Political Calender Calculus: How Social Security Reformers Got Hemmed In

by Bruce Webb (updated to add table)
Click to enlarge.

New poll: NCPSSM: Americans Support Protecting Social Security Benefits. Andrew Biggs links us to good news for those supporters of Social Security who oppose addressing the problem through benefit cuts. He comments on this and rightly points out that the poll is expressly limited to Boomers and current retirees, but still issues a caution to the benefit cuts first crowd.

The National Committee to Preserve Social Security and Medicare released the results of a new poll of Baby Boomers and older Americans regarding the future of Social Security. While the results show greater concern for Social Security’s future than the National Committee generally projects – 14 percent say it is in crisis and an additional 49 percent say it has major problems, while the National Committee tends to downplay the problem – nevertheless the results regarding policy solutions appear favorable to the left.

The survey asked, “Which of these four ways to insure the future of Social Security would you be most in favor of?”

Raise the earnings cap on wages subject to payroll taxes: 31%
Expand funding sources to include federal income and estate taxes: 27%
Raise the retirement age: 14%
Reduce benefits for future retirees: 6%
Don’t know or refused: 22%
While I would have phrased the questions differently – I have seen polls showing that progressive benefit reductions rank higher than all policy options other than increasing the wage cap – and would have included younger respondents, who are most likely to be affected by Social Security reform, these results do pose a challenge to those who would wish to fix Social Security finances entirely on the benefit end.

I have put my comment to Biggs’ post below the fold, but first let me make some observations. First Boomers by and large are not buying into benefit cut based solutions. At least not before some combination of raising the cap or using income or estate tax revenue which in practice means taxing people in the top two quintiles (58% vs 20%). Given that for at least the next two decades this combination of Boomers and their elders are a very powerful political force simply by their propensity to vote this presents an uphill challenge to reformers, there still being some juice in the Third Rail of American Politics. Second I suspect they would have been more open to this in the mid 90’s when the date of projected Trust Fund Depletion was getting ever closer and ultimately back to 2029, which is the point of maximum Boomer impact on Social Security. Now that TF Depletion has moved to 2041 a combination of using a calender and a calculator and the mortality tables shows that on this topic for this demographic the Fierce Urgency of Now has dissipated.

More importantly that move from TF depletion in 2029 to 2041 equally changes the calender for Gen-X, benefit cut proposals that originated when their impact would fall on Boomers starting retirement are losing their force as the heaviest incidence starts falling on Gen-X instead.

Bruce to Andrew:

Yes I think the challenge for reformers is that they view ‘crisis’ amongst themselves as one of sustainability which is largely defined as minimizing claims on the General Fund going forward. This builds in the somewhat silent assumption that the response to TF Depletion in 2041 will be demands that benefits be kept at the current schedule come what may. Which requires the premise that retirees at that time will have the political clout to make that happen.

This narrative made perfect sense in the early 90s when it appeared that Trust Fund depletion would coincide with the period of peak impact of Boomers on the system. That is under projections that TF depletion would come around 2029 Boomers would be aged from 65 to 83. At that point the mortality tables suggest that half of the oldest Boomers would still be alive and voting with that percentage going up as you moved down through the cohort. This dovetailed with a prevailing popular image of the Boomers being naturally selfish, the ‘Me Generation’ (subject of a bazillion magazine cover stories) and an understanding that seniors tend to vote at higher rates. The combination of selfishness and voting demographics was thought to be powerful enough to just swamp the Gen-Xers push back. Moreover this basic narrative was supplemented by one that holds that taxes will have to be increased at the time of TF shortfall or programs slashed to pay for Boomer Retirement only to see Social Security go ‘bankrupt’ or ‘flat broke’ at TF depletion which younger workers have translated into ‘No check for me’.

And this isn’t just theoretical. I have been blog commenting on this since there first were political blogs and the sense of resentment from younger workers is palpable, they really do believe they are going to get screwed two ways, paying extra taxes first and then getting nothing latter.

Under this scenario a reform proposal that included some immediate package of benefit cuts and tax increases that could be phased in in time to make the Selfish Boomers share the pain while making sure that some benefits would be in place for Gen-X made sense. If we were still sitting in 1994 watching the solvency of the TF erode in the way it was.

But by 2000 the calculus had changed considerably. Instead of the TF projecting to go to depletion at the point of maximum Boomer impact on Social Security and the ballot box it was now set for 2037 when Boomers would be aged 73 to 91. Moreover this meant that just about half of Gen-X would be eligible for benefits themselves. Under these circumstances a policy of starting phased in benefit cuts in 2009 largely gives Boomers a pass (it being accepted dogma among reformers that people in retirement or approaching it should not have their retirement options curtailed when they don’t have an opportunity to build up their PRAs in time) while guaranteeing that Gen-X gets their baseline benefit cut. In effect they are being asked to gore their own ox. And this became even more true as TF depletion pushed out from 2037 to 2041 over Bush’s first term.

Now given that crisis at TF depletion is really just a matter of taking a smaller benefit in 2042 than some of these Gen-X retirees were getting in 2040, and that timing and needed cut the timing and size of the needed cut being contingent of actual economic performance, it might not be as bad as expected, selling an across the board guaranteed cut in benefits offset by whatever gains you would get from your PRA (after clawback) naturally gets harder to sell.

After all for workers making under the median ‘crisis’ is defined as a future benefit cut. Arguments that lifting the cap wouldn’t backfill the entire gap lose their power when those workers realize that the rest of the gap will require benefit cuts anyway. Nor are they likely to be moved by arguments that crisis should be measured not by TF balances but instead by the time transfers from the General Fund need to start. After all the General Fund is mostly funded by a tax that many of them (and particularly those with children) don’t have to pay to start with.

So yes indeed the ‘benefit end’ only people really do have a challenge. They have been hemmed in by the calender calculus.

To which I would add that this largely explains why the reformers are still trying to make the argument that now is the time to move on creating a bi-partisan commission. Because the calender continues to work against them. It has pretty been the consensus among reformers right since 1983 that it would be unfair to cut benefits for people in retirement or approaching it because those people simply don’t have time to replace that income via a new Personal Retirement Account system. Instead benefit cuts should be restricted to those eight or more years from full retirement age and even then phased in. For example a change in calculating initial benefits from real wage to price increase doesn’t effect anyone actually drawing benefits, their check being adjusted to prices already. Similarly a shift from shifting from CPI to some measure taking into account a lower price for the typical basket of goods for seniors has a very modest effect over the first decade or two but starts to bite deep as the decades go on. And by that time most Boomers will have shuffled off to Buffalo and points beyond (or up and down depending on your belief system).

Every year that reformers fail to sell their message that we have to start with benefit cuts is a year when Gen-X is being invited to shoot themselves in the foot while giving Boomers a pass. In 2009 if Social Security is left alone ‘crisis’ will be defined as a cut in benefits in 2041. If we define Gen-X as the eighteen year cohort of people born 1965 to 1983 (and it doesn’t matter what we call them) we are talking about people currently aged 26 to 44 who will be 58 to 76 in 2041. Meaning that a phased in benefit cut now or an increase in retirement guarantees at least half of them being absolute losers in their first years of retirement. Whereas an increase in taxes via a cap increase or a cross the board payroll tax increase simply means that people making over the median and particularly people earning over the cap have to divert funds from other retirement options. And the calculus only gets tighter as the years go on. Reformers who think they can just bide their time until some hypothetical Republican electoral sweep in 2012 or 2016 need to check their calenders. Gen-Xers then being all that closer to that key date of being 50, a point when people realistically can estimate their retirement outcomes and more mindful of what a repeat of a 2008-2010 event would have on their retirement fund.