Soc Sec XII: LMS, Solvency and ‘Crisis’

LMS is shorthand for the Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan one of any number of Social Security plans out there but noteable because of its authorship. Maya MacGuineas currently head of CRFB was previously ‘Social Security advisor to the McCain presidential campaign’, Jeffrey Liebman served on Bill Clinton’s Social Security team and is now one of Obama’s top economic advisors, while Andrew Samwick was (from LMS) “Chief Economist on the staff of President Bush’s Council of Economic Advisers, where his responsibilities included Social Security” as well as being a prominant econoblogger. That is we are not talking about three random academics writing some paper, instead these are policy players working at the highest levels, no matter who wins this fall one or more of them will be sitting at the table when Social Security policy is hammered out. So LMS matters. A lot.

But first lets define some terms and lay out some baseline numbers. Social Security ‘crisis’ is normally associated with Trust Fund Depletion which is currently projected for 2041. Although people tend to refer to this event with reckless language like ‘broke’, ‘bankrupt’ or ‘dead broke’ which leads others to conclusions that ‘Social Security will not be there for me’ or ‘no check’, ten seconds of informed thought tells us this is nonsense. As long at the payroll tax exists some level of benefits can be paid out and the Trustees tell us each year what that level is. With the 2008 Report the Trustees tell us that under Intermediate Cost assumptions that the benefit check will be cut sometime in 2041 to 78% of the scheduled benefit. Now given that the scheduled benefit would be 160% in real terms relative to the one a similarly situated retiree gets today and that 78% of 160% = 125% or a check 25% better in real terms than the one my Mom gets today some might question the whole notion of ‘crisis’. A topic that can be discussed in comments. But for now lets run with the number.

Okay so ‘crisis’ is defined as 78%. What would a ‘fix’ be. Well I am going to keep running with the Trustees here, they would define this is terms of Short Term and Long Term Actuarial Balance, meaning Social Security projected to end each year of the next ten or alternatively seventy-five years with a one year reserve. Which translates to 100% of the schedule. Moreover they tell us exactly what the cost of that fix would be if we chose to take a tax only approach. Per the 2008 Report that fix would require an immediate increase in the payroll tax of 1.7% which would take the FICA rate to 14.1%. We should note that when LMS was drafted the gap was 1.92%.

So now to LMS and Table 1 above, especially columns two and four where you have both halves of a couple surviving. One thing strikes you right away, LMS doesn’t actually promise you a fix as defined particularly for low earners, it only partially fills the gap. While some might be tempted to say ‘better something than nothing’, the devil is always in the details. A cost/benefit analysis of LMS lies below the fold.

Which takes us to Table 2 which scores the impact of LMS on the Trust Fund but which doesn’t tell the whole story. LMS at its core relies on PRAs (Personal Retirement Accounts) which are essentially government run IRAs that are considered to be outside the Trust Fund itself. If we take the totality of LMS what are the tax and benefit implications?

First LMS proposes a 1.5% across the board increase in payroll tax all of which gets put into the PRA. Additionally it proposes a partial lifting of the payroll cap for an additional 1.0% payroll equivalent. Which is to say that it proposes a 2.5% tax solution to a problem that had been scored at 1.92% and now is down to 1.7%. Given that we could achieve a ‘fix’ as defined above for less than LMS it is clear that for the authors their ‘Reform’ does not equate to our ‘fix’. But it gets even more interesting on the benefit side.

Along with the 2.5% total increase in payroll tax LMS also proposes a cut in the benefit from traditional Social Security benefit formula of 2.08% along with an increase in retirement age for an additional .68% for a total benefit cut of 2.7% once again much more than what we have described as ‘crisis’ to begin with. So what we have is a tax increase that would more than ‘fix’ ‘crisis’ as we have defined these terms along with benefit cuts that would fix ‘crisis’ in place. Which puts in place the dual questions ‘What does LMS actually accomplish?’ and ‘Why should wage workers fund it to the equivalent of 5.2% of payroll (2.5% in taxes and 2.7% in cuts)?’

At this point serious students might want to follow the link and read the plan which is only nine pages. The first six and a half pages contain the pain. The putative gains start on page seven.

“Sustainable solvency is achieved’. The net result from LMS would be to put Social Security into a .22% payroll surplus when examined from the Social Security and hence General Fund side of the equation. That this comes at a cost of 5.2% total to workers when they could get a better outcome at 1.92% (then) or 1.7% (now) is apparently just the burden we owe to future generations. Because on examination it is clear that the authors of LMS have a quite different definition of ‘solvency’ than say Coberly or I do. We like the fact that Social Security is a PayGo insurance plan with an intergenerational bargain of ‘you paid for my parents, I’ll pay for you, your kids can pay for me, and all with better real results as time goes on’. For the authors this situation is intolerable. Why? Well a fine topic for discussion in comments.

“Fiscally responsible plan” Here I think the authors let the cat out of the bag, note how they word the issue (bolding mine):

The plan puts great emphasis on fiscal responsibility – borrowing less from general revenues than any other plan that has been scored by the Social Security actuaries in recent years. Table 3 compares the LMS plan with other recent Social Security reform plan. The first column compares general fund transfers to the OASDI Trust Funds. This is one measure of how much a plan relies upon unspecified resources from outside of Social Security to bring the system into balance. The LMS plan does not rely at all on general fund transfers, and instead uses changes to
benefits and revenues to bring Social Security into balance.

. This is rather odd. Under current law there is no question of Social Security borrowing anything from the General Fund, the obligation is the other direction in the form of repaying the money borrowed from current Social Security surpluses. The LMS formulation builds in a tricky duality. First it asserts that the unfunded liability beyond 2041 is real enough that the government would fill compelled to backfill it with ‘borrowing, then it writes it off anyway by proposing even bigger cuts sooner. To me that seems special pleading.

“Many practical reforms are included”. All these reforms relate to administration of the plan and none actually to the issue of retirement security itself.

“Economically beneficial” On my reading of the text on page nine this translates to ‘exercising fiscal restraint on Congress’, a good idea in itself but one that is difficult to justify by placing the entire cost on wage workers.

“Balanced compromise”. I am not sure how a 5.2% bill for a problem scored at 1.92% is either balanced or any kind of a compromise, not at least from the perspective of workers. To me the whole thing looks like just trying to find the easiest path to screw over any concept of Social Democracy in favor for a everyman for himself philosophy typical of the Economic Right. In context ‘bi-partisan’ here is defined as compromise between the conservatives and the DLC/centrist wing of the Democratic Party, the concept that the New Dealers should have some voice is dismissed out of hand.