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Alice Rivlin: Reform Social Security to Save Social Security

July 22nd, 2010 . by economistmom

rivlina_portrait

And speaking of that dirty word, “entitlements,” and the gross misconceptions about what deficit hawks really want to do about those programs by referring to them as “entitlements” and talking about reforming them…Here’s a very nice column by Alice Rivlin (senior fellow at the Brookings Institution), who happens to be a member of the President’s deficit reduction commission, on why the best reason for reforming Social Security is not to reduce the deficit, but to sustain the program itself:

As a member of the Presidents Commission on Fiscal Responsibility and Reform, which is charged with producing a bipartisan plan to rein in future budget deficits, I get to hear the favorite deficit reduction schemes of friends, acquaintances and strangers. A surprising number lead with Social Security. Some begin, “The first thing is to raise the retirement age in Social Security, which would fix a big part of the problem, right?” (Wrong). Others are afraid the Commission will recommend cutting the benefits of elderly widows living on the edge of subsistence (absurdly unlikely). Many insist that Social Security, because of its separate funding, plays no part in projected federal deficits (also wrong), and therefore should be exempt from the deficit-cutting exercise. As usual, the real story is more complex.

The right reason for saving Social Security is to reassure all Americans that this hugely successful program is solidly funded and will be there for the millions who depend on it when they need it. That such action will make a modest contribution to reducing long run deficits is a serendipitous by-product, not the central motivation…

If no crisis is projected in the Social Security fund itself for 27 years, why should Social Security be part of the current deficit discussion? I see at least three reasons. First, this is the best time to put Social Security on a sound sustainable track. The only better time would be last year or any year before that. Workers need to know that Social Security will be there when they need it so that they can make other retirement plans on top of a secure base…[T]he sooner we act, the smaller the adjustments need be, whether they are benefit reductions, tax increases or some of each, because small changes cumulate over time…

Second, fixing Social Security now would not only reassure future retirees. It would build confidence both at home and abroad that our political system can still function to solve important problems. It is true, as we keep telling ourselves, that the United States is not Greece. But our public debt is on a dangerous trajectory with no end in sight. World markets have a tendency to plunge rapidly when confidence erodes…

Third, the interaction of an aging population with rising health care spending is the reason federal spending is projected to rise faster than the economy can grow over the foreseeable future…The fact that programs for seniors are driving projected spending increases doesn’t mean they should bear the brunt of the cuts (surely an aging democracy will spend relatively more on older people than a younger one). But neither should programs for the aging be immune. In particular, do we want to allow rapid growth in programs supporting seniors (including Social Security) to drive out spending for education or scientific research or improving infrastructure that might contribute more to future economic growth? Strong growth will ease the economic burden of an aging population, and weak growth will compound it. Fixing Social Security in the context of broader deficit reduction allows us to debate those competing priorities. Those who believe that slowing federal spending growth is necessary to curb future deficits, but want to exempt programs for the aged, need to say why, for example, it is more important to continue increasing benefits for upper-income retirees than to nourish low-income children…

[P]utting Social Security on a sound fiscal footing is not “punishing” the system or its beneficiaries. The bonds held by Social Security are obligations of the United States and will be paid. But current and future workers need to know that Social Security will be there for them, and the way to reassure them is to act now to adjust the future benefits, revenues or both. Immediate action is best for Social Security. That such action will also modestly reduce long run deficits and show the world that our political system is not totally gridlocked is just icing on the cake.

And speaking of plans to reform the entitlement programs being discussed around Brookings, today Alice Rivlin posed the first question to Congressman Paul Ryan at the event focused on Ryan’s “Roadmap” plan.  (I was one of the panelists who followed the congressman’s presentation.)  On this event page you can listen to the audiotape–and download Rep. Ryan’s Powerpoint presentation, which (tell me if my hunch is right) seems very strangely similar to Obama White House graphics in the particular style of white font over blue background.  (It also seems to match the Brookings logo…)

26 Responses to “Alice Rivlin: Reform Social Security to Save Social Security”

  1. comment number 1 by: AMTbuff

    The right reason for saving Social Security is to reassure all Americans that this hugely successful program is solidly funded and will be there for the millions who depend on it when they need it.

    That’s correct. It’s also the reason to renege on promises to provide Medicare, Medicaid, and health insurance subsidies. Those promises need to be scaled back to something affordable. Then the markets will stage a gigantic relief rally and the economy will take off.

  2. comment number 2 by: JJTV

    This is a classic example of someone who does not understand our modern monetary system. Social Security does not need to be saved and it is NOT in jeopardy of becoming unsustainable now or in the future. The US government is NOT revenue constrained and will always be able to make dollar denominated payments to retirees now and in the future.

    1. No incremental changes need to be made overtime. The system will always be solvent because the US government can create dollars, by debiting its Tax and Loan Accounts, and crediting its reserve accounts at the Fed. Both Alan Greenspan and Ben Bernanke have been quoted saying that “The US can NEVER become insolvent with respect to obligations in its own currency.” Therefore the Social Security system will never face a funding crisis.

    2. We don’t need to fix social security to reassure retirees because there is nothing wrong with the current system. This individual is correct in saying that the US is different from Greece. Greece was a user of currency and not an issuer. The US is the sole issuer of its currency and can run deficits indefinitely without causing economic instability. The US government has to run deficits to insure a private sector surplus. To have a private sector surplus while running a current account deficit the government must run a deficit greater than the current account deficit. The public debt is not on a dangerous trajectory. Treasury securities are issued as part of an interest-rate maintenance strategy with the purpose of draining excess banking reserves. They are in no way meant to “finance” government spending.

    3. Any spending shortfalls at the national level are self-imposed. The government can fully fund any programs paid for in its own currency. We need to get off the bandwagon of economic theory based on an economy with a fixed-rate convertible currency. The US has not been on a gold standard since 1971 and needs to stop operating its economy like it is on one.

    4. Money creation should not be abused. Inflation can occur when the economy has reached full-employment and all resources and capital are fully utilized, however, this has never occurred in the US economy, although I wish it would. It should be intuitive that at full-employment the government only needs to spend at a level necessary to insure a private-sector surplus. Any spending beyond that level will create a scenario in which there is too much money chasing too few goods increasing the possibility of inflation.

  3. comment number 3 by: Arne

    “the reason to renege on promises”

    If Medicare is over-promised, then it isn’t really much of a promise. Terminology matters, whether entitlements, safety nets, promises, or renege.

    I don’t think that educating people that health care costs that continue to inflate are not affordable is the same as reneging on a promise, but if you treat it that way people will not listen.

  4. comment number 4 by: AMTbuff

    I don’t think that educating people that health care costs that continue to inflate are not affordable is the same as reneging on a promise, but if you treat it that way people will not listen.
    Please clarify. I don’t follow this.

    The government has taxed baby boomers for decades for Medicare, promising that they would get virtually free medical care at age 65. The government cannot afford to give them free medical care. The promise must be broken, either openly or by subterfuge. I think the public already understands this.

    Maybe when you say “will not listen” you are thinking of the analogous situation with taxes. People know that taxes are going up no matter who is elected. So they might vote for the person who promises not to raise taxes, figuring that the increase will be smaller and later this way. It’s the same with benefit reductions: you vote for the person who promises never to cut your favorite programs, knowing that they will do so anyway. That’s informed choice, not “will not listen”, although it may appear to be the latter.

  5. comment number 5 by: Arne

    Medicare has mulitple parts.
    http://www.treas.gov/offices/economic-policy/reports/budget_trust_fund_3_23.pdf

    Part A, Hospital Insurance, is authorized to spend more than is takes in annually because it has a positive balance in its trust fund. When the TF runs out, the authorization runs out. Then it can only pay out what it takes in on an operational basis. All of this is public information, so any perceived promise of free health care is based on lack of being informed.

    Waiting until the TF runs out is stupid. For Medicare or Social Security. As Rivlin says “current and future workers need to know that Social Security will be there for them”. It is true about Mediciare as well, but making an adequate SS safety net available for workers is easy compared to figuring out how much medical care we can afford to provide.

  6. comment number 6 by: JJTV

    You’re both missing the point that the US treasury can always meet its social security and Medicare obligations. Most arguments for changing the current system are unfounded and are incorrect in their application of economic theory to the current US monetary system.

    If you read through the posted link and follow the accounting diagram it shows that the Treasury can always fund any shortfall to the programs. James Duggan is wrong in assuming that a shortfall must be “financed” by borrowing or increased taxes and spending cuts. Payouts from the funds, based on his diagram, can be met without any money in the Trust Fund. The government is writing the check with money it can create at will. His HI and SMI projection is grossly misleading as well. It is based on the assumption that medical costs will continue to infinitely rise at a rapid rate. The forecast also does not account for a large amount of new private payers coming into the system in 2014. Rising medical costs are correlated with a rising uninsured and those unable to afford medical costs out of pocket. Putting these people on a paying plan reduces medical costs because providers receive a larger percentage of their billable work.

    The focus in government should not be on support systems that can always be adequately funded but instead on policies that push the US closer to full-employment and price stability.

  7. comment number 7 by: VAT Brat

    Alice Rivlin disqualified herself as a serious economist and honest commentator by writing: “Social Security is a hugely successful program.”

    That is equivalent to writing that Bernie Madoff ran a hugely successful hedge fund for his investors — until 2008 when it went broke and the taxpayers refused to bail them out. Both programs ran on lies.

    Social Security, like Medicare, makes promises today that have to be kept by taxpayers tomorrow. Applying Generally Accepted Accounting Principles (GAAP) to Social Security and Medicare, they are bankrupt. You cannot be a serious economist and stand up to say that a bankrupt program is successful. It’s pure political pandering, but then Ms. Rivlin has lots of experience with political pandering during her career.

    At this point in history, we don’t need to hear from cowardly smart people with lots of experience like Alice Rivlin. We need to hear from honest and courageous people who don’t care about alienating their comrades in the “movement.”

    This is what we need to hear: “History has demonstrated that governments are very bad at operating defined benefit pension programs. The beneficiaries of these programs, whether unions or elderly voting blocs, capture the elected representatives who make promises to get elected in the present that will be paid for by taxpayers in the future. From now on, we must establish defined contribution plans that link an individual’s contributions to his ownership of the assets that will provide for his retirement. We can argue about what those assets should be limited to (US Treasuries, publicly traded stocks and bonds of private corporations, etc.), but the lessons of history are clear.

    “Social Security must be transformed to eventually become a defined contribution plan because the US Government has proven that doesn’t have the political will to resist the temptations to sacrifice the solvency of a program for short-term political goals. ”

    “Any shortcomings in Social Security payout promises to those who have already paid into the program above age 55 will be covered by the general fund receipts of the US Government. “

  8. comment number 8 by: AMTbuff

    You’re both missing the point that the US treasury can always meet its social security and Medicare obligations.

    We’re not missing that point. We’re ignoring it. We have previously discussed the “just print the money” theory and we do not intend to waste our time repeating that discussion. Don’t waste your time preaching it here.

    In the off chance that you are not a pseudonym for someone involved in the earlier discussion, just read all the comments from about 3 months ago and you’ll see an extensive exchange. You can learn from that if you want to, but regardless, nobody here will engage believers in this theory. It’s pointless for all.

  9. comment number 9 by: Arne

    SS does not have creditors. That makes discussing its obligations tricky and makes discussing bankruptcy meaningless.

    SS can provide a meaningful safety net indefinitely with minor changes to adjust to predictably changing conditions.

  10. comment number 10 by: SteveinCH

    Arne,

    Discussing SS obligations independently of other government obligations is silly.

  11. comment number 11 by: VAT Brat

    Arne, SteveinCH,
    The electorate believes that there are SS obligations even if there aren’t creditors owed a legal obligation. People base their retirement plans based on these obligations so they’re different than expenditures on farm price supports, defense, etc.

  12. comment number 12 by: AMTbuff

    Diane, you are certain to blog about it, but I just read Pete Peterson’s op-ed for Saturday’s WSJ. He substantially agrees with what I’ve been preaching here: “Given the growing concerns about the global debt crisis, we need to build confidence we are getting our fiscal house in order. This added confidence will help our recovery.”

    Points he misses are:

    1. Irreversible benefit cuts need to precede major tax increases in order to gain approval.
    2. Pain will extend far beyond just the well off and the able-bodied that he is willing to mention in the op-ed. This is the Concord equivalent to Obama’s campaign promise not to raise taxes one dime on people making less than $250,000. People are getting tired of this sort of, to put it nicely, salesmanship. They are ready to hear the truth, that the necessary changes will hurt absolutely everyone a lot.
    3. Third party payment is the root cause of health care cost explosion. The latest attempt at health care reform further expanded third party payment. Those pilot programs are going to “prove” that nothing really works. Nothing, that is, except thinking outside the box of third party payment. The trouble is that nobody will be willing to make that move until the third party payment system becomes more worthless than an urban public high school.

    Although Peterson missed these 3 important points, I give him high marks for the part I quoted above. The Administration ignores this linkage at their peril, and ours.

  13. comment number 13 by: SteveinCH

    VB,

    I think you’re making a distinction without a difference. If the government goes into an inflationary spiral or defaults, the fiscal position of SS as a program won’t matter a hill of beans.

  14. comment number 14 by: AMTbuff

    But it matters for purposes of placing blame. Politicians obsess about that.

  15. comment number 15 by: SteveinCH

    True enough, but we don’t have to buy in to silly obsessions ; )

  16. comment number 16 by: VAT Brat

    SteveinCH,
    Yes SS and Medicare are lumped together with all other expenditures. Yes, we could just as easily discard the gimmick of “payroll” taxes as somehow paying into a cordoned “fund” and simploy call those income taxes. That would be the honest thing to do. But I’m using the lingua franca of DC spoken by Alice Rivlin when she claims that SS is a hugely successful program. Based on what?

    The rate of return of those who paid into it and are now receiving benefits? ( Is 1% ROI a success? )

    Based on its ability to pay beneficiaries based on taxes earmarked for its funding? ( Bankrupt )

    Based on hosannas bestowed by the political class in homage to an FDR New Deal programs to congratulate the fruits of their ideology? Well yeah, I guess if self-congratulations counts as success then it’s successful.

  17. comment number 17 by: JJTV

    AMT Buff,

    The fact that you used the term “print money” means you don’t know the difference between a fixed ratio, redeemable currency system and a non-convertible, floating currency system. The US has not “printed money” since the end of the Gold Standard.

    I’m also not from any previous discussion. The theories you argue assume outdated concepts only applicable to a monetary system under a gold standard or a government with self-imposing constraints. It appears most of you are arguing out of a neo-classical or early period Austrian framework. Both of which have no applicable theories to today’s fiscal and monetary system.

    A country operating under a sovereign, floating, non-convertible currency can always meet its obligations. It does not have to “borrow” its own money from someone else. The US government spends by debiting its tax and loan account at banks and crediting its reserve accounts. It can ALWAYS pay its obligations to these programs by creating and spending its money in this fashion.

    The government issues US treasury securities to drain excess reserves from the banking system. Any changes to the amount of securities that are issued is based solely on the government’s short-term interest rate strategy.

    You are arguing out of an incorrect and non-applicable theoretical framework. Look deeper into the accounting graph and you can see that the treasury can directly fund these programs at an indefinable rate. There is no problem with the current social security and medicare system.

  18. comment number 18 by: SteveinCH

    Please take your theory somewhere else. You really won’t convince anyone here. Leave with the perspective that we are all stupid or close minded if it makes you feel better but please leave.

  19. comment number 19 by: JJTV

    I never stated that anyone was close minded or stupid. You made that statement SteveinCH.

    Explaining how our monetary system works is not theoretical. I wrote about it, in brief detail, in my first post. The mainstream theory that the media and many talking heads spout is not applicable to our current system including the bulk of hardcover books on store shelves. Most of that theory comes from the neo-classicals or a small group of early Austrian theorists. Both frameworks assume a fixed ratio, redeemable currency monetary system. These theories have evolved and significant parts of them operate under a monetary system with a non-convertible, floating exchange rate, however, few authors ever, excluding the original authors, write on these theories.

    If you read through the link posted by Arne, the author shows some accounting flow graphs. When following these graphs it is apparent that any program can be funded directly by the treasury, regardless of whether or not there is enough incoming revenue, to fully fund these social programs. The point I’m making is that people who write about problems concerning our current social systems ignore, or often times fail to realize, that their theoretical framework is meant for a completely different monetary and fiscal structure. Many economies operate well below their potential because we have policy makers operating under an incorrect framework.

    Pointing out that some people who have posted here are operating under an un-applicable framework is not meant to be rude. It’s to create valuable discussion and further reading on topics that deserve more attention. Whether or not you agree with me is not important. What is important is that you look into the available theory deeper and try to find arguments to refute mine or bolster yours. Both of which create better informed individuals.

  20. comment number 20 by: SteveinCH

    JJTV

    I’m simply informing you that there was an extensive debate of this theory several months ago on this site and people largely made up their own minds about it.

    The argument that we don’t need to worry about it because we just print (metaphorically) our way out of the problem is not one that most here accept.

    I can’t stop you from making the argument, I can only tell you that, if your goal is to persuade, you might seek out a different site to put your energies into.

  21. comment number 21 by: VAT Brat

    JJTV:

    Here’s what I wrote when you were calling yoursel Franko. You never responded to the challenge I raised because Mosler is a crank and doesn’t have an answer. Don’t come back until you have an answer. From May 19, 2010 —-

    Here is the root of the fallacy in all the writings you cite:

    “Dollar’s worth is the result of the fact that you and I can fulfil our tax obligation to the US govt only in US Dollars.”
    This is an historical falsehood. There is no currency in circulation today anywhere in the world that at one time was not linked to a commitment to redeem the currency in exchange for a commodity, or that was a specific weight of some commodity like gold. Money originated from the private sector, not government. All government did was standardize what already was in use by the market by stamping pictures of a sovereign on a fixed weight of a metal that was already in use as a medium of exchange. Governments “piggy backed” on something created by the private sector, not vice versa……….

    Just because fiat money or accounting entries are today manufactured by government and no longer linked to a commodity redemption doesn’t mean that their value comes from government compulsion to pay taxes. Here’s the thought experiment to help convince you that I’m correct.
    Suppose tomorrow the US Government announces that it will no longer accept US Dollars for tax payments. Now everyone must accept Obamas as the new currency. All expenditures will henceforth be made in Obamas. You are not able to exchange your US Dollars for Obamas at the Fed. You’ll just have to wait to receive your government expenditures in Obamas, which of course you claim will be valuable because you’ll owe taxes in the form of Obamas. All holders of US Dollar-denominated debt and financial instruments and bank accounts will have to figure something out.
    Explain to the class what would happen, please. Oh, and no cheating. Because if you pledge to exchange US Dollars at some fixed exchange rate for Obamas, then you’ve not severed the historical chain linking fiat money to a commodity. No, you have to prove to the class how you will create pure value out of thin air for the new currency.

  22. comment number 22 by: AMTbuff

    DNFTT

  23. comment number 23 by: JJTV

    If you met Franko and I in person you would find no physical resemblance. This site came to my attention only a few days ago when I made my first post. I put Mosler into a search engine and found a Warren Mosler. I assume that’s who you’re talking about when you said Mosler is a crank. I researched a little further and found out that he has his own website dedicated to economics. I’m unsure of his formal training as an economist but it appears he has done some work with professors from the “Kansas City School”. These professors are well respected within the economics field and correctly predicted both the financial collapse and Euro area debt crisis. I have read some of their work over the years.

    To answer you previous post:

    Your particular questioned is covered for economics students in their intermediate macroeconomic class. I imagine that in your undergraduate coursework, which is true for most undergraduate students, there simply was not enough time in the semester to cover the main texts in their entirety. This particular section often times gets left out or is to be taught in an elective course on monetary policy. The main text assigned, that will answer your questions is:

    Macroeconomics by Andrew B. Abel and Ben S. Bernanke. Chapters 13, 14, and 15 will explain in great detail, how a country can go from a barter system to a fiat currency system, without having to use any redeemable currency system. Examples of this process happening in the real world are provided as well.

    A text provided to those students in an elective course called International Finance would be good for answering your questions concerning the necessity of a metallic standard. The text is titled:

    International Economics, Theory and Policy by Paul R. Krugman and Maurice Obstfeld. Chapters 14-18 do a good job of explaining the operation of monetary system under different exchange regimes. The text also covers, in good detail, the history of the redeemable currency system that was present during different periods of time throughout the world.

    If you truly want me to post an exhausting reply, with references and corresponding lecture notes, I could. I would, however, suggest you read these mid-level texts and the assigned chapters before coming back with a response. You will find the answers to your previously posted questions, and flawed analogy, in the aforementioned readings.

    Due to my ignorance on internet acronyms. What does DNFTT stand for?

  24. comment number 24 by: VAT Brat

    JJTV:

    Do Not Feed the Trolls.

    Instead of rattling off a bibliography, why don’t you cite one example of a functioning currency in circulation that has no historical link to a currency that at one point in time was redeemable for a commodity?

  25. comment number 25 by: JJTV

    What both AMT Buff and VAT Brat are trying to do is separate, or ‘deduce’ the monetary system, without the idea of a State. This is impossible.

    Historical evidence shows that almost all commerce, from the earliest times, was conducted on the basis of credit and debits, not a metallic standard as both individuals suggest. The tally was the first method of ensuring the delivery of goods for payment. Debts were the original unit of value and not some “voodoo” belief in the worth of a piece of metal. We know this because the unit, in which the amount of the debt was expressed, has changed over time. It started out as a tally (2000 years prior to first recorded existing metallic coin), or a piece of wood, that stated the date of the transaction and the debt owed. While these units of payment changed over time from tally, to commodity, to paper their transition always required the state to announce a conversion rate.

    These debts were always nominal and never “metallic” in nature. Any existing debts were converted to the new commodity proving that units of account must be nominal. The reported nominal value of coins, throughout history, was never regulated by precious metal content. The State has played the main role, throughout history, in determining the type and nominal value of payment that is used. Thus the value of money has always been determined by the state any never in any other way.

    AMT Buff is completely off base in claiming that money originated in the private sector. Coinage was a product of governments and not the private sector. Prior to coinage, tablets existed with the written debits and credits.

    I’ll suggest a very brief entry level reading that provides two historical examples of how a state creates money that has value.

    “State, Money, Catallaxy: Underlaboring for a Chartalist Theory of Money” by Mark S. Peacock

    Two excellent books to help you brush up on your monetary history are:

    “The Origins of Money” by Phillip Grierson

    “Speculations on the Origins of Coinage” by R.M. Cook

  26. comment number 26 by: VAT Brat

    JJTV:

    We’re still waiting for your historical examples. I mean there must be dozens you could give us from the modern world.

    I guess you missed the writings of Marco Polo who marveled at the Chinese invention of paper money. Why would he marvel at something like that if the Venetians were using double-entry bookkeeping?

    Another thing you missed. A florin, dollar, dinar, pound or any other unit of currency was always defined in terms of a weight of precious metal. Just because they didn’t use the words “gold,” “silver,” “sea shells,” or some other commodity in their tallies doesn’t mean that the unit of accounting wasn’t based on a commodity.