Obama and Social Security: why NOT to worry

Parts of the blogosphere are in an uproar over some Q&A the other day that some interpreted as Obama putting Social Security ‘reform’ on the table. Well for reasons outlined by Barkley Rosser (and posted below by Dan) I don’t think we have much to worry about to begin with. But even if the Obama team takes a look at Social Security and even if they end up tinkering with it, we still don’t need to worry. Because there is a big difference between Social Security ‘Transformers’ and Social Security ‘Fixers’. Obama is a Fixer.

SS Transformers want to fundamentally change the system, most often into some set of Personal Retirement Accounts (PRAs). The motives of Transformers vary, you have one group whose intellectual leader was Milton Friedman and which drew its original inspiration from some combination of Ayn Rand and F. Hayek. For these people Social Security was either fundamentally immoral (Friedman’s word) or a dangerous step down the road to serfdom/socialism. Then you have a second group centered on Wall Street that simply saw fees and commissions to be had from a transformed system and a third group whose main motivation seems to be avoiding future claims by Social Security on the General Fund. These latter want to stabilize Social Security at a more or less stable share of GDP under the slogan of ‘sustainable solvency’. Now all three groups generally share a belief in the superior efficiency of free markets, that is most may sincerely believe that on balance PRAs will give superior results over the very long term (once you get some transition/legacy costs out of the way), but it really wouldn’t matter. Each would transform Social Security no matter what the actual outlook for the system as currently configured. Which is why supporters of Social Security cannot allow Transformers to even get their nose under the tent. Because before you know it we have the whole PRA camel inside and no easy way to get him out.

But we can listen to Fixers. Even if like me we really don’t think there is anything to fix. And I’ll tell you why under the fold.
This post was originally meant to be the conclusion of Social Security: ‘Crisis’ and ‘Reform’ a post that got so long and tedious that I decided to spare AB readers and instead put it up at the BruceWeb where only diehards and/or the unlucky will stumble on it. In it I discuss the two types of ‘crisis’, that is ‘crisis at depletion’ or the date that the Trust Fund goes to zero and ‘crisis at shortfall’, the date that revenue from taxation falls behind cost.

Taking the latter first. ‘Crisis’ at shortfall is totally bogus. It implicitly denies that the Trust Fund is a binding obligation and vastly exaggerates what it would take to Finance Shortfall. People who push this brand of ‘crisis’ knowingly or not are simply pawns of the Transformers. Now unfortunately the Obama plan even as modified falls into this camp. It proposes a solution consisting of directing more money at Social Security in 2019 for a problem which legally and numerically doesn’t actually manifest itself until about 2030, if it manifests at all. So that is not so good.

On the other hand this proposed solution actually would address the more real ‘crisis at depletion’. Under current projections Social Security will only be able to pay out 78% of the scheduled benefit starting sometime in 2041. Now opinions vary about whether this is really a crisis given that the reduction would still give a real benefit about 25% better than similarly situated retirees get today, but if that cut can be made smaller and/or more distant and done so in a progressive way that doesn’t reduce opportunities to advance the larger agenda we at least ought to listen. Because a cap increase would serve to reduce the needed benefit cut and move it out in time. So that is not at all all bad. But in any event it is not Transformation.

I don’t believe that Obama is a Transformer. For that matter I don’t think that anyone on his team, including Jeffrey Liebman (co-author of LMS-a Transforming plan), is committed to Transformation for its own sake. While your true Transformer will never be convinced by arguments from Solvency, that being at best a secondary consideration for them, a Fixer can be so convinced.

But, and this is the important point, as long as you can keep Fixers from incorporating aspects of Transformation into their plans then nothing they do can do much in the way of permanent harm to Social Security, because the end goal of the Fixer is to fix something, and that something can only be the projected benefit reduction at TF depletion. Now there are two ways of tackling that 22% cut. One you can put in place measures that mitigate it. For example you could adjust the schedule in ways that reduce the benefit somewhat in the medium term so as to pay out maybe 90% of the benefit over the long run and so avoid the discontinuity in 2041. Or you could raise the benefit cap in a way that accomplishes much of the same outcome. Or tinker with retirement age. Now personally I am on record opposing benefit cuts and changes in retirement age. And equally am leery at any suggestion that we target taxes in ways that move Social Security away from its insurance model and towards a welfare model. I believe in ‘Nothing’, the proven plan for Social Security. But Fixes are not as likely to be permanent as Transformations. Moreover the practicalities suggest that any proposed fixes will have to be phased in, it being a constant theme that we cannot and should not change the rules for people on the immediate verge of retirement. Even Transformers accept this as an operating political reality, you see this adopted in Butler and Germanis from 1983, in Bush’s speeches in 2004 and in the subsequent Commission Report.

We saw exactly this with the 1983 Reform, the tax increase was phased in as was the gradual increase in retirement age, (for example my age for full retirement was set at 66 years, four months even though that retirement was at the time forty years away). Meaning we should expect any package of fixes that might be proposed by Obama to be equally phased in and as such subject to change depending on actual outcomes.

For example Obama’s only defined proposal thus far is for a cap increase. But even that has been deferred to 2019, which is to say right around the time of projected shortfall. We can expect that if the numbers come in in a way that pushes the date of shortfall back then we should expect the date of the tax increase to be pushed back. If part of the package changes the benefit formula in ways that threaten to produce a worse result than the 78% we are faced with today, then the new formula can be scrapped in favor of the old one. If increases in retirement age beyond the ones already scheduled are seen to be unneeded they too can go on the scrap heap. And of course the same goes for tax increases. If for example someone proposed to phase in a .2% a year increase in FICA for ten years and it was clear by year five that we had overcorrected then really not much harm has been done, we can halt or roll back the increases

So we don’t really need to worry about the Fixers. Certainly we need to keep an eye on them and continually point out the actual data projections and critique the assumptions that underly them, but as long as we keep them from wandering over to Transformer territory all should be well in the long run.