World Economic Meltdown: Crisis for Social Insurance Solvency? Or opportunity to Kill It?

by Bruce Webb

Well the Republican Party and economic conservatives generally have made their position clear, they are openly using the current meltdown as an opportunity to kill Medicare and Social Security as they exist today. We saw this at the Stimulus Summit where the very first question by the Republicans, coming from Senate Minority Leader McConnell, was to ask Obama if he would commit to supporting the Conrad-Gregg plan for Social Security, a plan that starts from the position of crisis and only asks what kind of reform it needs (and if you guessed a combination of benefit cuts and a transition to PRAs you probably hit the mark). And in releasing the Republican counter-budget Ranking Member Ryan made eliminating Medicare for workers currently under the age of 55 in favor of an array of private insurance options a central part of the plan. I’ll leave the Medicare issue for Ezra and the people at TPM Republicans: Let’s Privatize Medicare! and focus on Social Security

It is no secret that Republican’s opposed the creation of Social Security in 1935 and the array of social programs established by the Great Society in 1964-65. Not only do many of them believe that Social Insurance is not a proper function of government, many believe it is unconstitutional, and some agree with Milton Friedman that such programs are immoral and a danger to freedom itself. But they also recognize that these programs are widely popular, attacking them directly having traditionally been seen as certain political death, Social Security and Medicare being seen as the Third Rail of American Politics.

The funding crisis that faced Social Security in the late seventies was seen by these people as their great opportunity. But they recognized that they couldn’t just shut down Social Security overnight they needed to supply a replacement mechanism and a transition plan. And so was born the IRA, the Individual Retirement Account and the Ferrara Plan. (This version is from 1997 but the plan itself dates back to before 1983.) They missed their chance in 1983, and the bitterness is palpable, for example Butler and Germanis called it a ‘fiasco’. So they retooled and moved on adding other plans to the Ferrara Plan, all however having as a central element the ultimate elimination of Social Security in favor of Personal Retirement Accounts. The problem is that all plans share the same three challenges: first how do you finance the transition for older workers who do not have time to build a private retirement plan, second how do you provide an equivalent return for workers making under the median, and three how do you do all that at a cheaper cost than just fixing Social Security via a payroll tax increase of less than 2%?

Answer is below the fold.

Umm, well it turns out that you can’t meet all three challenges at the same time. The various plans tackle this problem in different ways but even after their changes in benefits by changing the indexing they end up with results as seen here.
This table is from the LMS Plan. In each case you end up with substantial transfers from the General Fund, in some cases exceeding those needed to finance scheduled benefits in the system as designed. And remember this is after changing the benefit formula. That is if we examine LMS we see that while it proposes the least amount of transfer it also produces poorer results for lower income workers. When LMS was scored the payroll gap under traditional Social Security was 1.92%, in other words an immediate increase in FICA would have been projected to deliver 100% of the scheduled benefits over the 75 year window. Whereas LMS proposed a package of tax increases and benefit cuts for workers under the cap of 4.2% with the following projected result.

The authors of LMS recognized the problem of selling a 4.2% solution to a problem scored at 1.92% that produced worse results for many lower earners and tried to mitigate the problem some.

However, all three of us support the use of progressive matches to augment the personal accounts of low-income workers as long as a funding mechanism for the matches is identified. Thus, we would support, for example, integrating a paid-for Saver’s Credit with Social Security PRAs so that low-earners would have their PRA contributions matched by the government. We did not incorporate such a provision in our plan because changes to tax policy outside of Social Security are beyond the scope of our proposal.

. Which translates to even higher transfers from the General Fund. And while it may not be charitable my suspicion is that they didn’t include such a proposal because they didn’t like how it scored.

So how do you sell a crappier result at a higher price? Particularly when your Party is out of power? You seize on every opportunity to claim that the current system is ultimately unsustainable and will have to be replaced by something, anything. Moreover since that will require sacrifices by everyone it is important that the plan be bi-partisan, which in practice is meant a compromise on ground pre-established by the Blue Dogs and the Republicans. Hence the demand by McConnell (with implicit threat of withholding support for Obama’s stimulus and budget plans, which of course they did anyway) that Obama embrace Conrad-Gregg. Which in practice means embracing some combination of benefit cuts and PRAs.

What is fatal to such a sales campaign is the prospect that people will listen to Coberly who will helpfully point out you can get a 100% result with less than 2% of payroll (or 1.06% per CBO’s August estimate) or that they will listen to Rosser/Webb who point out that economic growth needed to fully fund Social Security as is is not that high by historical standards and moreover would need to be at those levels to fund PRAs anyway. That is you need to keep people from looking at the numbers or at least undermine people’s faith in them.

Which explains the assault launched last week by Biggs, and this week by his colleague Hassett with an assist from the WaPo. What do you do when people are hearing rumors that Social Security is fully funded until 2041 or 2049? Well you simply change the definition of what ‘funded’ and ‘surplus’ mean, and point out that using a particular version of a data set that February one-month numbers failed to meet your new test, imply that that will continue to be true forever and suggest that the only solution is to sign on in advance to a plan prepared by a bi-partisan group. Hence Hassett this week Recession Bites Into Social Security’s Surplus

We have all been so busy whining about bonuses at American International Group Inc. and arguing about the so-called card- check legislation that we forgot to watch the Social Security surplus. While we were looking away, that surplus disappeared, eight years ahead of schedule.

And what is to be done about this new, recession caused crisis?

That means benefits payments will be under more stress than they have been in modern times. To the extent that the federal government continues to pump money into assorted bailouts and rescues, it will undermine its ability to support a retirement program that is now a drag on the overall picture.

The only responsible course is to do what reformers have been advocating for at least a decade, a step that worked in 1983: Establish a bipartisan commission to recommend fixes to Social Security, and implement them now. The myth that we can postpone reform because everything is just fine has been exposed as such. The time to act is now.

If this sounds familiar to the language deployed in creating the President’s Commission in 2001 or Bush launching his actual assault on Social Security in November 2004 it is not an accident. Because Cato and people and organizations aligned with it have always had the same goal in good times and bad, in 1983, in 2001, in 2004 and now in 2009 they insist that the only answer is to transition Social Security to a system based on Private Retirement Accounts. In fact the original title of Cato’s program makes that abundantly clear, it was called the PROJECT ON SOCIAL SECURITY PRIVATIZATION. That was a little too open so they changed it to Project on Social Security Choice but don’t be fooled, they are working backwards from their preferred solution.

These people wished that Social Security and Medicare had been strangled in their respective cradles, now that they are mature they want to weaken them progressively until they can be drowned in Grover Norquist’s bathtub. None of this is about improving retirement security, all of their plans start with guaranteed benefit cuts that in some cases exceed those of allowing Social Security to go to depletion, and many of them come at a higher cost to workers than just fixing the current system via payroll tax. No it is all about pissing on FDR’s grave and preventing Social Security from becoming the template for achieving universal health coverage. The people at Cato are committed to blocking any expansion of government that might increase transfers from the wealthy down the income scale, regardless of the overall social utility. Arguments that most European health care systems deliver better outcomes to more people at a lower cost leaves them cold, if it means higher taxes on the real upper income folk then no deal. On the other hand they have no objections to an LMS plan that increases taxes on people making up to the 90% income level (but no higher) while delivering crappier benefits to current and future generations of workers. So it really isn’t about overall tax levels or intergenerational equity, like everything else on the agenda of the economic right it all ultimately boils down to taxes on the wealthy and/or reversing the legacy of ‘class traitor’ FDR.

Everytime you see someone from Cato or AEI argue that ‘The time to act is now’ (as Hassett does) understand that the unstated sub-text is ‘before we lose this opportunity to set Social Security on a path to privatization’. The goal never changes, only the circumstances in which they have to operate.