BW on Soc Sec VI: LMS and the Infinite Future

LMS: the Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan.
Above we see Tables 1 & 2 of LMS. Its authors are interesting for a couple of reasons. One they are connected at pretty high policy levels to Administrations past, current, and future. In their own self description from LMS:
“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.”
Which is well and good except that in this case ‘spectrum’ seems to span everything from (barely) left-center to right. This is bipartisan in the Lieberman sense, lets agree to slightly moderate a conservative position and call it good. Second coming of FDR it decidedly isn’t. But back to the authors. Prof Jeffrey Liebman (of Harvard’s Kennedy School of Government) is particularly interesting in that as well as being a former Clintonista he is currently one of the top three economists on Obama’s economic team. When Social Security policy is being discussed in what I hope is an Obama Administration he is more than likely to be sitting at the table, something I view with a certain unease. And then there is Professor Andrew Samwick who around the time this plan was being drafted was Chief Staff Economist at the Bush Council of Economic Advisors (CEA), now and then a Professor of Economics at Dartmouth as well as maintaining an active blog presence through his old blog VoxBaby and his new one Capital Gains and Games. He is highly regarded by the Econobloggers generally as being an ‘Honest Conservative’ and has his stuff crossposted at EV, DeLong, and here. He is a nice guy but one with policy views on Social Security that are in my view profoundly worker unfriendly. Which is the topic of this post. I gave Prof. Samwick a heads up about this post and an open invitation to comment. Hopefully he will.

Why worker unfriendly? Discussion below the fold.

Lets start with Table 1. It is a matrix with twelve cells in four columns. The first column is kind of confusing, it represents a rather odd intermediate stage of LMS so we can put it aside for now and examine the three end state situations. As those who have followed this series along will remember, under the 2008 Intermediate Cost alternative Social Security is projected to return 78% of the scheduled benefit at Trust Fund depletion. This figure is up fairly significantly from the 2004-2005 timeframe in which LMS was drafted, a fact that justs adds more difficulty to their argument. If we examine the other nine cells we see a curious feature of this ‘reform’, in four out of nine cases it does not supply a 100% result. If you subtract out ‘Two earner widowed’ that drops to four out of six with a fifth at 101.6% being rather marginal. Which means that for whatever positive policy goals come out of LMS it is not exactly a ‘fix’ from the perspective of most workers. Indeed for the low income one earner it is barely a partial fix, closing as it does only a third of the gap.

But something is better than nothing isn’t it? Hmm, not necessarily. Let’s take a look at Table 2 and figure out what that ‘Something’ will cost. First we should point out that LMS proposes a 1.5% across the board increase in payroll tax in addition to the figures shown in Table 2. That 1.5% doesn’t show up because the funds never hit the Trust Fund, instead they are placed in a PRA, a Personal Retirement Account, Table 2 in contrast represents the scored results of LMS on the Trust Fund itself as scored by the SSA Office of the Chief Actuary. So the total cost of LMS breaks down as follows:

1.5% payroll tax increase across the board
1.0% payroll equivalent by lifting the payroll cap to 90% of wage income
.06% payroll equivalent by raising early and full retirement age
2.08% payroll equivalent by changing the benefit formula (i.e. benefit cuts)

Add it all together and workers are expected to take a cumulative and collective 5.2% hit. And in most cases don’t actually get a 100% fix. In the face of a payroll gap that at the time LMS was drafted was 1.92% and is now 1.7%. Note particularly that simply taking the 1.5% payroll tax increase would have backfilled around 75% of the then projected gap (taking 1.92% to .42%) and now would backfill 88% of the 2008 payroll gap (taking 1.7% to 0.2%) which by my calculation gives a 97% benefit relative to the current schedule. With no changes in retirement age.

So the question for discussion is why workers would take a deal that requires workers making under the cap to take a 4.2% hit {corrected from 4.7%} to solve a 1.7% problem? And why we should make tax increases on the wealthy so much more out of reach by imposing a steep 6.2% increase on wages between $102,000 and $160,000 (noting that the cap increase is itself capped under LMS and still doesn’t reach to gains on capital)? LMS lays out some positive policy outcomes if Congress actually responds as the plan suggests, but those outcomes benefit the entire country and notably capital. Why oh why do we have to pay for these goals totally out of wage income?

Well excellent questions in context. Which is why they changed the context. In 2003 the Social Security Report suddenly introduced a new wrinkle. Instead of simply projecting solvency in terms of Short Term Actuarial Balance (1 year of projected reserves in each of the next 10 years) and Long Term Actuarial Balance (1 year of reserves in each of the next 75 years) they decided we needed to measure solvency across the Infinite Future Horizon. The utility of this measure has been explained in two general ways. One it is not fair for someone in the workforce to be told the system is solvent if you are just going to pull the rug out in year 76. Well okay, but vanishingly small portions of the current workforce are going to be around at that point, even our youngest workers would be in their late nineties and we could capture even them with a five or ten year expansion of the window. Why take it out to heat death of the sun? If the 2082 date was fixed this approach would make sense, but the 75 year window is adjusted each year to include the next year, it is a rolling number. To put it bluntly the argument that Infinite Future is required for current retirement planning is just nonsense. The second explanation is to say that it is all about inter-generational fairness. Which might be reasonable if any of these plans included some effort to close the spending gap on the General Fund side. But no forcing future generations to pay for military weaponry that by their time had been on the scrap heap for decades? Alrighty then. Asking them to fund their own retirements? Oh the horrors.

There is only one logical explanation for Infinite Future. It allows for scarier numbers by adding $10 trillion to Unfunded Liability and almost doubling the payroll gap. It was a lot easier to defend LMS when you could cite (generally without qualification) a payroll gap of 3.7% as opposed to 1.92% (2008: 3.2% vs 1.7%). It kind of buffered that 5.2% to 1.92% equation. But to me it smacks of fairly sneaky bait and switch to sell a plan that on the numbers is profoundly anti-worker.