‘A Well Tailored Safety Net’: Social Security and Old-Age Risk-Sharing

by Bruce Webb

Well I guess my reputation precedes me at least a little bit. Jed Graham of Investor’s Business Daily has devised a new fix for Social Security and published it as A Well Tailored Safety Net (link to chapter summary) and kindly offered to send me a copy to review. Well I am in the midst of a move South to Seattle and a new job search (see note under fold) and so won’t have time for a full reading but will put some first impressions below the fold. Mr. Graham points us to a favorable review by Jonathon Chait Noam Scheiber on Chait’s blog in The New Republic (h/t Graham) A Bona-Fide Social Security Fix as well as a piece in The National Review by Reiham Salam Jed Graham on Work Disincentives and concludes with some apparent satisfaction:

It’s kind of noteworthy when these liberal and conservative publications see eye to eye on an issue as ideologically divisive as Social Security reform. It’s even more noteworthy considering that these are two of the more thoughtful people writing about economic policy.

Well while Chait is a reasonably consistent liberal both him and TNR lean a lot heavier in the direction of ‘neo’ than ‘New Deal’ liberal, if we had an equally favorable opinion from The Nation maybe we could talk here. But Angry Bear readers can make up their own minds on the substance of the reviews and the overall political approach of the reviewers.

Meanwhile Mr. Graham appended a copy of his testimony to the Obama Deficit Commission What I told Obama’s Fiscal Commission About Social Security.

Well having let Mr. Graham by implication make his full case up-front I will address some of his points below. Rather roughly I am afraid, since merits of his specific proposal aside he is working from the same flawed conception of Social Security as almost everyone else, he just adopts them to screw over workers in a slightly more equitable way than most other ‘Reform’ plans.

(First on that job hunting note. I am looking for full, part time or project related work in the Seattle area, if interested my resume has its own blog PlanWebb)
Okay back to Mr. Graham.

First, and a minor carp, Graham didn’t tell the ‘Commission’ anything, instead he meet with two unidentified but “first-rate” staff members. which considering much of that staff was supplied by Pete G Peterson may mean little more than preaching to the converted.

But more serious objections can be found in his chapter summaries linked above.

Chapter one: “Social Security’s $2.4-trillion trust fund contains no real resources.” Graham has simply adopted the ‘Phony IOU’ narrative whole. There is nothing in the law or in past or current practice to suggest that the Special Treasuries will not be honored just as they were in the entire period from 1971 to 1982 when interest and principal were honored down to the next to the last dime or as they are being honored TODAY in respect to the DI Trust Fund which has been taking accrued interest in cash since 2006 and principal since 2009. If they are not “real resources” why is Treasury forking over some $32 billion in cash to the Disability Trust Fund in 2010 alone? The reality of those resources is proven every time a disability check hits a bank account. Graham thus loses me at sentence one.

Chapter two; “Social Security’s history over the past quarter-century reveals that today’s predicament of a worthless Trust Fund didn’t take anyone by surprise”. Pure polemic. The Fund is not “worthless”, a fact revealed by the redemption of DI assets over the last year and a half with no outcry from anyone. The Special Treasuries are real as the regular Treasuries held by the CCB and the proof is in the continuing benefit checks. And Graham doesn’t build back any cred with me by titling this chapter ‘A political fraud’, instead the political fraud is insisting that notes that in accordance with the Social Security Act of 1935 are “fully guaranteed as to principal and interest by the Federal government” are nothing of the sort.

Chapter three: ‘The Price of Delay’. Well unless we ignore that the cost of delay since 1997 has been a projected payroll gap down by more than 10% (from 2.23% over 75 years to 2.01% in 2010) even as the change in projection period itself should add 0.05% per year to the gap, the drop itself shows that the whole concept of “We can’t afford to wait” could use some examination. And Graham suggests that an immediate fix would require 1% of GDP where a fix delayed until 2037 would require 3% which numbers could use some sourcing. Per this Table from the Report Table IV.B6.—Unfunded OASDI Obligations for 1935 (Program Inception) Through the Infinite Horizon, Based on Intermediate Assumptions total Infinite Horizon GDP gap is 1.2% of GDP whereas the 75 year gap is put by the Trustees at 0.6%. Nor is it clear that GDP is the right measure here, far more informative would be to put these numbers in pocketbook form as a percentage of payroll. And the Trustees put that cost if the Trust Fund goes to depletion at 3.7% of covered payroll (12.4% to 16.1%), an amount significantly less than 3% of GDP.

Well I don’t have the time or inclination to go through the rest of the chapters but as typical Graham ignores the simplest solution to Social Security: keep the current structure in place and raise FICA by 0.1% per year (less than a tenth of projected Real Wage increases projected) for 20 years and per CBO the problem is solved without the complicated structure proposed by Graham. Plus the table in Graham’s testimony tells it all. Under his plan average workers taking early retirement are absolute losers compared to the current system for the first seven years of retirement and only slowly make it up via extra years of life. And since the initial cut is to 56.9% instead of the current steady 80.1% the net effect is to tie low income workers to the plow for some extra work years, a prospect pleasing to those fully invested in the Protestant Work Ethic (particularly those whose own jobs are pretty cushy) but not necessarily to the low income worker who is not a good bet to beat the mortality tables anyway.

In any event Graham would have to address my objections to his formulations and numbers in Chapters 1-3 for me to take this proposal seriously.

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