What are President Obama’s Plans for Social Security? What We Learned (and did not Learn) from the SOTU

Posted by Jeffrey Brown on Jan 26, 2011

Filed Under (Retirement Policy, U.S. Fiscal Policy)

There is a bipartisan consensus among scholars and analysts of the Social Security system that the program is fiscally unsustainable.  As I, and others, have pointed out many times, there are only two solutions to this problem.  Either we reduce the lifetime benefits that people receive (e.g., by raising the retirement age, changing the benefit formula, etc), or we raise taxes.  To find a bipartisan solution, we will almost surely have to do some of both.

Last night in the State of the Union Address, President Obama said:

“To put us on solid ground, we should also find a bipartisan solution to strengthen Social Security for future generations. We must do it without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations and without subjecting Americans’ guaranteed retirement income to the whims of the stock market.”

What to make of this statement?  One must read the key phrases carefully …

Let’s start with the easy one – the last one:

“without subjecting Americans’ guaranteed retirement income to the whims of the stock market” – no surprises here.  The President – like nearly every elected Democrat in Congress -  is opposed to personal accounts as part of Social security.  It would have been big news if he had not said this.  The fact that he said it just “checks the box” on what we already knew.

Now on to reading between the lines …

“without putting at risk” — notice that he is placing a priority on protecting benefits of 3 groups: (1) current retirees, (2) low income households, and (3) those receiving disability benefits from Social Security.  This is not surprising, and in fact is the “norm” in many recent reform proposals – including President Bush’s plan for “progressive price indexation” which would have protected both (1) and (2) and might have protected (3) depending on whether the new indexation would have been made to apply to the Disability Insurance program.  There are good economic and policy reasons – and even stronger political ones – to protect these groups.  So the President’s choice of protected groups is not surprising.

But notice what he did NOT say.  He did not say we could not reduce benefits, only that we cannot put these groups “at risk.”  So, now comes the debate over whether we can have any reductions without putting these groups “at risk.”  For example, if we made a technical change in the way we calculated the cost-of-living-adjustment, such as using a different version of the consumer price index (CPI) that is thought to be more accurate (relative to the current one that is thought to over-state inflation), would that qualify?  Even though such a change would result- over the years – in very large reductions in expenditures relative to current projections?

“without slashing benefits for future generations” – hmmmmm.  There are two problems interpreting this statement.  First, what does “slashing” mean?  Can we “trim” benefits, so long as we don’t “slash?”  What constitutes a benefit “slash” – a 25% cut?  A 5% cut?  A 0.01% cut?

Second, even if we define  “slash,” we have to ask, “slash relative to what?” Relative to currently scheduled benefits, or relative to what today’s retirees receive?  This matters enormously, since each successive generation of retirees sees average starting benefits rise with average wage growth.  If we interpret the President’s statement about Social Security benefits as being “relative to what today’s retirees” receive, we have a lot of room for meaningful changes to the benefit formula.  After all, President Bush’s progressive price indexation plan would meet this criteria.   In contrast, if President Obama’s statement is relative to currently scheduled Social Security benefits, then he has just promised us a huge tax increase.

Representative Paul Ryan (R) of Wisconsin gave the rebuttal to the speech.  The fact that he did not mention Social Security has raised some eyebrows (here and here), in large part because he has specific ideas about entitlement reform that he outlined in the Roadmap that has made him an emerging star in the Republican party.

Unfortunately, I predict that we may not learn much anytime soon about where this debate is heading.  After all, the President has to start running for re-election soon, so now may not be the time to tackle such a politically divisive issue.  Which is really too bad for future generations …

2 Responses to “What are President Obama’s Plans for Social Security? What We Learned (and did not Learn) from the SOTU”

  • Laura Perkins says:

    I think what he “really meant” was that someone has to start the conversation about social security. Someone has to continue the conversation about social security. Someone has to act on the conversation about social security. Politicans seem to be mostly concerned with “blasting” the opposition’s opinion; in that environment, it is impossible to engage in active listening, which is what is required for action on sensitive political issues. All words have to be chosen carefully to even begin a conversation. For example, look at your response, Mr. Brown. You reference a bipartisan consensus that notes we must reduce benefits and raise taxes. In my reading of the SOTU address, Mr. Obama the same thing.

  • Jeffrey Brown says:

    Thanks Laura. I completely agree that someone needs to start the conversation, and more importantly, do something about it. Having worked in a White House myself, I know that those words were chosen very carefully, and my intent was to see if we could discern from those words what policy options were ruled in or ruled out by the speech – because those words will help frame the debate going forward.