Friday, April 02, 2010

Keep Your Government Hands Off Social Security

-- Posted by Neil H. Buchanan

My FindLaw column this week (here) extends my critique of the recent front-page article in The New York Times that claimed to show that Social Security has reached a "tipping point" and is now in much worse shape than we thought it was. Those who read my Dorf on Law post last Friday (here) will find the first half of the FindLaw column very familiar, as I again try to explain the fundamental errors that the article's author commits. The second half of the column discusses a more fundamental question about Social Security's finances, i.e., whether the decades of annual surpluses (memorialized in the Trust Funds) were truly "saved." I show that they were, in the only meaningful sense in which it is possible for an entire economy to "save" for the future.

The broader point that I make in the column is that the "intergenerational deal" represented by Social Security is under attack by people who want to bring the system down. Their best strategy is to convince one party to the deal (post-Boomers) that the other parties to the deal (Boomers and the Greatest Generation) are ripping them off. Because macroeconomics is complicated and often counter-intuitive, it is all too easy to confuse people with half-truths and double-talk, making it seem as though things that have very real effects are not "real" because they are tracked through accounting conventions. Money is ultimately a fiction, so everything that is tracked in monetary terms can be twisted into seeming fictional, too.

Here, however, I want to turn to a different point regarding Social Security's future. The facts are not in dispute: Even though the Social Security Trustees use very, very conservative economic assumptions (even for their "rosy scenario"), their forecasts show that leaving the system alone will allow full scheduled benefits to be paid for two or three decades or forever (depending on how pessimistic one wants to be). If cuts do become necessary, scheduled benefits would have to be reduced by 25-35% as the system returns to annual pay-as-you-go financing. That 25-35% cut, however, is not as big as it seems, because the scheduled benefits in two or three decades are (in inflation-adjusted terms) going to be much higher than today's benefits. Even if the cuts become necessary, therefore, the real standard of living of future retirees will not be lower than today's.

Just because there is no programmatic reason to change Social Security, however, does not mean that there might not be other reasons to do so. The most obvious reason to consider changes in Social Security is that medical costs might continue to rise so quickly that it will be necessary to find savings in other parts of the budget to offset Medicare and Medicaid expenditures. As I have pointed out many times, even the biggest deficit hawks admit that Social Security and all non-entitlement spending are not a serious long-term problem. It is all about medical spending. If the current trends are not reversed, the budget really will be busted. The recent health care bill is surely going to help, but we do not know if it will be enough.

Therefore, we might consider cutting Social Security benefits or raising FICA taxes in order to reduce annual overall federal deficits going forward. I have argued (here, pp. 282-86) that this is a bad idea, essentially because it would enable the health care system to continue to gobble up the rest of the economy. I continue to believe that this is true. Indeed, I am more convinced than ever that the only way to combat health care inflation is to force the political system to confront it directly.

If I am wrong about that dynamic, however, there are surely some simple, relatively progressive changes to Social Security that could be adopted. Lifting the cap (currently $106,800) on labor income subject to the FICA tax would turn the tax from a regressive-by-design tax above the cutoff level to a flat-rate tax, which would be a distributional improvement. Similarly, expanding the Social Security tax base to include capital income could raise significant sums of money in a progressive fashion. Changes in benefits could also be designed in unobjectionable ways, for example, removing some built-in incentives to retire before a person might otherwise choose. Any combination of such changes could raise large sums of money into the indefinite future, reducing overall government debt and -- if done correctly -- insulating Social Security from claims of being on the verge of bankruptcy.

As plausible as that might seem, however, I believe that Social Security should remain strictly off limits. The simple reason is that I do not trust Obama and the Democrats. Tuesday 's announcement that Obama wants to drill, baby, drill, is only the most recent example of how this administration operates. Even the health care bill, though ultimately a political "win," was an awful bill in many ways. It was acceptable, in the end, only because the underlying health care system is such a mess. Since Social Security continues to be an extremely well-run system (with, for example, administrative costs that are only a fraction of those of private systems), there is no reason to open it up to tinkering.

It is, after all, far too easy to imagine Obama capitulating to all kinds of demands from Social Security's opponents. Less progressivity in the structure of benefits? "I'm reluctant, but this is necessary to try to reach an agreement." Real cuts in benefits (through, say, game playing with inflation adjustments)? "Gee, I guess we have to, to be bipartisan." Maybe even a carve-out for private accounts (Bush's dream)? "Well, I hope it's not necessary, but I am open to all ideas." And then, of course, there would be a flurry of business tax breaks added on, to prove that Obama is not "against small business."

In other words, just because there are unobjectionable ways to change Social Security does not mean that today's politicians will stay within those bounds. When it was in their political interest to do so, the Democrats -- even though they were in the minority in both houses of Congress -- killed Bush's attempt to begin to privatize Social Security. Unfortunately, the dynamics of the Democratic Party, particularly in the era of Obama, perversely all but guarantee that if they take the lead in "fixing" Social Security, they will end up undermining it, or worse. This is not a door that should be opened.