Brave Sir Alan vs Sir Sniveling NewDeal: Orszag Frames Social Security

by Bruce Webb

And by ‘framing’ I mean as in Film Noir gangster movies rather than Lakoffian terms. (Apropos of nothing, Prof. Lakoff gave me the worst grade I ever got in college, but felt so bad about it I wanted to tell HIM to ‘buck up’. Long time ago.)

Peter Orszag has made quite a stir with a couple of Op-Eds this last weekend of which the most recent was Safer Social Security in which he cleverly indicts and then sentences Social Security with the following:

Nevertheless, Social Security does face an actuarial deficit. Current projections suggest that, after 2037, benefits would need to be reduced by more than 20 percent to match revenue. Measured over the next 75 years, the deficit in Social Security is expected to amount to 0.7 percent of the economy — not a huge amount, but a deficit nonetheless.

So it would be desirable to put the system on sounder financial footing. And that is precisely what the co-chairmen of President Obama’s bipartisan commission on reducing the national debt have bravely proposed to do. It’s too bad their proposal has been greeted with so much criticism, especially from progressives — who really should look at it as an opportunity to fix Social Security without privatizing it. Although the plan leans too much on future benefit reductions and not enough on revenue increases, it still offers a good starting point for reform.

Well this is going to take a whole lot of unpacking, and the only question is where to start. And a prosaic answer is ‘Under the fold’.

Orszag’s first move is to point out that Social Security faces an actuarial defict and defines the effect of that in terms of a ‘more than 20 percent’ cut after 2037, and then proceeds to quantify that cut as an actuarial gap of 0.7% of the economy. Already he is having things two ways. Lets say we adopted a plan of ‘Nothing’ in the face of ‘Crisis’, what would be the result on that actuarial gap? Well one answer is that the accumulated Social Security Trust Funds would be drawn down to depletion, which if nothing was done in response would require a 22% cut from the scheduled benefit. Now whether this cut actually even represents a ‘Crisis’ depends on your reaction to what I call ‘Rosser’s Equation’. Under the current schedule real benefits as measured in terms of a basket of good are set to grow by 100% over the seventy five year projection and account for a full 45% of program growth over that period, which can be seen in graphic form via this 2003 CBO Report The Future Growth of Social Security: It’s Not Just Society’s Aging. This growth in real benefits is such that even a 22% cut on Trust Fund depletion in 2037 would still result in a better real result for the retiree of 2038 with Rosser’s Equation yielding something close to ‘78% of 160% =125%’, in this context ‘Crisis’ means ‘25% better real check than my Mom gets today’. Which should pose two questions: one to the hardline deficit guy of ‘Well then Who Cares?’ and another to the New Dealer ‘How do we close the gap?’.

Taking the hardliner first. In his world Social Security ‘crisis’ takes two forms. The one cited most often is the actuarial gap between scheduled and payable benefits over the 75 year and Infinite Future Horizon, that is what it would cost to appease that New Dealer and deliver 100% of the schedule. And those numbers are expressed in three ways in the following Table from the 2010 Report: Table IV.B6.—Unfunded OASDI Obligations for 1935 (Program Inception) Through the Infinite Horizon, If we take as SS critics like to do the Infinite Future numbers we see a gap of $16.1 trillion which equates to 3.3% of payroll and 1.2% of GDP, or if we use the more traditional 75 year window we get corresponding numbers of $5.4 trillion, 1.8% of payroll (2.01% if you add in the requirement for a 100% reserve), and 0.6% of GDP. But what critics, and including Orszag here, glide over is that a policy of ‘Nothing’, if strictly adhered to resets all those numbers to zero at Trust Fund Depletion, the benefit cut itself wiping out that ‘unfunded liability’. Because the so-called ‘Unfunded Liability’ is not in a legal sense a liability at all, Congress can and has changed both tax and benefit levels to raise or lower that ‘liability’ and can effectively eliminate it altogether by simply doing ‘Nothing’. Meaning that critics can present either the 22% percent cut or that 0.6% GDP gap as being the definition of crisis but putting them both forward at the same time is just dishonest. Because the cut in and of itself eliminates the gap.

So a policy of ‘Nothing’ projects the following result: 100% of the scheduled benefit payable until 2037 with retirees in that year getting a roughly 60% better check than today, and then if the economic projections are correct (a big if) then a cut to a Pay-Go status in 2038 that would have initial benefits only 25% better than today and then a continued (if slower) growth in real terms from then on. How does this result remotely add up to crisis for the hardliners? Well it is a mostly unstated political calculation, they believe that when push comes to shove that then current retirees will demand that the full schedule be paid ANYWAY, no matter what the consequences. So what is the ‘brave’ answer to this future political showdown? Convince workers that ‘crisis’ doesn’t mean ‘25% better real check’ but instead ‘no check for me’ and so accept a phased in benefit cut that STILL ends up with most workers getting a worse deal than plain ‘Nothing’. And especially those workers who will have spent most of their projected retirement already by 2037. The SSA Office of the Chief Actuary scored the ultimate effects of Simpson-Bowles as a percentage of scheduled and payable (i.e. after cut) benefits at various income levels, which scores were mostly extracted in the following post here: More From SSA on Simpson-Bowles. And the results show that everyone in the top 60-70% of lifetime wage earnings comes out a loser, first taking initially small cuts from the schedule starting in 2010 that by 2037 have the ‘High’ and ‘Maximum’ earners taking the same cut by 2040 as ‘Nothing’ would enroute to a 35% or 41% cut compared to the schedule respectively by 2080.

Now why does Orszag insist that progressives should accept this cut for the majority of beneficiaries as the starting point for compromise? Because it isn’t privatization. Oh boy, oh joy we get to trade slow bleeding for amputation! Instead of say going for a complete cure.

Now that we know what result ‘Nothing’ would deliver for the typical beneficiary, that is a 25% better basket of real goods even after the reset, what would be the cost of a ‘Something’ that would actually deliver 100% of the schedule or a 60% better basket? Orszag and friends won’t even allow you to go there, by methods fair and foul they have prevented open discussion of what in real terms a revenue based solution would mean, and in particular any revenue based solution starting from across the board payroll tax increases. The unstated implication is that such solutions would be too costly for the average worker for the benefits accrued, but despite a lot of talk about ‘all options being on the table’ this one is not offered even in expectation of it being rejected. Because odds are it wouldn’t be, in comparison to the drastic cuts presented as an alternative the needed tax increases would be a flea bite.

CBO recently scored 30 different policy options to address the projected 0.6% of GDP gap between scheduled and payable benefits in a Report linked from and with key graphic reproduced in this AB post CBO Scores Social Security Policy Options. Now a lot of progressives insist the answer is easy: “Lift the cap” and depending on how you lift the cap and whether you allow that increase to come with a commensurate better benefit you can fix or even more than fix the gap via that route, see Options 4 and 6. On the other hand the Option closest to the Obama campaign proposal of taxing wages over $250k at 2-6% which is no 9 only closes 1/6th of the gap. But some of the traditional SS defenders at AB think this is largely the wrong way to go, in large part because the cap has serious political and philosophical advantages in keeping Social Security a worker funded retirement system rather than a welfare system. Now Dale, Arne and me are currently on record with the NorthWest Plan which is close to Option 2 which CBO does score as backfilling the entire gap, but I would be perfectly happy with a combination of Options 3 (raise FICA 0.05% a year for 60 years) and 5 (gradually restore taxable maximum to the traditional 90% of wage income level) which disregarding possible interaction add up to a 0.7% of GDP fix to the 0.6% projected problem (CBO) or 0.7% one (SSA) and allows for adjustments in the out years.

But for Orszag embracing a fix in perfectly alignment with most past adjustments and maintaining the traditional balance and structure of Social Security is just us sailing up some river in Egypt, in our stubbornness unwilling to admit the ‘bravery’ of Simpson and Bowles where that bravery involves bleeding away retirement security for the middle class while giving the truly wealthy of free pass. Well sorry, until ‘compromise’ is defined as putting the FULL RANGE of possible solutions on the Table and engaging in a numerically honest discussion of the tradeoffs, I am inclined to ignore Peter Orszag and instead listen to the long-time champion of Social Security, Dean Baker of CEPR:
Action on Social Security: the Urgent Need for Delay whose advice starts:

There is enormous public confusion (much of it deliberately cultivated) about the extent of Social Security’s projected shortfall. Many policymakers and analysts point out that projections from the Congressional Budget Office and the Social Security Trustees show the program to be out of balance in the long-term, therefore we would be best advised to make changes as soon as possible. This paper argues that supporters of the existing Social Security system should try to ensure that no major changes to the core program are implemented in the immediate future. It points out that:
1) There is good reason for believing that the public will be better informed about the financial state of Social Security in the future, in part because of the weakening of some of the main sources of misinformation;
2) Many more people will be directly dependent on Social Security in the near future. These people and their families will likely be strong defenders of the program;
3) The group of near-retirees, who may be the victims of early action, will desperately need their Social Security since they have seen much of their wealth eliminated with the collapse of the housing bubble; and
4) The concern over “maintaining the confidence of financial markets” is an empty claim that can be used to justify almost any policy.

Consider this post my little attempt to help out on bullet point one. ‘Nothing’-STILL the numerically proven plan since 1997.