How the Deficit Commission Painted Itself into Corner on Social Security

by Bruce Webb

High on the list of tasks mandated of the Obama Deficit Commission is to get the deficit down to 3% of GDP by 2015. Unfortunately for them they have set up a situation where they can’t move that number via cuts to Social Security, if anything such cuts more one of their metrics the wrong way. To understand why we need to revisit old friends including ‘Leninist Strategy’, ‘CSSS’, ‘deficit’, ‘debt’ and ‘unfunded liability’.

It was well understood as far back as the publication of Butler and Germanis’ Leninist Strategy (11th article here) in 1983 that cutting benefits in the near term for existing retirees and even for newly approaching retirees was both politically deadly and deeply inequitable, these people simply didn’t have time to do alternative planning through Personal Retirement Accounts or anything else. This reality was explicitly recognized by Bush’s 2001 Commission to Strengthen Social Security where it was established as Guiding Principle no 1 of 6 CSSS. Now how long this grace period should be and whether it would be permanent for that class of retirees, or whether they would ultimately share in whatever index changes were adopted vary across plans. What doesn’t vary is the fact that no plan entirely based on benefit cuts can move that 2015 target number.

The why and how of this below the fold.

The first problem is that Social Security ‘reformers’ continually confuse ‘deficit’, ‘debt’ and ‘unfunded liability’. They implicitly assume that current year deficits sum into ten year debt increases which in turn equate to long-term unfunded liabilities. And if we were just talking about General Fund spending this would largely be so. But Social Security throws some wrinkles in.

Lets take the extreme case, one where benefit cuts happen right away from Day One. Well if big enough they would put Social Security back in cash-flow positive territory (CBO’s ‘Primary Surplus’) and so score as a reduction in deficits compared to the baseline, so far so good. But by forestalling the need to pay a portion of the interest accruing on the Trust Fund in cash those cuts equally serve to pad the bottom line of Trust Fund balances, which for this purpose score as a part of total Public Debt. To make it worse interest not paid out in cash gets transformed into new principal which itself starts drawing interest and so boosting Trust Fund Balances compared to the baseline. Exactly how are you creating ‘intergenerational equity’ and relieving your children and grand-children when the net effect of short term cuts is a boost in long-term debt. (I know this sounds goofy, but that is the way the numbers run).

So the Commission is already in a trap, they can improve the short term deficit position by cutting benefits and in so doing also have positive effects on 75 year and Infinite Future actuarial gaps but only at the cost of actually increasing Public Debt over the medium term. But it gets worse, because they have already ruled out short term benefit cuts.

The strictest plan being floated right now is that of co-Chairman Alan Simpson. He would reduce the grace period so that it only cover people 60 and older. But this means that you simply don’t see any savings at all until people now aged 59 reach Full Retirement Age which in practice means 2017. Meaning you don’t move the number in the target year of 2015 AT ALL. And unless you quickly phase in those benefit cuts in a big way in 2017 you end up with no real impact on your standard CBO Ten Year score.

And the Ryan Roadmap makes this worse, he would exempt people 55 and older which means your very first savings come in 2022 and so outside the 10 Year scoring window altogether. And then you have people like Bachmann vaguely proposing to ‘wean’ people under 50 off Social Security, which puts any savings off until 2027. Which is fine if your real goal is to eliminate Social Security over the long run, but not particularly compelling when you are trying to sell this as a deficit and debt reduction measure sparked by short term Obama spending. It literally does not compute.

The current public line being taken by most of the Commissioners is that they have to tackle Social Security to show the bond market that they are serious. But since it is doubtful they have the cojones to cut benefits in the short term and even if they do won’t have the effect they need on either their Public Debt or Debt Held by the Public metrics, how is that supposed to reassure the bond markets of anything?

Now the Commission has a tiny exit hole. If they can keep the focus entirely on reducing the 75 year and Infinite Future actuarial gap and keep the public in the dark about the actual effect of their proposals on ten year deficits and twenty year debt levels they might escape the trap. But their political need in the here and now to make unpopular future cuts to Social Security somehow forced on them by current deficits makes it difficult for them to pull the bait and switch, over the last year the informed public has been trained to look at the CBO score and in that regard the Commission has nothing.