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

 

What are the Policy Consequences of Delaying Social Security Reform?

Filed Under (Retirement Policy, U.S. Fiscal Policy) by Jeffrey Brown on Mar 28, 2011

Much has been written about the financial consequences of delaying action on Social Security reform (click here for one such report, notable for the fact that it is genuinely bipartisan).  Most of what has been written deals with the straightforward “mathematics” of delay.  In short, the longer we delay, the bigger the changes that will be required when Congress finally does act.  Regardless of whether you prefer that we return Social Security to financial sustainability via benefit reductions or tax increases, the point is that the longer we wait to do so, the bigger those benefit reductions or tax increases will have to be.  This is well-documented by policy experts across the political spectrum (even if the facts are somehow ignored by many of those that must run for re-election).

Today, though, I want to focus not on the simple mathematics of delay, but rather on what delay means for the politics, and what those politics, in turn, mean for the policy outcome.  In recent years, I have heard two very different views on the subject.  I am not sure which will prove to be correct, so let me just set them out here and invite comments if you have strong feelings on the subject.

The first view, which I first heard in a conversation that I had with a well-known and well-respected policy expert on the Democratic side of the debate (whose name I will not use simply out of respect for the fact that this was a private conversation) who pointed out that the longer we wait to address Social Security, the more likely it was that solvency would be restored through tax increases.  His political calculus was that the bigger the benefit cuts required, the less likely that the political will would exist to make such cuts, particularly given the clout of organizations like the AARP.  This particular individual viewed this as a desirable outcome, as it made it more likely we would keep the current benefit structure in place. 

The second view was explained last week in an op-ed published in the Washington Post.  Chuck Blahous, who is one of two Public Trustees for Social Security (he is the Republican trustee who spent 8 years in the Bush White House, although he was nominated to this current post by President Obama), argues that delay could result in the undoing of the program.  He says:

“Faced with a choice between wrenching benefit cuts and/or payroll tax increases vs. tearing down the wall between Social Security and the rest of the budget, legislators will tear it down. And that would be the end of Social Security as we know it. No more special parliamentary protections. No longer would benefit payments be shielded from the chopping block by the rationale that they were funded by separate payroll tax contributions. Social Security would be financed from the general revenue pool, and its benefits would thereafter have to compete with every other federal spending priority. The irony would be that the program was done in by its supposed defenders.”

These are two very different views from two highly respected experts on Social Security politics and policy.  Sadly, given the reluctance of Congress and the Obama administration to make Social Security reform a priority, we may be given the “opportunity” to find out which view is right.  That is unfortunate, as the better outcome would be to fix the program sooner rather than later, and leave the “what ifs” as a purely intellectual exercise.    

I’d be interested in what the readers think (and you can post your comment by clicking the link below) — does delay make it more likely that we will shore up the program by raising payroll taxes, or does it make it more likely that we will have to desert the 75+ year history of having the program financed by a payroll tax, or does it make it more likely we will have to cut benefits?  Or something else?  Thoughts welcomed …