CBO Scores Social Security Policy Options
by Bruce Webb
Following up on the publication of CBO’s Long Term Budget Outlook (see previous two of my posts) CBO yesterday published Social Security Policy Options (Summary for Web) and Social Security Policy Options (Full 51 pg PDF) scoring various revenue and spending cut measures that have been proposed for Social Security. The included Table shows various fixes scored as a percentage of 75 year GDP with the gap measured at -0.6%. Meaning that any fix scored at 0.6% or above backfills the entire gap, while fixes scored below that would have to be applied in combination. CBO does warn that certain fixes are interactive meaning that they are not simply additive, applying two might have either positive or negative effects on the total. I am going to publish this to get the ball rolling but will be updating both this post and comments over the next couple of hours.
BTW, the full version provides an excellent summary of Social Security overall, people not totally familiar with how the system operates (and some who think they are familiar but labor under certain misconceptions) might find it useful to skim through the relevant sections.
Well there is a lot here. First it is fairly common for people on the Left to insist that the easy solution is just to lift the cap. But as the table shows it matters a great deal how that is implemented, for example a fix along the lines suggested by Obama during the campaign of taxing income above $250,000 at 4-6% would close the gap between 0.1 and 0.15% or between a sixth and a quarter of what is needed. On the other hand simply eliminating the taxable minimum while allowing those extra taxes to contribute to benefits neatly fills the gap, while eliminating it and not allowing that to contribute provides a 0.9% fix which would leave room to enhance lower income worker benefits. But advocates need to be specific in what they are proposing, ‘lift the cap’ on its own is too reductionist.
Second this table pretty much validates the Northwest Plan for a Real Social Security Fix. While no option matches it exactly, option 2 is very close and in line with Coberly’s original proposal (pre-trigger): phase in a 2% increase by 0.1% per year, 0.05% each for employee and employer, for 20 years and the entire 0.6% gap is accounted for.
Third some of the benefit cut proposals being made end up being pretty punitive while still not doing the trick. For example means testing has to include 70% of all workers even to make up 5/6th of the gap while raising the Full Retirement Age to 70 only fills half of it. At a minimum we owe it to workers to allow them to have a voice in whether they want to accept a phased in tax increase rather than what can add up to dramatic changes in lifetime benefits.
The longer version of the document examines the specific effects of all 30 listed options.
There is an aircraft carrier steaming around the eastern Med showing the US flag, at 35 kts, and it is worthless and it is stealing from US people, but it is hard to turn that 85,000 tons of 35 kts momentum around.
Barry Ritholtz dispalyed a chart about UK government outlays.
Interesting discretionary outlays are less than 10% in the UK, the largest part is social safety net.
I suspect the rest of Europe about the same.
The US is running 35% discretionary and the corporatists enjoying solid demand at great returns on US government investment in protected industries (socialism for corprations) and CBO studies include demands to cut entitlements or raise payroll taxes.
CBO talking SS out of context of fiscal plundering is an exercise in diversion.
It takes a lot to turn an aircraft carrier which is useless since the Imperial navy is rotted in the Pacific since 1945.
The SS funding issue is not going to be addressed by caps, or raising the age or rate increases.
The aircraft carrier is the tip of a multi trillion dollar spear that has no reason to exist.
SS’ future will not be addressed until the corporatists are included in a fiscal picture for a growing propserous America.
This chart helps:
Very interesting stuff Bruce. I am particularly pleased to see how little raising the retirement age has on the small gap over the 75 year projections and that “means testing” would have to affect almost everyone to do the trick. Of course, the media and politicians will not consider these points at all.
terry
The CBO summary, which i suspect is the most that the media and politicians will read does not make the different options very clear, certainly not it terms of their consequences on the people Social Security was designed to protect. Nor are they clear that Social Security wsa designed to be worker funded… that is, the workers pay for their own retirement insurance… and many of the “plans” simply destroy Social Security as worker funded, as well as destroy its ability to protect the workers ability to retire at a reasonable age with at least “enough.”
Most people will not look at “benefit cuts” and realize how damaging a 13% cut would be to a person already living on the line between “barely enough” and “not enough.”
It may not be the CBO’s job to point out the huge differences in consequences between a half a percent tax increase (or a tenth of a percent if done intelligently) and a benefit cut or increase in the retirement age, but it shouldn’t be their job to obscure the difference either.
Unless they are truly clueless.
and may i say
none of this will make a damn bit of difference unless it can be explained to the people so they will stop the politicians of both parties from “fixing” Social Security in the name of deficit reduction.
it’s funny that ten years ago they were going to fix Social Security so we could all enjoy the high returns from the stock market. maybe if this “fix the deficit” dodge doesn’t work, the next administration will “fix social security” to clean up the Gulf.
Well they don’t really have a lot of choice. Any legislation coming out of this process is by rule REQUIRED to be scored by CBO. And while in previous years maybe nobody would have noticed the debate around the stimulus and then HCR have sensitized people to CBO scoring, it has become the measure by which the MSM evaluates legislation.
And an additional thing in this context, not only won’t an increase in retirement age do much over the 75 year window, as structured it does exactly zero for either your ten year or twenty year budget/deficit score given that every proposal out there exempts people within x number of years from full retirement age where x ranges from 7 (Simpson) to 20 (Ryan Roadmap). Arithmetically a phased in increase starting in 2030 and not effecting the entire retiree population until say 2060 CAN’T generate big numbers for either SSAs 25 or 50 year sub-periods. Sure they generate big numbers over the Infinite Future, but when people recognize they will see nothing concrete in their own lifetimes and what they would see is a cut in their children and grandchildren’s retirement I think this effort will come up short.
Posted 1 July at WSJ site link below:
“The event took place as scheduled last Saturday, with thousands of citizens meeting in different cities. They duly absorbed a booklet alerting them to the danger of deficits. They deliberated. And then something funny happened on the way to the consensus.”
“According to a preliminary compilation of results, participants supported “an extra 5% tax” on incomes of greater than $1 million per year (by 68%) and an increase in the corporate income tax rate (59%). They thought a “carbon tax” was a good idea (64%) as well as a “securities transactions tax” (61%). On Social Security, austerity was nowhere in sight as 85% backed raising the limit on taxable income, and only a miserable 27% thought that we should “create personal savings accounts.” Majorities favored cutting defense spending and expressed support for further recovery measures even if they increase the deficit.”
But do read the entire article.
http://finance.yahoo.com/banking-budgeting/article/109982/avoiding-the-austerity-trap?mod=bb-budgeting&sec=topStories&pos=5&asset=&ccode=
I want to point out that the Northwest Plan avoids some of the “hard choices” the hard men are urging be imposed upon the poor.
By raising the payroll tax one tenth of a percent “at need,” there will be plenty of time to see if the aging population really does put undue burdens on the Social Security system. there will be plenty of time to decide if the answer is to, for example, offer an “add-on” private markets based, government managed retirement fund. or people could see if the increase in life expectancy was such that it favored rich people, the benefit structure could be made more progressive… such that people who were in poor health, had arduous jobs, or just wanted to, could retire on a basic pension sufficient for modest comfort according to the standards of their time. while those with good health and great jobs and high incomes could keep on working, keeping their pension that they paid for in reserve, but not adding to it. In effect trading “making more money now” for not having their pension increased later. (I said that badly, hope you understand what i am trying to say. basically ending the “incentive” for working longer for people who get plenty of incentive from the size of their incomes.)
There is no need to “fix” Social Security today with a fix that fits what we “think” will happen in fifty or a hundred years. WE can “fix it as we go,” and I am reasonably certain that that fix will turn out to be a one tenth of one percent rise in the tax from time to time. fairly frequently throughout the 30’s, much less frequently after that.
And Arne, you aren’t going to live long enough for that tenth of a percent to even reach a total of a 1% increase in your tax, even if you are paying both the employee and the employer share. So relax.
And the CBO does not place any of its fixes in context. The thing about the northwest plan is that tenth of one percent raise in the tax from time to time is coming at the same time wages are going up more than a full percent every year.
so while Arne is worried about losing that ten cents per week he was planning to invest in something with a higher return, he has lost sight of the fact that every ten cent increase in the tax comes with a five dollar increase in pay. no reason he’d want to chip in ten cents of his hard earned raise to insure his own retirement… because we know nothing bad can ever happen to him… just to make it possible for someone else’s grandmother to be able to retire while she can still walk.
Full disclosure:
The northwest plan projects a twenty cents per week per year increase in the payroll tax over the rest of this century. Thats for an average earner, paying only the employees share, in terms of today’s dollar and today’s real wage.
For a high earner paying both shares (self employed) that twenty cents could be a dollar a week per year. But remember this is out of an income of a hudred thousand dollars a year, that will be growing 25 dollars per week per year.
It’s hard to see that as a hardship. Or a need to “compromise” or present a “balanced” plan that only cuts off half the arms and legs of the poor while … while what? saving the rich from a tax increase? the rich don’t pay the tax. saving the high earning wage earner from a tax increase?… well there you have it. no reason to think a high earning person would want to pay a higher premium to insure a higher return in retirement at an age when he can still enjoy it. Nope, your higher wage earner needs to invest every cent so he can “live the way he wants to” when he retires… if nothing goes wrong. P’nut butter and jelly for the kids. Can’t be wasting a lot of money on food when there are good investments out there waiting to be made.
I could go on, because there are lots of things about this folks never think of. But there is a reason they don’t think, so I’ll give ’em a break.
If you are going to post a response to me it should be on a thread I have already posted on myself.
Arne
I am using you as a straw man. Bad manners I know. But the best I can do.
The best plan for the next 10 to 15 years is still Nothing. The reason to talk about changes is to stave off the silly worrying that having a 75 year projection encourages.
The NW plan makes the 75 year gap go to zero and eliminates the discussion. The tax increases coberly suggests are not going to be a hardship on me. The problem I see is that you actually need to meaningfully discuss the other proposals before people will accept that 100 percent tax increases really is the way to go.
When you do that you find that it does not take the full current law benefits to provide a safety net that is getting stronger each year. It seems obvious (to me, but not to Pete Peterson) that as productivity increases, some of that increase should go to strengthening the safety net, but how much? The NW plan sticks to the amount provided by current law, but why?
The NW plan makes the 75 year gap go to zero and eliminates the silly worrying.
“The NW plan sticks to the amount provided by current law, but why?”
For the same reason by the Trauma Team seeks to stop the bleeding and stabilize the patient before deciding on the ideal course of surgical and post-surgical treatment.
The current assaults on Social Security are based on the argument “We can’t even afford the status quo!”. The NW Plan says “Yes we can and here is how. Why should a democratic majority accept YOUR alternative?” And the last point is key, the whole goal of the Leninist Strategy is to get workers to vote against their own self-interest.
As to whether Social Security should be enhanced, well that is a totally different question from “Is it bleeding to death?” Personally I have given up deploying Rosser’s Equation, not because it isn’t valid but because it feeds into the campaign of those who would treat an allegedly mortally bleeding patient with a leeches therapy. To switch metaphors, when barbarians are at the gate it is not helpful to point out that we could have built the wall better.
Arne
my argument is not with you. You are a good and decent person, and reasonably correct about SS. my argument is with the aid and comfort you give those who want to raise the retirement age.
As we have both said, if in fifty years that looks like a good idea, let them decide so then. But our friends on the commission won’t wait fifty years. They’ll change the law now and all the idiots in the country will say “won’t affect me.” And then by the time it does, it will be too late to do anything about it.
And phrases like 100 percent tax increases just confuse everyone. You mean, why address the problem with only tax increases. The answer is because the tax increases are tiny, and will hurt less than ANY other proposal on the table.
The thing to remember is that Social Security is not a “tax,” it’s an insurance premium. If the cost of the insured event goes up, it is reasonable for the premium to go up. It is not reasonable to run around and look for a “balanced plan.” Hey, what if we only pay for HALF of your accident? Hey, what if we force the guy down the block to pay for your insurance? Hey what if we don’t pay the claims of people who have too much money? Hey, what if double the premiums of people who have more money than YOU?
actually, it makes the infinite horizon gap go to zero. but i only showed it for the same 75 years the Trustees have numbers for.
Though on my reading it might require a (temporary?) FICA bump in around 2090. Because oddly the 100 year actuarial gap is actually larger than either the 75 year or Infinite Future one. It doesn’t jump from the page, you have to dive into the definitions of ‘current participant’ and ‘future participant’ and examine the numbers in this Table
http://www.ssa.gov/OACT/TR/2009/IV_LRest.html#267012
It shows an unfunded obligation of $16.3 trillion for ‘current participants’ which means for everyone born in 1994 and before against a $15.1 trillion obligation for ‘all participants’ which seems to translate to an actual surplus after 2100 or so. Not much of one when projected over the Infinite Future but still—.
Plus a straightline extrapolation of the TF ratios of the last ten years of the NW Plan leads to that same conclusion. But it is all buried in the rather bizaare definition of ‘current participant’ as including kids whose SS contributions might be a couple of bucks from their part time job at Taco Bell.
As our German and Yiddish friends might say ‘machts nichts’, ‘makes no difference’. The differences between Arne, Coberly and me are more than swamped by the uncertainty in the projections. Even before the Masters of the Universe decided that placating what Krugman calls the ‘invisible bond vigilantes’ is clearly more important than either putting people to work or feeding grandma.
As late as early 2006 I was fully confident about long-term Social Security solvency even under a policy of ‘Nothing’, surely even the Bush Administration couldn’t get us down to Intermediate Cost outcomes, still less High Cost, there was no way that ANY Administration would tolerate the 6.5% ultimate unemployment number needed. Surely there would be a policy response THEN.
It’s like a nightmare. In fact some nights it is a literal nightmare. Because 10 years or so of 8% plus unemployment and flat to declining Real Wage makes the long-term picture dark indeed, and not just for Social Security. God forbid we get ourselves in a situation like that of 1937 where the only ultimate solution was World War and total economic mobilization via the industrial war machine. That is not the kind of stimulus we need.
Well
the differences between coberly and others who at least understand Social Security are exactly zero for “all practical purposes. but those who insist upon playing the science fiction future game give aid and comfort to the enemy, because the people are not remotely capable of distinguishing between facts, likely future scenarios, and remote possibilities that will look completely different to the people who may face them than they can to those of us who imagine them against the background of our own present experience.
Now I can show, I HAVE shown, that IFF the Trustees own numbers, and the CBO’s own numbers, are “true”, or as close to true as they are to each other, the cost of “fixing” the “huge horrible hairy deficit” that they predict, amounts to a tax raise on the order of twenty cents per week per year… for all of the years they report numbers for. No need to raise the retirement age, no need to tax the rich, no need to cut benefits that are already at a barely survival level.
Furthermore, the Trustees show, while CBO doesn’t bother, that the need for this invisible tax increase will occur at the same time that wages are increasing ten times as fast, in absolute dollars. So it’s a little hard to see how it makes anyone any worse off.
But hey, we can always have a nightmare and wake up screaming and run kill the wife and kids to save them from a fate worse than death. Not to mention save that twenty cents per week for something really worth while, like another new Porsche or a sure thing on the stock market.
CBO completely ignores general revenue transfers. Yet the SS Trust Fund has been drained by benefits paid to early generations well in excess of those justified by contributions. These extra payments are welfare payments, not social insurance payments, and should have been financed outside the social insurance system. Instead, they dramatically reduced the balance in the trust fund. If the general fund were to repay the amount drained, SS would be solvent going forward. CBO doesn’t even discuss this fact.
I think I understand what you are implying, but I have to guess from the comment. Use numbers as well.
Anon
unfortunately you are completely ignorant of how Social Security is financed, and you are spinning a fairy tale.
The Trust Fund has been drained of nothing. Like every other Trust Fund, the money is put out to let, to be called for at need. What you call “drained” is “prudently invested” by another name.
The early contributors to SS got a “better deal” from their contributions, in much the same way that early purchasers of Microsoft got a better deal than later purchasers. The program was created to solve a problem. And it solves that problem by using the “savings” of the people who were saving for their retirement, to pay for the retirement of those who had contributed at least a few years (six, I think) to the program. This may be seen as welfare if you want to look at it that way. But since those folks were going to have to get welfare anyway, I think it just amounted to a pretty smart way to put the savings to work. By the time Social Security was fully phased in, the contributions of workers would bear some rational relation to their benefits. But all workers from the beginning to the present, and for the forseeable future, will get benefits that are at least equal in real value to their contributions.
Pretending that they “could have got more” if they invested the money in the market is a lie. An ignorant lie. A greedy, stupid, ignorant lie.
Your rate of return on your social security “investment” is at least as good as what you would get on any investment at least as safe. Better, when you count its insurance value. Much, much better.
I have no idea what “general revenue transfers” you are talking about. Neither do you.
You would do well to learn that the Trust Fund is not how Social Security is funded. It is a pay as you go system, with the Trust Fund merely balancing times of excess revenues with times of “not enough” revenues. It was allowed to grow large because of the baby boom demographic challenge. Now that it has come time to pay for what it was created for, your minders, and their idiots, are calling for Congress to reneg on the debt, so they can turn around and say “Social Security is bankrupting us.”
Lies it takes really, really stupid people to believe. Unfortunately we got a ton of em.