Who gets to define what Social Security ‘crisis’ is?

by Bruce Webb

The following three Tables are copied from the Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan to make a couple of points. One is that the plan authors are just not that into you, that is if you are a wage worker seeking a more comfortable retirement. They see crisis from a much different standpoint. Discussion under the fold.

For workers ‘crisis’ is normally defined as a cut in retirement benefits at some point in the future. In its more invidious form this translates into ‘Social Security will not be there for me’, i.e. ‘no check’. Well this can’t happen, as long as FICA payroll tax is being collected and dedicated to Social Security then checks at some level will still continue to go out. Still the Trustees tell us in the 2008 Report that benefits after 2041 will only be 78% of those payable in 2040. They further tell us that we could backfill that gap with a 1.7% immediate increase in payroll tax split between employer and employee or roughly double that if we wait until the last minute. LMS was published in Dec 2005 and the numbers were a little different, at that point the Trustees told us that benefits after 2041 would only be 76% of those payable in 2040 unless we raised payroll tax immediately by 1.92%. (The reason why the projected gap shrank and so the cost of the fix from 2005 to 2008 is a good question for another time.)

If we look at Table 1 we clearly see that the authors of LMS are not first and foremost concerned with a better check, not at least for the typical situation where the male earner predeceases the female earner. LMS freely accepts that lower earners will have to take a 4-15% cut relative to the schedule and that single earners at all levels will take a net 9-15% cut. At first glance it looks like only high income two earning couples make out. But even that is deceiving as we will see.

Now some might give the authors the benefit of the doubt and point out that 85% is better than (then) 76%. A look at Table 2 will disabuse you of that notion. Under 2005 projections we could provide a 100% result with a 1.92% increase or in other words an improvement of 24 points. Which suggests we could get about a 12 point jump with a 1.0% increase or an 88% result. Meaning for the low income one earner couple they could get a better result just by accepting the provision for a payroll cap increase (here called ‘raise taxable minimum’) which is scored at 1.0%. Or they could close even more of the gap by just accepting an increase in retirement age which is scored at .62%. Those two provisions alone reduced the projected gap down to 0.30% which for a low earning couple making $30,000 translates to $90 per year. That is raise the cap, increase retirement age, and pay less than $2 a week and ‘crisis’ defined as ‘benefit cut compared to the schedule’ just vanishes.

But is worse than that. What Table 2 doesn’t show is the provision that would directly raise payroll by 1.5% ANYWAY. Which itself would generate about 18 points of improvement meaning that everyone would get a (74+18=) 92% benefit just from the proposed tax increase. In fact lower and medium level workers would get a better deal just by cutting that tax increase by 33% to 1.0% and raising the cap for another 1.0%. Boom! that 1.92% payroll gap would be more than erased. And the point only gets sharper if you substitute the current 1.7% gap.

So what do lower income workers gain from LMS and its PRAs? Well nothing really, and even that assumes 6.5% real returns on equities. Instead they are promised 2.7% in combined benefit cuts plus 1.5% in tax increases so as maybe to backfill about a third of the benefit cut that “Nothing” promises them today. You don’t have to be a math genius to understand that throwing 4.2% of combined payroll equivalent at a problem scored at 1.92% and only closing 9 points of a 24 point gap is not really serving your interest. (And that is not considering the adverse effects resulting from raising the payroll cap.)

In fact the calculations don’t change much as you move up the income ladder. While the higher income double earning household ends up with a 127% result that comes at the price of paying an extra 1.5% on income up to the existing cap and then 12.4% on income up to the proposed cap.

So ‘cui bono’. Obviously the authors are not defining ‘crisis’ in terms of actual wage worker retirement security, because those workers could get better results at much lower costs, clearly they really are not that into us. So for them what is the definition of ‘crisis’? Well a look at Table 3 gives you the needed hint. The table is a little confusing so lets allow the authors to explain it in their own words (with some bolding by me)

Fiscally responsible plan – 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. The second column shows the sum of all Social Security cash-flow deficits. In years in which Social Security benefits exceed revenues, the shortfall must be made up by the general funds of the government either through reductions in other government spending, increases in taxes, or issuing additional debt. Paying all currently scheduled benefits would require the rest of the government to come up with $6,372 billion in funds over the next 75 years. Under the LMS plan this number is reduced to $1,456 billion. None of the other 18 other plans scored by the Office of the Actuary in the past three years has lower cash-flow deficits than the LMS plan.

Clearly for the authors of LMS the definition of ‘Social Security crisis’ is simply the demands it MIGHT make on the General Fund going forward. (Because of course we could just proceed with a plan of “Nothing” and just take our lumps in 2041 (SSA IC) or 2049 (CBO IC) or never (SSA LC)).

Now defenders of LMS might jump into point out that PRAs allow a form if inheritable rights that current Social Security doesn’t. But the devil is in the details. The authors again:

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.

Investment options are restricted and full annuitization is required because Social Security is meant to provide a basic level of retirement income support. For an average earner, the combination of the traditional benefit and PRA annuity will provide a replacement rate of about 35 percent.

Hmm so the average working couple (who don’t happen to die within 10 years of retirement) will have a government issued, inflation adjusted check replacing around 35% of their pre-retirement income. With no inhertable property right. Which sounds a heck of a lot like traditional Social Security. But at least you would be able to control your investments, wouldn’t you? Well not really.

In order to keep total expected retirement benefits at levels comparable to those specified in current law, the LMS plan establishes personal retirement accounts equal to 3 percent of taxable payroll (using the current-law maximum as the cap).
The investment options for PRAs are designed to limit administrative costs and the risks to investors. PRAs would be invested with one of 15 private fund companies certified by the government to be eligible to receive PRA deposits. Each of these fund companies would be required to offer 5 broadly diversified investment options, patterned after the Federal Employee Thrift Savings Program. A central clearing house would handle transactions. Social Security actuaries estimate that administrative charges associated with PRAs would be approximately 30 basis points per year.

Why not just open the Federal Thrift Savings Program to everyone? With the Social Security Administration acting as that ‘central clearing house’?

I don’t think that Liebman and MacGuineas at least were motivated by simple ideological hostility to the New Deal, Liebman after all taking posts in both the Clinton and Obama Administrations and Maya MacGuineas just being a centrist deficit hawk. For that matter I don’t think even Samwick is driven by anything other than a commitment to traditional market economics that reflexively prefers private to public solutions, even as here where the ‘private’ is more or less symbolic. But what is clear is that none of them are driven by some progressive impulse to improve the economic condition of wage workers now or in retirement.

Conclusion. When someone comes up to you and claims that Social Security is in ‘crisis’ and needs ‘reform’ you should be asking them three questions: how do they define ‘crisis’, what do I get out of their ‘reform’, and what is it going to cost me. And that is not class warfare or denial or anything else. It is instead just a market transaction, make the cost/benefit case for why a societal problem scored at 1.92% or 1.7% of payroll needs to be paid for by a combined 5.2% package paid for exclusively by wage workers.

(And no, ‘retirement gift for President Bush’ doesn’t make the cut’)