AB readers may have been surprised that I suggested I have respect for the Andrew Samwick view, which he has clarified:
I don’t favor default on securities issued by the federal government. I didn’t bring this up – it shouldn’t even be a question. But Social Security is not a security issued by the federal government. It is a program that current generations legislate on their own behalf and largely at future generations’ expense. It is not the only such program. I think all such programs need to be carefully considered, and in particular, that we should tread very lightly on future generations’ income when the proceeds go for our own consumption, not for investments that increase the size of the economy they will inherit. That attitude applies to Social Security, to Medicare, and to the level of federal debt … I wouldn’t characterize anything I’ve suggested at any point as a default on Social Security. I do want to scale the program back to what can be afforded in the long term (as I have defined both “afforded” and “long term”) with roughly the same payroll tax rate on future generations as we’ve paid.
The formulation of the issues provided by Brad DeLong once again proves invaluable:
It depends on what kind of Social Security reform we are talking about. There’s one reform in which benefits are cut and taxes are raised but the equality:
(Current Value of Trust Fund) + (Present Value of Future Social Security Taxes) = (Present Value of Future Social Security Benefits)
is preserved. That’s not a default.
There’s another reform in which the principal purpose is to open up a gap between the left hand side and the right hand side and make:
(Current Value of Trust Fund) + (Present Value of Future Social Security Taxes) > (Present Value of Future Social Security Benefits)
That is tantamount to default.
Most proposals for Social Security reform that start out with statements like “The Social Security Trust Fund doesn’t really exist” are proposals of the second kind.
Dean, Brad, and I would object to the second form of “reform”, which I’ll discuss in a moment. Isn’t Andrew putting forth the first form? In other words, is he suggesting a form of privatization that lowers the payroll tax rate, which of course would require policymakers to lower the Present Value of Future Social Security Benefits such that the equality hold. If so, we cannot accuse this proposal of what I’ve called the backdoor employment tax increase.
But as Andrew has explained, policy makers have managed the rest of the Federal government such that the expected value of future income taxes cannot cover Federal debt plus the present value of expected future Federal spending outside of the Social Security program. This is the fiscal crisis that Ben Bernanke testified to – as did Alan Greenspan when he was Federal Reserve chairman.
So how does President Bush intend to address this general fund fiasco? Certainly not an increase in income taxes. Certainly not a reduction in defense spending. Certainly not a repeal of that expensive prescription drug benefit that he brags about in the same speeches where he brags that his tax cuts have given us our money back. This kind of pandering and dishonesty is not the fault of Andrew Samwick or Ben Bernanke. And it’s this kind of dishonesty that leads me to believe that President Bush is advocating what Brad called the second form of “reform”. Dean Baker calls this default and some uber-technical types object to his term. Fine – let me call it grand larceny. If implemented, it would be a backdoor employment tax increase. Now if President Bush and his minions want to balance the budget by raising employment taxes, might we simply ask that they be honest about it? But then one could argue my suggestion is silly – after all, how many thieves call the bank before they come over and clean out the vault?
I am not in favor of complete privatization as workers likely do want some form of defined benefits retirement plan. Mark Thoma has been excellent in discussing this aspect of the debate. Of course, one can reasonably ask whether we need as much longevity insurance as the Social Security program offers. Andrew and I might have a difference of opinion on this issue. But as I read Andrew’s many excellent discussions on this, he is not advocating an implicit backdoor employment and nor am I. Let’s be honest – President Bush and his minions are pushing for a backdoor employment tax increase. But let’s also be fair to Andrew – he is NOT one of Bush’s minions.
Update: Brad DeLong also enjoyed what Andrew Samwick had to say and adds this background:
In the early 1980s, acting on the advice of the Greenspan Commission, President Reagan and the congress began “prefunding” Social Security–having the Social Security system run a surplus in the years from 1983 to 2017 or so in order for it to run a deficit later on. Reagan, George H.W. Bush, and the congresses of the 1980s and early 1990s (and George W. Bush and his congresses of 2001-2006) used this Social Security surplus as an excuse for not dealing with their enormous general-fund deficits: taxes were lower and spending was higher than if they had lived up to their responsibilities or not had the Social Security operating surplus to draw on. What does this history entail for future fiscal policy, both as a matter of honor and a matter of prudence? Andrew Samwick tries to think through these issues, and gives his take. He says smart things
The only thing left to say is that George W. Bush created the latest round of enormous general fund deficits. We shall all remember this the next time George W. Bush cynically claims he wants to reform Social Security.