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

 

Raise your hand if you’d favor a balanced budget that spent 18% of GDP. Not so fast, GOP hopefuls!

Filed Under (U.S. Fiscal Policy) by Nolan Miller on Aug 12, 2011

Last night’s GOP debate featured some high political theater.  One of the highlights was when the moderator asked the eight candidates to raise their hands if they would reject a deficit deal that included $1 in tax increases for every $10 in spending cuts.  Every one of the contenders raised their hands.

Now, I don’t want to be political here, but I don’t think it is political to say that the candidates could not possibly have been thinking when they supported this proposition.  (The one exception is Ron Paul, who is a principled Libertarian and supports the elimination of the income tax entirely.)  Let’s think about what it would mean.  Currently, the U.S. federal government spends about 24% of GDP each year and takes in about 15% of GDP in taxes.  So, a 10-to-1 ratio of spending cuts to revenue increases, if scaled appropriately, could lead to a balanced budget that spends around 16% of GDP.

Now, the current revenue number is somewhat lower than the historical average, which has run around 18% of GDP.  This is partially due to the recession and partially due to the Bush tax cuts.  If the economy recovers and the Bush tax cuts are extended, CBO expects receipts to grow to about 21 percent of GDP by 2020 (with part of this increase being driven by new taxes aimed at paying for the Patient Protection and Affordable Care Act).  Of this increase, expiration of tax provisions are expected to contribute about 1.8% of GDP.  About 0.5% of GDP comes from expiration of the Bush tax cuts for households making more than $250,000 per year, which President Obama opposes. 

So, let’s do a quick, back-of-the-envelope calculation using numbers from the Office of Management and Budget.  (See tables 1.1 and 1.2).  Between 2011 and 2016, OMB estimates that total tax receipts will be about $18.54 trillion and total outlays will be about $23.95 trillion, for a total deficit of $5.41 trillion.  Suppose we were to close the gap using a 10-to-1 ratio of spending cuts to tax increases.  This would give us a balanced budget that spends $19.03 trillion.  Total GDP over this period is expected to be $104.02 trillion, which implies that federal government spending would be 18.3 percent of GDP over that period.  Ballpark computations (which I haven’t done fully) suggest that about the same conclusion comes from using a 10 year window.

The balanced budget amendment proposals that the Republicans have proposed tend to cap federal spending at about 18% of GDP unless there is an extraordinary override vote.  Many of the candidates have voiced their support for these proposals.

Now, the calculations I’ve done may not be quite right, but I think the point is clear.  A 10-to-1 ratio of cost reductions to revenue increases gets us to exactly where Republicans say they want us to be: a balanced budget that spends around 18 percent of GDP.  At the very least, a thinking candidate should have thought that the numbers were close enough to the ballpark that the proposal would require more scrutiny.

So, this leaves us with two possibilities.  Either the candidates were making a stand, saying that while they were willing to spend 18 percent of GDP, 18.3 percent was just too much, or else they just weren’t thinking and dutifully raised their hands in response to what they thought people wanted to hear.  If the former, I can respect that.  If, as I suspect, support for the proposition that a 10-to-1 ratio of spending cuts to revenue increases arose from a failure to consider the proposal and a desire to pander to the party’s base, the candidates are going to need to step it up.  (I suspect that the same set of hands would have gone up if the ratio had been 20-to-1 as well.)  The issues facing the country are too difficult and important to entrust to someone who is not willing to think about them.