Recent statements from key policy personnel of AARP, the powerful lobby for the elderly, expressed a willingness to consider reductions in future Social Security benefit growth to help correct the program’s financial shortfall. These remarks received a fair amount of coverage, the central thesis of which was that AARP’s newly expressed receptivity to benefit changes may make it substantially easier to enact bipartisan reform legislation.
My take on this interpretation of AARP’s statements is one of skepticism. I do not see their recent comments as significant or new. In support of this skepticism I offer the following observational points:
First point: The substance of AARP’s recent statements is not new or different. AARP has always expressed a willingness to consider “a balanced package of revenue and benefit measures”, if – and that’s a big if – the entire package is to their liking. By contrast, there has always been another caucus of advocates urging that benefit growth restraints never be enacted. This other is an unabashedly far-left caucus and AARP has never been within it, instead portraying itself as less ideological and less partisan. AARP has in the past expressed an appreciation of the need to reform Social Security’s benefit structure even as they have withheld their support from various specific proposals to do so. AARP’s follow-up statements have confirmed that this longstanding posture has not changed.
Published for The Hoover Institution, May 26th, 2011:
In this morning’s Washington Post, political analyst Dan Balz interprets the Democrats’ victory in the 26th New York Congressional District as being a direct result of Republican overreach on Medicare reform. Specifically, he writes that Republicans are making “the same miscalculation that other politicians in both parties have made, which is to assume a mandate when one doesn’t exist.”
As his prime example of “other politicians” making the same mistake, Mr. Balz offers President Bush’s Social Security reform efforts of 2005:
“Former president George W. Bush made a similar mistake after the 2004 election when he launched his proposal to partially privatize Social Security. He sprang the plan on Congress and the country in early 2005 without having fully aired his intentions during his reelection campaign.”
Whether Mr. Balz is correct in his current political analysis is not a matter on which I have any especial expertise to offer. I did, however, serve President Bush during the 2005 Social Security reform effort and thus feel compelled to note that the description above is incorrect on at least two counts.
The substantive correction first: President Bush did not propose to “partially privatize” Social Security. He did propose a savings component within the Social Security program, but he explicitly specified that both this savings component and the traditional portion of Social Security would remain publicly administered by a federal agency. Given the frequency with which political opponents charged President Bush with wanting to “privatize” Social Security, it’s not wholly surprising that Mr. Balz would make this mistake, but it is nevertheless is an incorrect description of what President Bush actually proposed.
In this year’s budget submission, the Obama Administration included a proposal to partially reform the finances of the Pension Benefit Guaranty Corporation (PBGC). In essence, the proposal would give PBGC increased authority to modify both the level and structure of premiums that pension sponsors are charged for pension insurance.
Proposals similar to President Obama’s have previously been offered both by the George W. Bush Administration and by the Simpson-Bowles commission. The proposal also faces energetic opposition from much of the business community. I believe that the basic conception of the Administration proposal is sound and that its enactment would strengthen the insurance system standing behind worker pension benefits.
Background: When employers make defined-benefit (DB) pension promises to their workers, those benefits are insured (up to a statutory cap) by the PBGC. Employers are assessed premiums for that insurance. A core principle underlying the PBGC system is that it is supposed to be self-financing; that is, funded by pension sponsors without taxpayer support.
If a pension plan terminates (e.g., if its sponsor goes bankrupt), the PBGC assumes its assets and benefit payment obligations. If the plan lacks the assets to fund the benefits insured by the PBGC, the insurance fund takes a hit. The solvency of the fund thus depends on both the adequacy of pension funding and on the adequacy of premium assessments. Funding requirements and premium assessments are currently established by federal law.
PBGC’s insurance programs currently face a deficit of roughly $23 billion in present value. This deficit was made worse by the recent recession but was not caused by it. Even when financial markets were at their recent peak, PBGC had reported substantial deficits for several consecutive years.
If one surveys left-of-center commentators about how to solve Social Security’s financing shortfall, one suggestion is heard more frequentlythan all others: increase the amount of worker wages subject to the Social Security payroll tax. The rationale is usually presented much like this:
Social Security taxes are currently only applied to the first $106,800 (indexed) of wages. This cap is said to shield high-wage workers, and thus to be regressive and unfair.
The current cap was set in 1983 to expose 90% of total national wages to the Social Security tax. Because of inequality in income growth since then (the rich growing richer), the amount of wages escaping such taxation has grown from 10% to about 15%. It is said that if we raise the tax, we will return to historical intent and also address the erosion of income equality since 1983.
If we raise the cap on taxable wages, it is said, we would only affect a very small number of workers, the very richest Americans.
If we raise the cap on taxable wages, it is said, we will make significant headway in reducing the Social Security shortfall.
All of the statements above are at the worst untrue, and at the very best so imprecise as to be misleading. The purpose of this piece is to clear up some of these points of common confusion, and to explain why raising the cap on Social Security taxable wages would actually leave most of the program’s financing shortfall in place.
Published for The Washington Post, March 25th, 2011:
Young people often ask me whether Social Security will be there for them. My answer has traditionally been: Yes, it will be there. It will probably pay less than it is currently promising you. You should not expect a generous return on your contributions. You may have to pay more in payroll taxes. But the basic structure of the program is likely to remain intact.
Recent events require a reassessment of this answer. Chances are now markedly increasing that Social Security will eventually cease to operate as the self-financed, earned-benefit system that Americans have long known it to be.
Many recent statements by public officials express a mind-set in which fiscal repairs to Social Security might be deferred for years. Administration officials play down the urgency of action by pointing to still-growing balances in the program’s trust fund. A recent Senate bill would erect steep procedural barriers against many measures to improve system finances. Even the Senate majority leader recently asserted that Social Security could be safely left alone until “two decades from now.”
If these statements are indicative of near-term policies, Social Security is in very deep trouble.
Social Security last approached the brink of insolvency in 1983. An interruption in benefit checks was only months away. Despite this urgency, rescue efforts broke down several times before negotiators reached a last-minute bipartisan accord. The 1983 reforms were difficult to negotiate and enact. They neared the limit of the sudden changes that our political system is willing to make to preserve Social Security as a self-financed system.
Statement of Charles P. Blahous Research Fellow, Hoover Institution and Public Trustee for Social Security
Before the House of Representatives Committee on the Budget
March 17, 2011
Thank you, Mr. Chairman, Mr. Ranking Member, and all of the members of this distinguished committee. It is an honor to appear before you today to discuss the challenges facing the federal Social Security program, a cornerstone of retirement security for millions of Americans.
The Social Security Financing Challenge
Social Security finances have many facets. Experts can and do differ on which aspects should be of greatest concern to elected policy makers. I will focus first in my written testimony on those aspects of program finances that I believe are broadly agreed upon.
Taxes: Under current law, the vast majority of funds used to finance benefit payments at any given point in time is generated via a payroll tax upon covered wages. The total payroll tax upon wages is 12.4%. Though nominally divided into two 6.2 point halves assessed respectively upon employer and employee, most economists agree that the entirety of the 12.4% tax is levied on the worker’s wage compensation. Wage earnings subject to this tax, as well as any benefit credits based on those earnings, are both capped. This cap reflects Social Security’s historic design of providing a floor of protection in the event of income loss due to old-age, disability, or death of a primary household wage earner. The current cap is $106,800 annually, and is indexed to grow generally with the national Average Wage Index (AWI). In addition to payroll taxation, a much smaller amount of incoming program revenue (about 3%) is generated via income taxation of Social Security benefits.
This is the second of two pieces explaining why I have a more favorable view of the Simpson-Bowles Social Security plan than that expressed in a recent paper from the Center on Budget and Policy Priorities (CBPP). In the first installment, I listed instances where I mostly agreed with their analysis – sometimes agreeing with the policy criticism, sometimes not. In this piece, I give instances where I have disagreements with both the critical analysis and the policy conclusions.
To see the first part of this analysis, click here.
Criticism #4: The Plan “Relies Excessively on Benefit Cuts.”
I have a fundamental disagreement with some characterizations of Simpson-Bowles’s relative reliance on benefit cuts to achieve solvency. The statement was made that the lion’s share of the plan’s savings “comes from benefit cuts. The benefit provisions account for nearly two-thirds of the savings over the 75-year period and four-fifths of the savings in the 75th year.”
These figures are arrived at by dividing the plan’s provisions into revenue and benefit pieces, and then adding up the relative size of provisions in each category. I do not believe this method provides for a complete, accurate assessment of the plan’s total effects. The total reliance of Simpson-Bowles on benefit changes is much less.
The reason is that some plan provisions affect both revenues and benefit obligations. Raising the cap on taxable wages, for example, increases total system revenues, but it also increases total benefit obligations. So too does the plan’s provision to expand coverage to state and local workers. Simply listing these provisions as being on the revenue side does not capture their full effects.
Published for economics21.org, February 17th, 2011:
The hottest economic policy issues now facing the White House and Congress include government spending levels, the statutory debt limit extension and efforts to “repeal and replace” last year’s health care law. Largely overlooked in the public debate, however, has been the close relationship between the last two of these issues.
Few have been discussing the fact that last year’s health care law will increase gross federal debt and thus accelerate the speed at which we will approach the statutory debt limit in the future. As elected officials wrestle with these two contentious issues (health care and the debt limit) it seems reasonable to set a minimum policy goal that last year’s health care law be modified so that it at least not worsen the statutory debt outlook.
Note: this is not about whether one believes the Congressional Budget Office (CBO)’s scoring of the health care law. It’s not about whether one believes that assumed reductions in physician reimbursements and other Medicare payments will ever take place. Rather, even if one believes that all of this will occur to reduce unified budget deficits, total government debt subject to statutory limit would still rise significantly because of the law.
This fact is not in dispute. In a January, 2010, letter to Senator Jeff Sessions, CBO substantiated that then-pending health care legislation would increase total government debt by $226 billion through 2019. Obviously, if future Congresses fail to follow through with the cost-cutting provisions envisioned in the law – about which many have voiced skepticism – this increase in the total debt would be hundreds of billions higher. But even with all the assumed cost reductions, we will be bumping up against the statutory debt limit more frequently as a direct result of the new law.
