Three Strikingly Different GOP Visions about Social Security Reform

Filed Under (Retirement Policy, U.S. Fiscal Policy) by Jeffrey Brown on Jan 17, 2012

At the Republic debate in Myrtle Beach, SC last night, in response to a question by Gerald Seib of Wall Street Journal, three of the candidates weighed in on Social Security reform.  Their responses revealed strikingly different approaches to economic policy.

Governor Romney took the practical approach.  After pointing out that he would protect everyone over the age of 55, he laid out two very specific changes to the benefit formula that would substantially reduce Social Security expenditures in the decades to come.  The first change would change the way that initial retiree benefits are calculated.  Under current law, benefits from one cohort of retirees to the next rise with average wages in the economy.  Governor Romney suggested, instead, a plan similar to what Social Security policy experts call “progressive price indexing.” This would continue to index starting benefits to wage growth for those at the bottom of the income distribution, but would index benefits at the top end of the income distribution to price inflation instead.  Because prices tend to rise less quickly than wages, this would reduce expenditures relative to current law.  The impact would be gradual – and thus the short-term cost savings would be limited, but over many decades can be quite substantial.  Second, Governor Romney indicated a willingness to increase the full retirement age by one or two years.  Importantly, increasing the full retirement age does not actually require that anyone work longer: rather, it simply moves the age at which one receives “full” benefits back by one to two years.  Variants of both of these reform proposals have been floating around Washington over the past decade.  In essence, this is a fiscally responsible approach that recognizes there is no pain-free way to fill in the fiscal gap.  While this is good fiscal policy, whether or not it is good politics remains to be seen.

In sharp contrast to Romney’s “eat your spinach” approach to reform, Speaker Gingrich suggested that we follow the “all dessert” approach to Social Security.  Rather than being upfront about the need for politically difficult changes to taxes or benefits, Speaker Gingrich suggested that the government can guarantee retirees that they can receive full promised benefits without paying a dollar more in taxes, despite the existence of a multi-trillion dollar shortfall.  How does he propose we do this?  By allowing workers to shift 100 percent of the employee payroll tax contribution (currently 6.2 percent of payroll) into personal accounts, leaving the 6.2 percent employer contribution going into the existing system.  Citing the examples of Chile and Galveston, Speaker Gingrich argues that people will not have to sacrifice any benefits.  As I discussed last week, however, he fails to acknowledge the huge implicit liability he is imposing on taxpayers by essentially guaranteeing that stocks will perform close to their average historical values.  They might, but to guarantee this without acknowledging the real economics cost is both fiscally reckless and intellectually dishonest.

Former Senator Rick Santorum used most of his response to correctly point out another fact about the Gingrich proposal: namely, that by diverting 6.2 percent of payroll into the personal accounts, we will have to borrow additional money to back-fill the missing payroll tax revenue, nearly every penny of which is now going to pay current retirees.  And the Speaker’s statement that we can somehow fill this gap by eliminating the overhead associated with consolidating anti-poverty programs is mathematically ridiculous.  Those numbers don’t even come close to adding up.

This is quite a different situation than we faced a decade ago when the President’s Commission to Strengthen Social Security (on whose staff I served) recommended personal accounts at a time when Social Security was projected to have another 15-plus years of surpluses.  One of the key rationales for personal accounts a decade ago was to ensure that those surpluses were saved, rather than redirected to underwrite other government spending.  The Commission plans also envisioned smaller accounts, further reducing the need to fund a transition investment.  Even so, the plan still had to come up with substantial short-term revenue to cover the transition, an aspect that contributed to the proposal’s demise.  Unfortunate, “carve-out” personal accounts – which I have supported in the past – is an idea whose time has come and gone.

Aside from criticizing Speaker Gingrich, Senator Santorum offered few specifics.  He did endorse means-testing, noting that we should reduce or eliminate benefits for the 60,000 retirees who earn over $1 million per year.  This is a perfectly reasonable suggestion, albeit with two problems.  First, if high earners receive no benefit whatsoever for paying into Social Security, then this converts the 12.4 Social Security payroll contribution into a pure tax, with all the associated efficiency losses.  Second, the money saved is a “drop in the bucket” compared to the size of the projected Social Security shortfalls.  Assuming that every one of those 60,000 millionaires gave up 100 percent of their benefits, this would save only a few billion dollars a year.  This is real money, but when one looks at the size of the expected annual Social Security shortfalls that we will face in another 20 years, we need dozens – if not a hundred – money saving ideas of this magnitude.

Thus, what we have witnessed are three fundamentally different approaches to Social Security reform.  One candidate who puts forward real meaningful solutions and is therefore criticized for not being sufficiently bold, one candidate who promises a free lunch at taxpayer expense, and one candidate who appears not to have put together a plan sufficient to the task ahead of us.  Only time will tell how voters respond to these three different narratives.

Disclosure: Over the past few weeks, I have begun to offer informal, unpaid advice to the Romney campaign’s policy staff on issues related to Social Security.  All opinions expressed in this blog, however, are mine alone.

This blog is cross-posted, with permission, at www.forbes.com

 

The Economics and Politics of “the NRA”

Filed Under (Retirement Policy, U.S. Fiscal Policy) by Jeffrey Brown on Sep 13, 2010

When most Americans think “NRA,” they think of Charleton Heston – the American actor who served for many years as the public face of the National Rifle Association (the better known NRA).  But I want you to think about Charlton Heston for a different reason – namely, that he continued to work into his 80s – well beyond the Social Security Normal Retirement Age (the lesser known “NRA.”)

In the United States, the Social Security system defines a “Normal Retirement Age” as the age at which retirees can claim “full” benefits.  Indeed, it is sometimes called the “Full Retirement Age” – which is probably a better name, because there is nothing “normal” about the NRA, given that most people claim benefits much earlier.

For many decades, the NRA was age 65.  It is now approximately 66, and it will be 67 by the time most of today’s younger workers reach retirement age.  (Click here for the full schedule).

For many years, a large number of economists and policy wonks have publicly and privately expressed the belief that we ought to raise the NRA, especially in light of the fact that people are living longer and healthier lives than ever before.  If 65 truly is the new 55, then why have our retirement policy reflect this?

These issues have come to the fore in our public debate again, in part because President Obama’s fiscal commission appears to be considering a recommendation to further increase the NRA.  Indeed, politicians on both sides of the aisle (including Republican John Boehner and Democrats on the fiscal commission) have spoken favorably of the idea.  Even the AARP *might* be open to the idea.

This is despite the fact that messing with the NRA can be politically difficult.  I distinctly recall the first public meeting of the 2001 President’s Commission to Strengthen Social Security.  Before the meeting – and keep in mind, it was before the meeting, so nobody had a clue what the Commission was going to propose – there were protestors holding signs that said “don’t make me work til I am 70.”

The politics are not unique to the U.S.  This weekend, over a million citizens of France took to the streets to publicly protest against raising the retirement age.  Yes, that is right -  in a country smaller than ours, they managed to get a million French citizens to protest an increase in the NRA.

Personally, I think raising the NRA is a terrific idea.  It recognizes the increase in health and longevity.  It can be phased in gradually so that younger generations have plenty of time to adjust their work and savings behavior.  It will make a meaningful dent in the longer term fiscal health of the program (although it is nowhere near sufficient to eliminate the financing problem by itself – but it is a useful start).

But let’s be clear.  Despite all the political rhetoric, raising the NRA (while doing nothing to change the early entitlement age of 62) is nothing more than a particular way of cutting benefits.  If you claim at age 62, you will get a smaller benefit if the NRA is 70 than you would if the NRA were 67.  Normally, I am a big fan of calling things what they are – in this case, calling a benefit cut a benefit cut.  But if people want to believe that raising the NRA is something different, and if that belief actually allows Congress to make some progress against filling in the fiscal gap, then so be it.

But regardless of what we do about the NRA, the most attractive solution to our long term financing problems may be finding ways to get people to stay in the labor force longer (rather than still retiring at 62 with a smaller benefit).  So regardless of what you think about Charleton Heston’s “other” NRA, his model of continuing to work at older ages may just hold the key to our fiscal future.