Friday, September 03, 2010

Friendly Fire on Social Security

-- Posted by Neil H. Buchanan

I keep expecting Social Security to return to the back burner, which would allow me to write about something else for awhile. The supposed problems facing our retirement system have, however, become a continuing topic of policy conversation. Most of that conversation is, of course, woefully misinformed, led by those on the right who never liked Social Security and want to end it.

Last week's mini-scandal about former Sen. Alan Simpson, who is currently the co-chair of President Obama's commission to recommend ways to reduce the deficit, offered a rare view into this DNA-level hostility toward Social Security. Although the public discussion revolved around Simpson's use of one of the seven dirty words you can't say on TV -- an odd word choice for a guy from a farm state, who should be naturally inclined to use the word "teat" -- the real story is in Simpson's seething scorn for the entire idea of the Social Security system. He has, in fact, spent a big chunk of his career attacking the system and advocating that it be privatized, as have many of his ideological soul-mates.

More perversely, however, a large number of putative liberals readily buy into the idea that Social Security is doomed, a scam, or whatever. In my FindLaw column this week, I discuss a pair of interviews from this past Monday night, when Lawrence O'Donnell was the guest host on Keith Olbermann's show on MSNBC. (Transcript of the entire show here. Videos of the two interviews here and here.) As I point out in the column, O'Donnell used the relative youth of his interviewees (both of whom are clearly post-Baby Boomers) to launch into an all-out attack on Social Security as being a time bomb that will hurt young people if something is not done right away.

I discuss two of O'Donnell's errors in my FindLaw column. First, he claimed that in 2037, "when your time comes to collect, the money will not be there." When his interviewee started to correct him, pointing out that an empty trust fund does not mean that there is no money to pay for benefits, O'Donnell basically started casting about for numbers. He first allowed that 75% of benefits could be paid, then changed it to 60%, then 65% -- with no basis or explanation for his impromptu game of "Let's Make a Deal." The effect, enhanced by O'Donnell's condescending tone, was truly bizarre. Even worse, he added that this doomsday scenario was true "according to all the projections that we have today." Even the hyper-cautious Social Security trustees provide a completely plausible scenario in which the trust fund is never emptied, putting the lie to that claim.

The rest of my column explores a more substantive question about retirement finance, pointing out that even a fully privatized system of retirement accounts must involve having the young support the old. Because O'Donnell's comments were so far off base, however, I will use the remainder of this post to discuss the errors that I was not able to discuss in my column. I do this not because O'Donnell is uniquely villainous, but because he is simply giving voice to the "thinkable thought" that has taken hold among most of the establishment liberals in Washington. O'Donnell, formerly the chief of staff to the Senate Finance Committee, is saying essentially what Obama's advisors and other nominal liberals are saying.

After completely mangling the first interview, as described above, O'Donnell moved onto an interview with Ezra Klein of the Washington Post. Returning to the self-interest angle, O'Donnell again tried to make a big deal out of the solvency question. Klein responded (correctly) that the Social Security shortfall -- even under the assumptions that would lead to the trust fund's depletion in 2037 -- is simply not very big. When Klein pointed out that the cost of fixing the shortfall is almost exactly the same as the cost of extending the Bush tax cuts for the richest 2% of taxpayers, O'Donnell interrupted him and offered this: "So—is that to say the Democrats should be willing to violate FDR‘s principle that Social Security be self-funding and pay for itself so that the workers can actually claim that what they‘re getting is what they earn? ... Are we now supposed to depart and pay for Social Security out of general revenue for the first time?" Klein did not actually make that argument, but O'Donnell's argument is bogus in any case.

The whole idea since 1983 has been to pay for part of scheduled Social Security benefits out of general revenues during the Baby Boomers' retirement. That's what the "IOUs" in the trust fund mean -- that the Baby Boomers have been accumulating a surplus for decades, by paying more in taxes than was needed to fund the program, thus allowing them to receive benefits that are partially funded by general revenues for the next few decades. As soon as we went from annual pay-as-you-go funding to building up the trust fund, we violated FDR's original vision of the plan.

More to the point, O'Donnell's take on this issue is based on the belief that any use of general revenues beyond the amounts in the trust fund would go beyond giving workers what "they earn[ed]," with anything added from general revenues being an inappropriate bonus. This requires one to believe that the interest rate being paid on the trust fund is the true and correct rate that appropriately credits workers for their contributions, nothing more and nothing less. While the technical arguments about the trust fund's proper interest rate are far beyond the scope of this blog post, there is very good reason to believe that the trust funds are understating what they should be measuring.

Beyond that difficult technical argument, however, the moral argument is pretty simple. O'Donnell is arguing that it would violate a sacred principle to draw even a penny more from general revenues than the accumulated interest on the trust funds would allow. This is a strong statement. If we are really going to cut people off -- to hit future retirees "very hard" and "very suddenly" -- then we had better think a lot more clearly about whether the trust funds are accurately measuring workers' accumulated entitlements to future benefits. Invoking FDR's legacy is not an argument.

Finally, O'Donnell suggested raising the retirement age, one of the favorite arguments from those in his camp. When O'Donnell claimed that the retirement age was set at 65 at a time when average life expectancy was only 58 (implying, I guess, that we can raise the retirement age to 85 today, when life expectancy is 78), Klein corrected him by noting that life expectancy for those who reach retirement age has actually not gone up by much since the thirties. (Significantly lower rates of infant and child mortality explain most of the increase in average life expectancy.)

Beyond that basic error, however, the bigger problem is that increases in the retirement age represent a huge decrease in benefits. With the retirement age currently at 67 for workers born after 1960, the average worker can expect to collect about 11 years of benefits. Raising the age to 70 -- a round number often tossed out in policy discussions -- would thus represent a 27% cut in lifetime benefits. Moreover, it would require people to give up the three best years of their retirements, when they are healthiest and can enjoy life much more than will be possible later.

Once we take into account Klein's further argument that there is a huge distributional issue, caused by lower-income workers having much shorter expected lifespans than do higher-income workers, increasing the retirement age becomes the least appealing way to "save" Social Security.

Finally, we should return to O'Donnell's overall argument, that we need to make these changes to prevent younger workers from being harmed later. Any increase in the retirement age will be phased in, and (under any realistic time line) it will reach 70 only for post-Boomers. Younger workers should not be fooled by the crisis rhetoric. A plan that purports to help young workers by making them work longer is a perverse joke.


tjchiang said...

Once you start to consider whether boomers should be able to tap into general fund revenues, you hit the problem that the boomers have used their disproportionate political power to gorge on general fund spending over the last 30 years, without paying sufficient income tax to fund it. So we have a deficit in both social security and general funds.

As for your last point that any reduction in benefits will be phased in to hurt currently young workers (Generation X) the most, the problem is comparing all the alternatives. Because the Baby Boomers have gorged themselves on spending (both general fund and for promised Social Security), Generation X has essentially three choices:

1. Pay for the overall deficit of the Boomers by forgoing benefits or other spending.

2. Pay for the deficit of the Boomers by paying higher taxes.

3. Keep the cycle of borrowing and make Generation Y face the same choice.

What you are advocating to Generation X is that, seeing the result of their parents selfish actions, to redouble that selfishness when their turn in political power comes to screw Generation Y. And when Generation Y's turn comes, to screw Generation Z. Self-interested, to be sure. Wise, not so much.

Paul Scott said...

Or you could mostly ignore the deficit, since its not really that big of a deal anyway. Your choice in #3 is largely counter factual and assumes that the borrowing is wasted or at least that it does not produce dividends equal to or in excess of the rate of interest required to obtain it.

If that assumption is meritorious, the problem is still not with the deficit itself, but rather with the choices made allocating the resources obtained by borrowing. There are a lot of entities quite successfully profiting through deficit spending. There is no entity better equipped to handle very long term payoffs and better able to cheaply borrow the money to do so.

Ultimately, you are complaining about deficits, but those deficits by necessity must be a diversion from your real issues. By definition it is simply impossible for any amount of deficit to be a bad choice so long as 1. the payoff exceeds the interest and 2. liquidity sufficient to pay for the interest exists. #1 is debatable on an expenditure by expenditure basis. #2 has got to be theoretically possible, but there is no evidence that we are anywhere near it.

tjchiang said...

Paul Scott, you are correct to some degree. But whether borrowing generates "dividends" sufficient to pay for itself is trickier in the government context, since government reaps returns from borrowing not from direct profit-making enterprises like a corporation, but rather more indirectly in the economy, from which it then recovers taxes.

So one crude measure is whether borrowing facilitates so much economic growth that tax rates can remain the same in the future, without spending (including social security spending) being cut. This is simply an empirical question. And I will readily agree that my propositions are "counter factual" if our economy happily "grows out" of its deficit problem, obviating the need for either tax increases or spending cuts. I just seriously doubt that is likely to happen.