Social Security

Matt's right on in his last post on the platform. I wanted to highlight a particularly important pair of sentences in the part he excerpts:

We recognize that Social Security is not in crisis .... The real long-run fiscal challenge is rooted in the rising spending on health care ....

That's exactly right (they could have been more explicit about the nature of the rising spending on health care, but that's pretty much covered in the earlier section on health care).

It's also worth contrasting the '08 fiscal language with the same section of the 2004 Dem platform. In general, the '04 platform is more Rubinesque, with little recognition of the importance of long-term investments as core component of fiscal responsibility. The '04 platform also committed to cutting the deficit in half over four years and a line-item veto, items I don't see in the '08 platform.

Pete Peterson is back on the hunt to cut “entitlements”—which he seems to define as only Social Security and Medicare—but a new report by my colleagues Dean Baker and David Rosnick at the Center for Economic and Policy Research finds Baby Boomers nearing retirement are likely to need those benefits more than ever. Why? Because the housing bubble led people to believe they were set for retirement. Why save when you have more than enough worth in your house? In fact, why not refinance now and live it up a little? Well, the days of giddily checking Zillow are gone and with it are many an American’s dream of a comfortable retirement.

If house prices stay the same through 2009, Dean and David project the median family headed by a person between the ages of 45 and 54, those in their prime earning years, will have 24.7 percent less wealth than did the median family in this age group in 2004. These families will have accumulated just $113,268 in net worth in 2009, barely $15,000 more than their counterparts in 1989, whose net worth totaled $97,600.

If real house prices fall 10 percent, the median family in the 45 to 54 cohort will see a 34.6 percent loss in wealth compared with the median in 2004, while families in the 18 to 34 cohort will lose 67.6 percent. If prices fall by 20 percent, a more pessimistic – but still realistic – scenario, families in the 55 to 64 cohort will experience a loss of 49.6 percent of their wealth compared to the same cohort in 2004.

Baby Boomers have watched their portfolios expand and contract through the stock and housing bubbles. Without defined benefit pension plans, they are in a scramble against time to save what they’ll need to retire. While some political figures have suggested cutting back Social Security and Medicare in order to relieve pressure on the budget, as a result of the housing crash, the workers who are now approaching retirement will be far more dependent on these programs than workers had been in prior years. These workers will have a very difficult time supporting themselves in retirement even with benefits at current levels.

The fact that workers have so little wealth suggests the need for new mechanisms to promote retirement savings. For example, several states, including California, Connecticut and Washington, are now considering a system of state administered portable retirement accounts which would offer pensions to those who are not currently covered by an employer’s plan. It will be difficult to get Americans to save again, but the government can act to make it easier for workers who want to start.

Social Security is, and has always been, a pay-as-you-go system, meaning that current workers make contributions to the system that pay the benefits to current beneficiaries. (One minor difference from a pure pay-go system is that Social Security has some excess revenue that is put into reserves.) If the human race is phased out at some point, pay-as-you-go might be a problem—the last doomed generation of workers might not have anybody to pay their benefits—but if that happens, even Pete Peterson would probably agree Social Security is the least of our problems.

John McCain, however, has a somewhat different view, calling Social Security financing "disgraceful" at a recent forum:

"Americans have got to understand that we are paying present-day retirees with the taxes paid by young workers in America today. And that's a disgrace. It's an absolute disgrace, and it's got to be fixed."

So far, McCain's bizarre statement has gotten little coverage. Dean Baker notes:

Some folks might have thought Senator McCain's description of Social Security as a "disgrace" was worth a mention somewhere in the media, but the NYT, Washington Post, WSJ, and USA Today don't seem to have noticed. It's not like he said "bitter."

And Krugman piles on:

I’d guess that there are three things going on here.

First, McCain has no idea how Social Security works. That may sound hard to believe, but not to anyone who has spent any time in or around the federal government. Politicians, by and large, get where they are mainly by looking and sounding good; this may or may not go along with any actual understanding of governing.

Second, McCain lives in the Washington bubble; and as I wrote a while back,

Inside the Beltway, doomsaying about Social Security — declaring that the program as we know it can’t survive the onslaught of retiring baby boomers — is regarded as a sort of badge of seriousness, a way of showing how statesmanlike and tough-minded you are.

Finally, McCain has surrounded himself with people who hate Social Security. They probably tell him that it’s a doomed Ponzi scheme, and he believes them.

Here's the video:

Via Dean Baker, I learn that the Washington Post published an op-ed over the weekend that debunks the Pete-Peterson-financed, crisis-mongering party line about Social Security the Post faithfully hews to. One wonders how long whether this particular Prague Spring will last before Premier Peterson and General Walker roll in the tanks. (Although the guy who wrote the op-ed is a deputy assistant secretary of the Navy, so he has some reinforcements of his own he can call in).

Dean Baker explains why the Pete-Peterson-financed effort to cut Social Security has no political legs:

....

The granny-bashers are arguing that the country is paying more than it can afford to support retirees. Therefore they want to cut Social Security and Medicare, the main benefits that these retirees receive.

However, the implicit assumption behind these cuts is that retirees will have enough money to support themselves, even if these programs are cut. While this would not have been especially true even before the collapse of the housing bubble (Social Security already provided more than half of the income for two-thirds of the people over age 62), it is certainly not true in the wake of the housing crash.

The crash of the housing bubble has already destroyed almost $5 trillion in housing bubble wealth, more than $60,000 per homeowner. As a result, the generation of workers who are approaching retirement will have almost nothing to support themselves in retirement other than their Social Security.

Working from the Federal Reserve Board's Survey of Consumer Finance, we found that if real house prices drop 10 percent from their March 2008 level, then the a typical family in the age group from 45 to 54, will have just $98,400 in wealth in 2009, counting the equity in their home. This is a falloff of 34.6 percent from 2004. (This number does not include wealth in defined benefit pensions.) Since the median income for this group is over $62,000, this will not go far toward maintaining living standards in retirement.

The basic problem is twofold. When these families saw their houses exploding in value, they didn't think they had to save. They assumed that house prices would just keep rising.

The other problem of course is that house prices not only didn't rise, they collapsed. This collapse was entirely predictable, and those who were concerned about the country's long-term financial situation should have been out in the forefront warning of the dangers posed by an $8 trillion housing bubble.

Unfortunately, these folks were too busy trying to cut benefits for the elderly to pay attention to such trivial developments. Well, now the collapse of this housing bubble should put cutting Social Security and Medicare off the table altogether.

....

It's sad to know that Pete Peterson is wasting so much of his hedge-fund wealth on a wrong-headed effort to scare people into thinking we have a Social Security/entitlement crisis. While Peterson and others missed the housing crisis, they could make up for it by deciding to tackle a real problem like global poverty, the U.S. health care crisis, or global warming.

That's Henry Aaron of Brookings who had the best testimony at this week's House Budget Committee meeting on the Pete Peterson-funded jihad against Social Security and legislation that would create a commission to come up with a proposal to cut Social Security. Aaron summarizes the case against this legislation as follows:

The bill mischaracterizes the source of [projected, long-term] deficits. They derive entirely from projected increases in national health care spending, not from problems peculiar to government health care or entitlement spending.

Materially slowing the growth of Medicare and Medicaid apart from general health system reform is impossible, unless the nation reneges on its commitment to assure the elderly, disabled, and poor health care roughly comparable to that available to the rest of the nation.

The specification of 'issues to address' and 'policy solutions' in section 3 of H.R. 3654 is unbalanced. For example, the draft bill specifies as a 'policy solution' limits on entitlement spending, but does not mention as a 'policy solution' curbing in tax expenditures that putatively serve the same general objectives as direct spending, but benefit different groups.

The draft bill virtually invites 'game playing,' as policymakers could avoid hard choices by manipulating long-term projections with artful assumptions, scoring methods, or other tactics for avoiding hard choices. Such practices were used extensively to subvert the Gramm-Rudman-Hollings targets in the 1980s. H.R. 3654 could actually obstruct desirable action to address projected long-term budget deficits.

Commissions never solve complex problems unless members of Congress are prepared to address the underlying source of those problems.

From one of The Nation's blogs, the Social Security privatizers and entitlement-crisis grandma haters are joining forces to convince young folks to stand up for their rights, and, well, undo the generational social compact. And they're doing it with the bias and misinformation that's endemic to the Washington discourse.

On Monday, these and other youth organizers, along with a number of conservative and "nonpartisan" policy types, convened in Washington for the Youth Entitlement Summit. The name alone--entitlement--should ring alarm bells as a conservative frame, as should the leading sponsor organization, Americans for Generational Equality (AGE)--a conservative outfit that promotes "intergenerational strife" and argues for the privatization of Social Security. Founded in 1986, it closed up shop in 1990 only to reopen it's doors - and PR machine - in 2006.

The conference claims "non partisanship," and a spirited discussion of the issues, but if that is really true, why are there no progressive economists like Jared Bernstein or Dean Baker addressing the attendees? Why are the Center for American Progress and the Economic Policy Institute nowhere to be seen in the list of partners? Instead, the agenda boasts scholars from the Brookings, Heritage and Hoover foundations and the panels all take on the false frame of "X program in crisis." Hardly a fair and balanced representation of the issues.

In related news, Gene Steurle, who, like any good grandma hater, is moving to the Pete Peterson Foundation, is also trying to wake up the youth to the travesty of democracy that is our retirement and health security system. Perhaps there's a good reason why young folks don't trust old people.

Alice Rivlin and John Kingdon argue that the next president should "tackle social security first" in early 2009 because it's--and I'm not making this up--an "easy" issue to "get out of the way." Here's why it's so easy: Democrats need only "accept benefit cuts" and Republicans a tax increase, and we're good to go.

Democrats have to accept future benefit cuts, but they need not be drastic and can spare current retirees and lower-income beneficiaries. The package could include future gradual increases in the retirement age and concentrate benefit cuts on higher income people.

As part of the compromise, both parties must agree to revenue increases, but they, too, can be modest and can spare low-income individuals. For example, the cap on income subject to social security tax can be raised in gradual steps.

Missing from Rivlin and Kingdon's op-ed is any reality-based account of why Social Security should even be on the list of problems that the next administration needs to tackle over the next four years. According to CBO, the Social Security surplus a decade from now will be around $250 billion. Moreover, Social Security is fully solvent, under current projections, until 2046.

There are real crises out there. Social Security just isn't one of them.

Number of times that the words "chaos", "crisis", "disaster", "bombshell", and "salvo" appear in a recent Washington Times op-ed on Social Security and Medicare:

Chaos: 4
Crisis: 4
Disaster: 2
Bombshell: 1
Salvo: 1

While this kind of crisis rhetoric may be merited in an op-ed on the Iraq War or global climate change, it seems wildly inappropriate in an op-ed discussing Social Security and Medicare, especially since as Henry Aaron of the Brookings Institution reminds us:

... anticipated budget problems are fully explained by projected growth of Medicare and Medicaid. But the same forces driving public-sector health care spending are also driving private spending. Sensible reforms of publicly financed health care require a systemwide approach. Apart from health care, currently legislated federal revenues suffice to cover all currently projected spending, including all Social Security and other entitlements. The United States confronts a public and private health care spending problem, not an entitlement crisis.

In the cases of Social Security and Medicare, crisis rhetoric is ill-advised not only because the "entitlement crisis" frame is a misleading description of the problem, but also because it feeds public cynicism and apathy. I commend to the op-ed's distinguished authors this short discussion of the pitfalls of crisis rhetoric in public discourse:

....

The language of crisis rhetoric is used almost daily to grab our attention. Policy entrepreneurs fan the flames of crisis—failing public schools, terrorists in our subways and shopping malls, burgeoning government budget deficits, foreign takeovers of homegrown companies, skyrocketing medical costs, the breakdown of traditional family values, and on and on.

Cynics point out this is par for the course in policy debates. Indeed, surly exchanges on late-night news have become a staple of every American’s media diet.

Our politicians have become experts at using crisis-mode language to frame debate over Social Security’s long-term problems and call for reforms—even when the outlook is exceedingly good and Social Security benefits can continue to be paid in full until 2042 when 73 percent of benefits can be paid.

....

Forecasting is always risky business—especially in the case of Social Security where projections almost always understate long-term economic growth and exaggerate the system’s vulnerability.

So why do politicians and pundits continue to wave the crisis flag—not just for Social Security but a multitude of other equally complex and long-term structural problems in the United States?

To some extent, they do it because it does work. Psychologists know that panic negatively affects cognitive processing and decision-making. And so it is with the crisis rhetoric. We debate the terms of policy proposals differently and can more easily be persuaded that something must be done, whether we really need to or not.

The problem is that such distorted debate can lead to actions that are more often regrettable than not. Witness how the war on drugs, launched by President Reagan, led to policies that have America’s prisons overflowing at vast taxpayer and social expense. Yet 20 years later drug use remains virtually unchanged.

With regard to Social Security, the danger of crisis rhetoric is that it causes the public to lose faith in programs based on long-term expectations. From one generation to the next, we expect adjustments to be made in a fair and prudent manner. By chipping away at the public’s psychological sense of security and faith in these programs, exaggerated and misleading claims needlessly create a climate of “social insecurity.”

While a moratorium on the use of “crisis” in political rhetoric would be welcome, its use may simply be too tempting for enterprising reformers (of whatever ideological stripe) to give it up. But if citizens at least recognize such claims for what they are—manipulative rather than analytical—more informed, sober public debates might follow.

One final observation: the kind of proposal the op-ed's authors are pushing would appear less partisan and partial if it applied not solely to two progressive public programs—Social Security and Medicare—but also to regressive tax expenditures like the mortgage interest tax deductions and the exclusions of employer-provided health and pension benefits.

Paul Krugman notes the latest good news on Social Security in the just-released annual trustees report:

... the key message is what has happened to the estimate of actuarial balance — the difference between projected outlays and projected revenues over the next 75 years. This is the thing that’s supposed to get steadily worse as time goes by, as the 75-year window contains ever fewer years in which the baby boomers are in the work force, paying payroll taxes, and ever more years when the boomers are out of the work force and collecting benefits.

In fact, however, the actuarial balance has been improving rather than worsening. It’s now better than it’s been since 1993. What this tells us is that projections made in the mid-to-late 1990s were, in the light of subsequent revisions, way too pessimistic.

Moral: Social Security’s financial problem is relatively minor. It doesn’t deserve the emphasis it receives from most pundits.

Meanwhile, Heritage and Brookings are getting together on Monday for an event premised on the crisis-mongering notion that Social Security is one of the "major drivers of escalating deficits." In addition to this slander of Social Security, the Brookings notice for the event includes this unintentionally funny line: "at this public event ... experts will present a new paper ... [authored by] a diverse group [that] includes experts affiliated with many different organizations who have found solid common ground." Here's the list of that diverse group with their major affiliations and ideological orientations:

Joseph Antos: conservative at AEI, Reagan Administration economist

Robert Bixby: executive director of Concord Foundation, funded by former Nixon Commerce Secretary and Blackstone Group founder Peter Petersen

Stuart Butler: conservative at Heritage Foundation

Paul Cullinan: researcher at Brookings Institution

Alison Fraser: conservative at Heritage Foundation

William Galston: fellow at Brookings, DLCer who worked in Clinton Administration and for presidential candidate John Anderson

Ron Haskins: fellow at Brookings, former Republican staffer in the House, also worked briefly for Bush II

Julia Isaacs: relatively new researcher at Brookings, previously at HHS

Maya MacGuineas: former Social Security adviser to McCain 2000 Presidential Campaign and Concord Center employee, chairperson of Centrists.org, currently at New America Foundation

Will Marshall: conservative Democrat and co-founder of DLC

Pietro Nivola: Brookings

Rudolph Penner: fellow at Urban Institute, previously at AEI

Robert Reischauer: president of Urban Institute, previously at Brookings, and director of CBO

Alice Rivlin: OMB during Clinton Administration, senior fellow at Brookings

Isabel Sawhill: fellow at Brookings, conservative Democrat, previously at Urban, OMB during Clinton Administration

Eugene Steuerle: senior fellow at Urban, previously at AEI, in Treasury Department during Reagan Administration

Ah! Just reading the list, can't you hear the unruly chorus, the diverse and representative voices of America in all its rainbow-colored and free-thinking glory!

You can't hear the glory? Well, ok, I guess this is basically a list of Republicans, conservative think tankers, conservative democrats from the Eisenhower-Nixon wing of the Democratic Party, and third-way types who think the third way is to be found somewhere in between a center that's already off-center and the far-out movement conservatism of the Heritage Foundation. (And let's not even mention the lack of racial and generational variety of the list, extreme even by DC's pale gray think tank standards). The only liberal-leaners on the list are Robert Reischauer—who's usually quite sensible so I'm not sure why he let himself get roped into this—and Alice Rivlin. The lack of diversity is even more notable when one considers who at Brookings didn't collaborate, including the Rubinistas at the Hamilton Project, and the eminent Henry Aaron, who recently concluded:

Apart from health care, currently legislated federal revenues suffice to cover all currently projected spending, including all Social Security and other entitlements. The United States confronts a public and private health care spending problem, not an entitlement crisis.

If the Heritage-Brookings-AEI crisis crew ever manages to find the common ground that Aaron is standing on, and stops trying to prop up the phony idea that we're in the midst of an entitlement crisis, they might be worth listening to. But don't hold your breath, the folks at AEI and Heritage are zealous conservative advocates, and way too politically savvy to make a concession that would undermine their movement's interests.

WaPo's Ruth Marcus has her (scary) story on Social Security and she's stickin' to it. Economist's View provides a useful compilation of posts debunking Marcus. Some excerpts:

Dean Baker: .... [Marcus'] idea that taking steps earlier rather than later makes things easier means that it is better to either raise taxes on a cohort that has seen 30 years of wage stagnation or to cut their retirement benefits, even though most have accumulated little for retirement other than their SS. Even the trustees project that the typical worker will have a wage that is about 35 percent higher in 2040 than what workers earn today. Only the Post would argue that it's better to raise taxes and/or cut benefits on much poorer workers today than to risk the possibility that we may have to raise taxes or cut benefits on the much wealthier workers of the future in order to cover the greater cost of their own retirement (they are projected to live longer also -- that's the real problem. We're so cruel to our children.)

Kevin Drum: ... .Bottom line: 2017 is a better time to deal with Social Security than 2007. Raising taxes now doesn't accomplish anything, and if it turns out that we need to reduce benefits we can do it in 2017 just as well as we can do it today. For now, we should put Social Security on the back burner and instead spend time worrying about healthcare costs, nuclear proliferation, and global warming. Those are problems that really do need to be addressed right away.

Paul Krugman: By any reasonable standard, Social Security is at most a second-tier policy issue.

Brad DeLong: By my count Social Security needs to take a number and get in line, being only the fifth-most serious budgetary shortfall, behind: Medicare hospitalization, Medicaid, Medicare drug benefit, The Bush 2001 and 2003 tax cuts. But ... Ruth Marcus lacks the ovaries to state that Social Security is only fifth in magnitude of our budgetary shortfalls...

An interesting point from Dean Baker on how the Bush proposal would affect low-wage workers:

The initial response to President Bush’s new health care proposal indicates that it is unlikely to go very far, but it is still worth considering its implications. The basic principle is reasonable, even if it does little or nothing to address the real problems of the country’s health care system: it equalizes the tax status of health insurance regardless of whether it is purchased through an employer or by an individual worker.

Of course a tax break matters much more to taxpayers in high income tax brackets than to low-wage workers with little or no tax liability. But, President Bush has something for low wage workers also. Under his plan, a worker who buys a family plan would pay no payroll tax on her first $15,000 of income. Since the combined employer/employee tax is 15.35%, this would mean a substantial tax break even for low wage workers. (It’s not clear from the proposal if workers would get the employer-side payment refunded.)

Here's the title of a piece in yesterday's NYT:

"Fragile Hopes for Bipartisan Rescue of Social Security."

And, here's a multiple choice question:

Judging by the title alone, does this piece appear in:

(a) the news pages
(b) the editorial pages
(c) the Sunday Styles section, perhaps as one of those "A Night Out With ..." pieces
(d) none of the above.

The correct answer is (a) the news pages, but given the use of the word "rescue" in the title, one would think quite reasonably that the answer is (b) the editorial pages.

After all, according to the projections of the non-partisan Congressional Budget Office, Social Security will have enough money, without any changes, to pay full benefits through the year 2046. If I'm correct in my calculations, the year 2046 is somewhere around 39 years from now.

Remember Titanic? Leo and Kate clearly needed to be "rescued" after the ship had broken up and they were shivering in each others arms in the icy waters of the north Atlantic; but it would be a bit odd to say that they needed to be "rescued" more than 39 years before that point.

I've been reading Tony Judt's extraordinary book Postwar: A History of Europe Since 1945—which despite being a historical tome that weighs in at over 800 pages, and almost as many pounds, is as much a page-turner as the Scandinavian detective novels that I spend most of my time reading—and came across this great paragraph about balanced-budget fanaticism:

Like the Romanian dictator Ceausescu, [Portuguese authoritarian ruler Antonio] Salazar was obsessed with the avoidance of debt, and conscientiously balanced every annual budget. Fanactically mercantilist, he build up unusually high gold reserves which he took care not to spend on either investment or imports. As a result, his country was locked into poverty ....

Dean Baker on David Broder's most recent "The Sky (Social Security) is Falling" column:

Projections show that the combined cost of Medicare, Medcaid, and maintaining the roads and sidewalks in front of the Washington Post will increase by more than 8 percentage points of GDP by 2050. Clearly we cannot afford to maintain the roads and sidewalks. When will politicians have the courage to cut the budget for maintaining the roads and sidewalks in front of the Washington Post?

Yes, David Broder did the old Medicare and Social Security trick again. (Projections show that Medicare's costs will explode over the next 40 years, the projected increase in Social Security spending is about the same as over the last forty years.) By the way, one of the "prominent non-aligned" economists who provided the background wisdom for Mr. Broder's article was David Lereah, the chief economist