Overfixing Social Security: the Importance of Honest Scoring

by Bruce Webb

And I could add honest definitions and honest framing to that.

In Dec 2005 three former staffers to Bill Clinton, John McCain and GW Bush respectively released the Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan (9 pg PDF) or LMS. The authors proposed a package of changes to Social Security comprised of a 1.5% across the board payroll tax increase, an adjustment of the payroll gap back to the 90% level (it had drifted down to 84%) for the equivalent of another 1.0% of payroll, and adjustment in retirement age scored at 0.62% of payroll, and a change in indexing of initial benefits that scored at 2.08% of payroll for a total worker financed ‘fix’ of 5.2% of payroll. Interestingly enough in that year the total 75 year actuarial gap was scored at 1.92% of payroll, meaning that an immediate hike of that amount would deliver 100% of scheduled benefits over the 75 year window traditionally used to score Social Security solvency. So why a 5.2% solution to a problem scored 1.92%?

Well therein lies a tale, and an important one when we are faced with a so-called Deficits Commission whose leaders make it clear that Social Security is front and center, as workers and future retirees we owe it to ourselves to understand what problem ‘reformers’ are actually addressing. Because LMS at least is not focused on retirement security, not at least in the dollars and cents sense. Much more under the fold. (It wouldn’t hurt to bring along your tin-foil hat).

My first introduction to LMS came the summer before publication when co-author Prof. Andrew Samwick outlined it in a guest post at DeLong. In the course of discussion he casually claimed that the payroll gap was 3.5%. When in comments I asked “Whence 3.5% Samwick?” and pointed to the standard 1.92% 75 year number reported by the Trustees, both he, and by e-mail DeLong, informed me that he was referencing the gap projected over the Infinite Future Horizon and pointed to Table IV.B7 in the Report. Well sure enough alongside the $3.5 trillion dollar 75 year gap was a $10.5 trillion Infinite Future one.

Well I had been reading and comparing Trustees Reports since 1997 and never heard of such a thing, was I just a sloppy reader? Well no, it turns out this particular measure was relatively new having been introduced with the 2003 Report. Why was it so introduced? And why should we prefer it to the previously satisfactory 75 year window? Well a tale within a tale. From the Report, bolding mine

Consistent with practice since 1965, this report focuses on the 75-year period from 2003 to 2077 for the evaluation of the long-run financial status of the OASDI program on an open group basis (i.e., including both current and future participants). Table IV.B7 shows that the present value of open group unfunded obligations for the program over that period is $3.5 trillion. Some experts, however, have described the limitations of using a 75-year period. Overemphasis of summary measures (such as the actuarial balance and open group unfunded obligations) for the 75-year period can lead to incorrect perceptions and policy that fails to address sustainability.
In order to provide a fuller description of long-run unfunded obligations of the OASDI program, this section presents estimates of obligations that extend to the infinite horizon.

Hmm, “some experts”, “incorrect perceptions”, “address sustainability”. What the heck is sustainability in context? Why should workers care? Got a name for any of those experts or an explanation of why an alternate perception that focuses on outcomes within our own lifetime and not on retirement of people not yet born is somehow “incorrect”? Why so? Well I suggest that the answer is that retirement security for current workers is simply not the focus of these unnamed “experts”, and that somehow the Trustees in 2003 rather silently adopted that same focus for reasons unstated.

Returning to LMS. In the description of the authors we get the following, once again bolding mine:

Andrew Samwick is Professor of Economics and Director of the Nelson A. Rockefeller Center for Public Policy at Dartmouth College. From 2003 to 2004, he was Chief Economist on the staff of President Bush’s Council of Economic Advisers, where his responsibilities included Social Security.

Well “responsibilities” is a broad term, but you would expect that an implicit change in the focus in Social Security from 75 year solvency to Infinite Future ‘sustainable solvency’ might suggest the involvement of the CEA Chief Economist, and certainly Samwick qualified as an “expert”, but Prof Samwick has informed me personally that he was not in fact responsible for this particular change. And Andrew is a truly nice guy and is often described along with Bruce Bartlett as one of a small number of “honest conservative economists” by people like Brad DeLong, still it is interesting to me that the introduction to LMS starts off with these sentences:

The three of us – former aides to President Clinton, Senator McCain, and President Bush – did an experiment to see if we could develop a reform plan that we could all support.
The Liebman-MacGuineas-Samwick (LMS) plan demonstrates the types of compromises that can help policy makers from across the political spectrum agree on a Social Security reform plan. The plan achieves sustainable solvency through progressive changes to taxes and benefits, introduces mandatory personal accounts, and specifies important details that are often left unaddressed in other reform plans.

So while Prof. Samwick was maybe not the engineer here, he certainly was willing to board the train in time to draft LMS.

To which we return once again with an examination of Table 2 on page 7 along with this accompaning text:

Sustainable solvency is achieved – The Social Security actuaries find that actuarial balance would improve by 2.14 percent of taxable payroll over the 75-year projection horizon. The current Social Security deficit is 1.92 percent of payroll. Therefore, the changes in the plan would lead to a 0.22 surplus. Trust fund balances in the last year of the actuaries’ projection period are positive and increasing. (See http://www.ssa.gov/OACT/solvency/Liebman_20051117.pdf).

Okay we have a 1.92% payroll gap and a 2.14% solution, reasonable enough. But what was this about a 5.2% solution? Where is the extra 3.06%? Well 1.56% percent of it is accounted for in the Table, that amount gets diverted to a new PRA, Private Retirement Account, leaving us missing only 1.5%. And where is that? Well buried in the text on page 1, LMS proposes a mandatory deduction of 1.5% credited directly to the individuals PRA and so not properly speaking contributing to Actuarial Balance and so excluded from Table 2.

Well I have to cry foul here. We have a problem scored 1.92% and a solution that includes a package of tax increases totaling 2.5% between the across the board increase and the payroll cap increase, that is more than enough to deliver 100% of scheduled benefits if simply applied to the Trust Fund. But we ALSO have an additional package of benefit cuts totaling 2.7% which itself would have closed all of the gap and then some. On the other hand the individual comes out of this with a PRA funded with a total of 3.06% of his wage income over that period. Perhaps the end result is a BETTER than 100% of scheduled benefit? Well no, a look at Table 1 shows that a retired couple can expect to get a result from 85% (low earner one worker) to 109% (high earner two worker) compared to the baseline schedule.

Well but what about Ownership Society? You have your PRA, surely you can pass those assets onto your heirs? Well no. Not unless you die quickly.

All payments from PRAs would be paid as annuities, which would initially be required to be fixed, inflation-indexed annuities provided by the Social Security Administration as part of a beneficiary’s regular Social Security benefit. Full annuitization by age 68 is required, but beneficiaries can choose to spread annuitization between 62 and 68 if so desired. Married beneficiaries would be required to purchase joint and two-thirds survivor annuities. Annuities would be 10-year certain annuities to provide payouts to heirs of those who die soon after annuitization. The total balances in the accounts of the two spouses in a married couple would be split equally in the case of divorce.

So what would workers see out of LMS? Well a joint survivor fixed income, inflation indexed annuity paid out monthly by the Social Security system. Which sounds identical to what happens today, except the result in the case of LMS is exposed to the market, the results in Table 1, bad as they are, assume “Expected Yield on Mixed Portfolio”. Meaning it is kind of a crap-shoot.

Does LMS do some good things? Well yes, but none of them particularly rebound to the benefit of most workers and certainly not lower earning workers. Instead they are asked to chip in a combination of 1.5% in ‘contributions’ (they obviously would not be exposed to the cap increase) and take a guaranteed 2.7% cut in benefits hoping to make up around half of that through returns on their PRAs. How did the authors possibly proposed to sell that?

Time to put that Tin Foil Hat on. If you bury the 1.5% increase in the text and address all the other changes you have workers giving up 3.7%, or 2.7% for those earning under the old cap. Which is a lot to only partially solve a problem scored at 1.92% over 75 years. But not a lot to solve a problem scored at 3.5% over the Infinite Future. It is really the odd coincidence to have a new number pop up in the 2003 Report so useful for the purposes of selling a Privatization Plan that on one accounting requires just that amount of offset. How do you sell a plan that proposes a 5.2% solution to a problem scored 1.92%? Easy hide 1.5% of the solution and re-score the problem by 1.58%. Tin Foil Hat off.

As we confront the work of the new Deficit Commission it will be important for workers to firmly keep their own self-interest in mind and ask some serious questions. One what problem is the Commission actually addressing. Two how much of that problem if any was actually caused by Social Security. Three if the solution to that problem only calls for sacrifices by workers in the form of benefit cuts where is the equity. We know the way the problem will be framed, it will be expressed in dollar terms over the Infinite Future Horizon, it will be blamed on excessive Backward Transfers to previous generations, there will be attempts to blame Boomers for ruining the whole world with their greed. Because that is what the ‘reformers’ have been doing for years, trying to find some way to stick workers with the tab.

Make them honestly define the problem they are solving. Make sure they use honest scores. Don’t let them frame this as some problem created by workers when it is nothing of the sort. And above all don’t let them bill you 5% for a problem that in 2009 was scored 2.01%. Social Security faces a real actuarial gap much as it has in various years past. And given that it is a plan financed for workers by workers it is incumbent on workers to suggest a solution. Dale, Arne and I have proposed a solution that delivers 100% of the scheduled benefit via a phased in set of payroll tax increases. Other workers might decide that it would be better to combine a lower set of increases with some changes in indexing or retirement age, or throw in some increase in cap levels. All of which is legitimate enough. What isn’t legitimate is for some Commission to use some bait and switch tactic like LMS does.

Tags: , , Comments (57) | |