'. Now a few seconds of reflection on the mechanics of Social Security shows this to be nonsense, as long as the FICA payroll tax exists Social Security can be paid out at some level, the real question is what will that level be and do we need to do anything about it. But instead of diving into that lets just stipulate that a gap between projected revenue and cost is the definition of 'crisis at depletion'. And right now that gap is projected to be 22% starting in 2041, or to turn it around a 78% payout of the scheduled benefit.

In more recent years a new definition of 'crisis' has surfaced. This is 'crisis at shortfall' which is the point at which revenue from taxation fails to meet costs. Now while it is really, really odd to call this a crisis given that Social Security is projected to have about $5 trillion in US Treasuries when this event is projected. But for the purposes here we will simply grant the crisismongers the point and pretend that the Trust Fund doesn't exist.

So that is the two 'crises' we are dealing with: 'crisis at depletion' which at root is defined as inability to pay benefits and 'crisis at shortfall' which is defined as inability to finance benefits, two slightly different concepts.

When we turn our attention to 'reform' we once again see two different frames. One would think that the goal of any 'reform' would be to fix the crisis. But that assumes we all share the same goal and the same interpetation of what the crisis is, something that as it turns out is not true at all among reformers.

When I look at 'crisis at depletion' I see it as a potential for a benefit cut that would be if not fatal be certainly painful to retirees in whatever year it occurs and for whatever years it persists. If the gap can be avoided altogether or mitigated at a reasonable cost I would prefer to try to close the gap as much as possible. But certain reformers don't see that benefit cut as a problem in and of itself, instead they see it as a threat and a call for a bailout. Thus you get a certain tension between people like Coberly who insist that the cost of the fix is cheap and people like FA who don't even like what they are paying now and certainly don't want to pay a penny more, not now and not in 2041. Now we know what the Coberly cost would be, a 1.7% point payroll increase now or roughly double that if we simply let 'crisis' run its projected course and avoided a tax increase until the last minute. But this assumes that we stick with the scheduled benefit which itself is based on a formula where initial benefits are based on real wage increases and subsequent benefits by CPI. Alternatively we could alter the schedule by changing the formula and so close the gap from the opposite direction. That is we can simply lower people's expectations about the replacement value of their retirement check in the interests of avoiding any need for a sudden bailout down the road. Now this approach is not inherently cruel, there are ways of doing it right and ways of doing it wrong, a lot of it comes down to achieving a good faith consensus on what our targeted outcome should be. If 78% after 2041 is not enough, what compensating benefit reduction between now and 2041 would place Social Security back on a pay-go basis under existing rates with permanent outcomes better than 78%. But whether we are talking a tax increase or some sort of benefit cut the goal here is to provide a fix for that sticker shock. This is 'reform' as 'fix' for 'crisis at depletion'.

On the other hand there are those who define 'reform' quite differently, instead of a 'fix' they look for a 'transformation'. If that transformation supplies a fix then great, but for some of these guys 'crisis' translates to 'opportunity'. That is there is a substantial group of people who hate Social Security for reasons that have nothing fundamentally to do with solvency. And while many of them may sincerely believe that their preferred system will out perform Social Security as currently configured, that belief is clearly secondary to their policy preferences. This becomes apparent when you look at plans like LMS whose outcomes for most seniors are not much better than simply letting the system go and whose interim costs are much higher than a simple Coberly-like fix would be. Now I suspect there are some mixed motives going on. Some free-market purists simply prefer privatization as an end in itself, the anti-socialist solution as it were. Other supporters of privatization seem more motivated by a desire for tax avoidance down the road, the no-bailout solution in this case. But neither group is really focused on maximizing retirement security for all, although they recognize that paying lip service to it may be politically unavoidable. When evaluating 'reform' plans you need to see if the reformers are really looking for a 'fix' or just a 'transformation'.

Okay that is 'reform' as it applies to 'crisis at depletion'. Fix Social Security or transform it. But what about 'crisis at shortfall'?

Well this one is a lot more cynical. After all at least at depletion we have an undoubted event: benefits and revenues have to be brought into line one way or another, there is a real imbalance internal to the program. Shortfall is different. A plan was put in place in 1983 designed to mitigate the impact of future revenues falling behind future costs. And that plan wasn't free, instead future retirees who were then working took on an additional tax burden in order to postpone benefit cuts for as long as possible. And those additional taxes, which are still being collected, have grown with accumulated interest to $2.3 trillion today and are projected to total more than $5.6 trillion by the peak in 2023. An amount sufficient to pay full benefits until 2041 (SSA) or 2049 (CBO) or potentially through some sort of reform continue to pay out some benefit better than 78% for the foreseeable future. But for some people 'crisis at shortfall' simply means being unwilling or perhaps unable to pay back the money they borrowed and their proposed 'reform' comes in the form of short to medium term changes in taxes, benefit levels or retirement age. In this case 'reform' pretty much boils down to 'tax avoidance' with 'fix' meaning 'not with my dime pal'. Note that in this case there is no immediate appeal to private accounts, no one even pretends they could be a solution to a cash shortfall projected to happen in less than ten years. This can't be excused as just an exercise in preferences for free market solutions, it is just out and out theft. Some will argue that they have no choice. Which doesn't change the moral equation.


Anonymous said...

I really get tired of those like you who keep pushing this nonsense that there isn't a problem with Social Security. When payouts exceed income they will have to start drawing from the "Trust Fund" only there isn't any money in the Trust Fund so the government will have to start borrowing even more money from the private sector to make up the increased shortfall.

Bruce Webb said...

Anonymous. Piss off. You don't know what you are talking about. At all.

Stale talking points are not arguments. If you are tired, lay down.

Anonymous said...

Keep running from reality, typical leftwing idiot. Facts are facts, when we have to start drawing from the "Trust Fund" we will have to borrow more and more.

Talking point? All you have are nonsense talking points.

Oso said...

Anonymous-why do idiots assume that reasoned viewpoints which contrast with their own viewpoint are "leftwing" ?
Just curious.

Bill Woessner said...

Regarding the trust fund:

If a corporation issues itself its own bond, is it an asset?

If the federal government issues itself its own bond, is it an asset?

Bruce Webb said...

Google and OpenId don't seem to want to recognize my iPhone and gobbled my longer response. Oh well.

It matters nothing that the Special Treasuries in the TF don't match the definition of 'asset' in the back of your Intro to Accounting textbook. Treasury is legally required to make them good and there is no plausible political scenario under which Congress would abrogate those obligations.

All the rest is glibertarian verbal circle jerks.

Bill Woessner said...

Treasury is legally required to make them good

Then would it be fair to say that the Social Security Trust Fund merely represents a claim on future income tax revenue?

Bruce Webb said...