Thursday, September 08, 2016

The Wonderful Resilience of Social Security

by Neil H. Buchanan

If this were a typical election, we would have expected by now to hear a great deal about government spending, deficits, debt, and so on.  None of it would have been edifying.  Indeed, as the token "normal Republican" on his party's ticket, Mike Pence has tried to revive the silly "debt doubled under Obama" claim on his lonely campaign trail, fortunately to no avail.

We would also be enduring yet another round of attacks on Social Security and Medicare from the right.  A party that has elevated Paul Ryan to its highest office is a party that has plans to undermine those programs.  But because Donald Trump decided that his mostly older, white audience would not be happy with attacks on their retirement security, those plans have receded into the background for now.

As I note in a new Verdict column today, that will surely change after the election.  Republicans will be looking to take big swings at the new President Clinton, and trying to force her to have her fingerprints on a bill that begins to unravel Social Security would be a huge win.  (Even if Trump somehow wins, there is no reason to think that he would bother to oppose Ryan on this issue.)  Fortunately, Clinton has made it clear that she will not play along, and she would be crazy to do so.

But my larger point here is that Social Security has been under assault by politicians in both parties for decades, yet it has survived intact.  And as I note for the umpteenth time in today's Verdict column, even if politicians leave Social Security untouched forevermore, it will continue to do its job of providing at least a dignified retirement for all Americans.  (It could be better, of course, and Clinton has proposed important improvements.)

It is not necessarily a good thing for Congress to do nothing about Social Security.  If the day ever comes when the system's trust fund reaches zero, inaction by Congress would almost certainly cause a recession, which is no small matter.  So I should not be heard to say that a sit-tight strategy is the best approach.  I am only saying that the claims that Social Security is "going broke" and that it will disappear are nonsense, and Republicans' proposals would move us in exactly the wrong direction.

The very need to repeat that simple truth, however, is the result of decades of demagoguery by people who fancy themselves fiscally responsible.  Social Security (and Medicare, but that is a story for another day) are props in the relentless morality play about our government's supposed fecklessness in the face of doom, doom I tell you.

Among countless examples, consider Steven Rattner, a private equity executive who served in the first Obama Administration.  (No, the connections between Wall Street and the Democratic Party are not figments of Bernies Sanders's imagination.)  Rattner, who is given occasional space on the op-ed page of The New York Times, wrote a column earlier this summer in which he mostly argued against foolish fiscal austerity, pointing out that airport security lines and uncollected taxes were the result of Republicans' deliberate bleeding of the TSA and IRS, respectively.

So far, so good.  But because Rattner is enthralled with the "deficit scolds," he simply had to write this: "Adopting a sensible fiscal policy that eliminates corporate loopholes instead of extending them and focusing on restructuring Social Security and Medicare instead of starving discretionary spending should be our highest priorities."

Restructuring Social Security and Medicare is code for cutting both programs significantly.  And Rattner has plenty of company among Democrats who have decided that the road to fiscal nirvana runs through the retirement dreams of millions of Americans.  (Note to millennials: Do not forget that the "restructuring" that Rattner proposes would necessarily affect post-Baby Boomers much more than Baby Boomers.)

Indeed, there is a strange twist in the history of some Democrats' attacks (or complicity in such attacks) on Social Security.  I was recently reading a fascinating article from last summer about Bill Clinton's admirable efforts to apologize for his various mistakes as president (don't-ask-don't-tell, the Defense of Marriage Act, the 1994 crime bill, and so on).  The author's point was that Clinton has some important items remaining on his to-do list (especially the death penalty).

What caught my eye, however, was the author's rendition of the history of the Lewinsky scandal.  At his lowest point, in January 1998, Clinton was rumored to be considering resignation.  Instead, he tried to change the subject by delivering a policy-heavy State of the Union address, with fiscal policy front and center.

Clinton argued, the article notes, that "the federal government would finally be running a surplus, and that the surplus should be devoted entirely to saving Social Security."  Ay, yes.  Remember "Save Social Security First," which led to Al Gore's "lock box" rhetoric two years later?  Good times.

It might seem that these are not examples supporting my point, because both Clinton and Gore claimed to be defending Social Security from its attackers.  That is true in that neither man agreed with the many Republicans who would have been happy to privatize or simply repeal the program.  The president and vice president seemed to be saying that Social Security was worth saving.

The problem, of course, is that they accepted the framing of Social Security's critics.  The system was in need of saving, which means that it was in trouble, and it could only be protected by inventing imaginary things like boxes filled with trillions of dollars in cash.  No wonder that George W. Bush began his second term with a major effort to begin privatizing Social Security.  Everyone, it seemed, agreed that something had to be done.  We were only negotiating over the details.

The good people in the media heard the message loud and clear.  Abandoning the "two sides to every argument" standard -- to which they are almost pathologically committed, as their indulgent treatment of Donald Trump this year demonstrates -- it became absolutely standard practice for reporters to report as a fact beyond challenge that Social Security is going bankrupt.

With Republicans, many prominent Democrats, and the media all lined up to start slicing and dicing Social Security, however, the system remains untouched today.  What explains the wonderful resilience of this political punching bag?

The cynical answer is that "old people vote," but of course that does not explain why Bush's even more cynical gambit to exempt older voters from his proposed cuts did not cause elders to support his plan, or at least to sit out the fight.  Even if older people are using their political power to protect a program that is good for them, they are doing so on behalf of their children and grandchildren.

I think the better explanations have to do with both policy and politics.  People are skeptical about government, but they are also skeptical about Wall Street's ability to screw over small-fry depositors.  Therefore, the big pitch in using private accounts instead of a government-run retirement security system relies on appeals to (no surprise here) individualism.

Anti-Social Security policy shops have spent years trying to show that "you can do better investing on your own than the Social Security system does."  They produce analyses of the system's "implicit rates of return" that compare unfavorably to hypothetical private investment portfolios.  Why not trust yourself rather than some bureaucrat, conservatives ask?

Most Americans have been delightfully unimpressed by that argument.  There appear to be three reasons.

First, if anyone bothers to think through the wonkish aspects of this, they will discover that the Social Security system includes more than the equivalent of the ability to withdraw money from a retirement savings account.  It includes major insurance components that would be expensive (or even impossible) to replicate in private markets.

More to the point, as many economists have pointed out for years, the implicit rate of return on Social Security could be increased by legislation, which is simply a matter of increasing benefit levels.  Would that make financing the system more difficult?  Yes it would, but if the economy is not strong enough to support higher Social Security benefit levels, it also will not have interest rates that will be high enough to generate better yields on private accounts.

In short, as a matter of substance, Social Security can do everything that private accounts can do in the aggregate.  Which brings me to the second point.  "In the aggregate" abstracts from distributional concerns.  In this context, that highlights the fact that Social Security is designed to narrow the range of outcomes that retirees might face.  It is a feature of the system that high-income earners receive a lower implicit rate of return, while low-income earners receive a higher rate.

And getting rid of that feature is not especially appealing to the average voter.  The message they are supposed to hear is, "Hey, you can do better than all the chumps around you by beating the market."  That sounds good to the small number of people who track stocks as a hobby and try (and fail) to beat the market.

What most everyone actually hears, however, is: "Hey, the conservative answer to the growing inequality in incomes and wealth is to increase inequality in retirement benefits, too."  Even Trump's supporters are angry about how the little guy never wins, and certainly not when Wall Street is involved.

Finally, the third explanation seems to be the most important of all.  People do not want to deal with the hassle of designing and monitoring their own retirement plan, and they understand their own cognitive biases when it comes to dealing with financial decisions.  They know that they should save more, pay more attention to their investments, and generally spend more time and effort being financially virtuous.  But like the new exercise regimen that never quite gets started, everyone knows that they will never be able to live up to their own best intentions.

This is most definitely not a matter of "personal weakness" or lack of intelligence.  People simply need shortcuts to navigate the many difficult decisions in life.  (I have expressed great skepticism about the "behavioral law and economics" research movement, but there is no denying that people have cognitive biases.)  Without shortcuts, every decision becomes a costly dive into cost-benefit analysis.

Perhaps the most obvious example of such thinking is the widespread practice of over-withholding on taxes.  People, year in and year out, implicitly decide to have the government force them to save money and pay a zero percent rate of interest.  Why?  Never seeing the money is actually a good thing, because it is too easy to fritter it away in small amounts, and it feels good to have a big bonus in the form of a tax refund check every year.  No matter how much economists and financial planners inveigh against this, people continue on their merry way.

Why, then, is it really surprising that people are not flocking to support a political scheme that takes what is a very simple system that requires absolutely no thought or effort and would replace it with something that will require expertise, research, and risk?  (And ultimately guilt, because most of us will never feel that we have done enough research or gained enough expertise to assess the risks.)  That might be the most obviously rhetorical question that I have ever asked.

No comments: