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Social Security: A Small Problem That Still Grows Bigger Over Time

August 9th, 2010 . by economistmom

OASDI Cost and Scheduled Tax Revenue as a Percentage of GDP

OASDI Cost and Scheduled Tax Revenue as a Percentage of GDP

The Trustees’ reports on the status of the Social Security and Medicare programs came out last week, and the reports underscore two “big picture” points:

  1. Of the two programs, Medicare faces much larger fiscal challenges than does Social Security, because Medicare has both demographic factors and rising per capita health costs working against it; and
  2. If health care reform is to significantly help the outlook for Medicare, some tough choices prescribed in the reform bill and in the rest of current law will have to be followed through on.

Let me put aside point #2 for now.  It’s a point the Concord Coalition has made before regarding health care reform, underscored by CBO’s long-term outlook report as well, in the difference between their “extended baseline” (not so scary) scenario versus their “alternative” (very scary) scenario.

On point #1, the contribution of the Social Security program to the overall fiscal gap is expected to be relatively small over the coming decades–with the difference between annual program income (without interest) and annual program cost staying close to 1 percent of GDP within the 75-year long-range window under “intermediate” assumptions, as can be seen in Figure II.D5 above from the Trustees’ report.  (Over the last half of the period the gap grows steadily from just over 1 percent to closer to 1.5 percent–reaching 1.44 percent by 2085; see details in table VI.F4 here.)

Some suggest that if Social Security contributes so little to the fiscal gap relative to Medicare, then why do we have to talk about reforming Social Security?  (In fact, CBO doesn’t even vary their current-law assumptions about Social Security in considering their two different fiscal scenarios.)  The argument is often that if Social Security is not really “the problem” (at least not the big part of the problem), then why pick on it?

The trouble is that it’s often impossible to simply “undo” the causes of the problem–and given that we “can’t get back there from here,” we have to learn how to “deal with it” and move on as best we can.  In the case of the fiscal challenges posed mostly by uncontrolled growth in health care spending, it’s highly unlikely that we will be able to close the gap in the health care programs just by (even major) health care reform alone.  And even if it were theoretically possible, we’d be unlikely to choose those policy changes given their likely implications for the quality of health care and quality of life.

On Social Security, it’s a small gap, but it’s one that’s much easier to close, both theoretically and in practice.  Closing the gap is certainly not “fun” and does involve sacrifice.  We would not want to do it right away in any way that would place undue burdens on current retirees and lower-income workers, especially given the currently-still-weak economy.  But there are many different options available to immediately improve that 75-year outlook on Social Security without immediately burdening anyone.  (The Committee for a Responsible Federal Budget just released this nice summary of the Social Security Trustees’ report including a very helpful compilation of Social Security reform options.)

And although the Social Security Trustees’ report does not get into specific policy options to close the (small) gap in Social Security, they do make the point that even small problems have a tendency to get larger over time (in this case because the demographic challenge just keeps growing), and closing that gap sooner–even with a plan that is phased in very slowly over time–would be easier than closing it later.  From the conclusion of the report’s overview (emphasis added):

Over the full 75-year projection period, the actuarial deficit estimated for the combined trust funds is 1.92 percent of taxable payroll?—?0.08 percentage point smaller than the 2.00 percent deficit projected in last year’s report. Solvency of the combined OASDI Trust Funds for the next 75 years could be restored under the intermediate assumptions if increases were made equivalent to immediately and permanently increasing the Social Security payroll tax from its current level of 12.40 percent (for employees and employers combined) to 14.24 percent. Alternatively, changes could be made that are equivalent to reducing scheduled benefits by about 12.0 percent. Other ways of reducing the deficit include transfers of general revenue or some combination of approaches.

If no substantial action is taken until the combined trust funds become exhausted in 2037, then changes necessary to make Social Security solvent over the next 75 years will be concentrated on fewer years and fewer generations:

For example, payroll taxes could be raised to finance scheduled benefits fully in every year starting in 2037. In this case, the payroll tax would be increased to about 16.1 percent at the point of trust fund exhaustion in 2037 and continue rising generally thereafter, reaching about 16.7 percent in 2084.

Similarly, benefits could be reduced to the level that is payable with scheduled tax rates in each year beginning in 2037. Under this scenario, scheduled benefits would be reduced 22 percent at the point of trust fund exhaustion in 2037, with reductions reaching 25 percent in 2084.

And regarding the argument often made that we can afford to put those reforms off to future generations, well, even if we made the above changes anytime between now and 2037, the Trustees’ report explains that we wouldn’t be done–that there would be plenty more for future generations to worry about once we get to that next place we’re kicking the can to:

Either of these actions would eliminate the shortfall for the 75-year period as a whole by specifically eliminating annual deficits after trust fund exhaustion. Based on the assumption of continued increase in the average age of the population after the 75?year period (due to expected improvement in life expectancy), Social Security’s annual cost will very likely continue to grow faster than scheduled tax revenue after 2084. As a result, ensuring solvency of the system beyond 2084 would likely require further changes beyond those expected to be needed for 2084.

So Social Security reform isn’t absolutely “easy”–but it is certainly relatively easier to do than health care reform, and it’s even easier the sooner we do it.

How (Not) to Have a Bipartisan and Adult Conversation on Fiscally Responsible Policies

August 8th, 2010 . by economistmom

Visit msnbc.com for breaking news, world news, and news about the economy

House GOP Leader John Boehner seems to have trouble responding to David Gregory’s very direct questions to him regarding deficit-financed tax cuts on today’s Meet the Press.  He just won’t come out of his ideological corner, no matter how hard David tries to lure him out with quotes from a suddenly agile Alan Greenspan doing his boxer shuffle from the center of the ring.

Kind of ironic, given that right after the exchange on tax cuts, Boehner claims to be ready to carry on an “adult conversation” with Democrats regarding Social Security reform–except he won’t even respond directly to David’s questions on that topic, either.  And of course, if you asked many of the Democrats to respond to the same questions on tax cuts, even they might have trouble responding directly to the suggestion that deficit-financed tax cuts are not fiscally responsible–because they themselves support most of the same permanent, deficit-financed tax cuts that Boehner does. At the same time many Democrats have trouble talking about Social Security without staying in their version of their (opposite) ideological corner.

Guess it’s easier talking about having adult conversations (in theory) than actually having them (in practice).

I Think Paul Krugman Agrees with Me on This One

August 5th, 2010 . by economistmom

… on what to do about the Bush tax cuts at least.  What he writes today goes beyond Treasury Secretary Geithner’s call to let the high-end Bush tax cuts expire as scheduled (at end of this year), although he does punctuate that overlap.  Paul pretty clearly recognizes there’s not much of an economic case for a deficit-financed and permanent extension (i.e., beyond the next couple years) of even the so-called “middle-class” Bush tax cuts, when he says this (emphasis added):

If we could wave away political reality, I’d let all the Bush tax cuts expire, and use the improvement in the budget outlook to justify a large, temporary increase in public spending. Unfortunately, that’s not going to happen. Given the political realities, I’d go for a temporary extension of the lower-end cuts, and just letting the upper-end cuts expire.

Why?

It comes down to the dual fiscal problem the U.S. economy faces: short-term, the government needs to do all it can to prop up spending; long-term, it needs to reduce the deficit. The latter concern means that it would be a terrible idea to make the high-end tax cuts permanent; that would be a huge drain on the public finances, serving no good purpose. But why not a temporary extension? Because it would do very little to promote spending.

Paul emphasizes the long-term concerns and the “huge drain on public finances” that permanent extension of the upper-end Bush tax cuts would produce–but he at least implicitly recognizes that argument applies even more to the permanent deficit-financed extension of the “middle-class” Bush tax cuts as proposed in the Obama budget, by choosing to call for only temporary extension of even those middle-class cuts.  (Recall that the extension of the upper-end cuts costs about $700 billion over ten years, but the extension of “just” the “middle-class” portions proposed in the Obama budget costs over $2.1 trillion over ten years–without AMT relief and without interest–according to the Congressional Budget Office.)

How Kids Could Help Their Parents Act Like Grownups

August 4th, 2010 . by economistmom

Matt Miller has the answer (from the Washington Post):

What this country needs is a movement to lower the voting age to 10. Hear me out.

Wherever you look, from debt to schools to climate to pensions, the distinctive feature of American public life today is a shocking disregard for the future. Yes, politicians blather on about “our children and grandchildren” all the time — but when it comes to what they actually do, the future doesn’t have a vote. If you want to change people’s behavior, you need to change their incentives. It’s time to give politicians a reason not simply to praise children, but also to pander to them.

About 125 million Americans voted in the 2008 presidential election. There are about 35 million Americans ages 10 to 17. Giving them the vote would transform our political conversation. It would introduce the voice we’re sorely missing — a call to stewardship, of governing for the long run, via the kind of simple, “childlike” questions that never get asked today.

We’re in a topsy-turvy world best captured by my favorite political cartoon from the debt-soaked 1980s:

“Your generation will just have to spend a third of your income to support my generation when you grow up,” says a stern father.

“Why us?” his scared daughter asks.

“Because of your failure as children to teach your parents to be responsible.”

“I’m sorry, Daddy!”

“So am I.”

I love it.  If Matt’s idea came to life, why, suddenly my own kids’ “say” would quadruple.  (Only my oldest is of voting age now.)

Stockman on the Latest “Triumph of Politics”–the Bush Tax Cuts

August 3rd, 2010 . by economistmom

stockman-triumph-of-politics-book

When Peter Orszag first announced he was leaving the Obama Administration, I was itching to post something about Reagan’s budget director, David Stockman, and how Peter would now be free to write the latest version of Stockman’s “Triumph of Politics” book (which was one of the first books on fiscal policy I read as a budding economist, in fact).  My idea was that Peter would finally be able to talk about how he really feels about the economic wisdom (or not) of the Bush tax cuts–the policy President Obama is now trying to turn into his own.

You see, Peter spent many years researching and writing about the Bush tax cuts with his Brookings colleague Bill Gale (who just wrote this nice updated summary of stubborn myths on the Bush tax cuts in the Washington Post), and most of what the two of them had to say over all those years and papers was not very flattering.  I’ve assumed that Peter’s been biting his tongue a lot over the past couple years (or maybe not?) as President Obama has blamed the deficit-financed Bush tax cuts for the awful fiscal situation he inherited and yet at the same time has been insistent on keeping the very same tax cuts as part of keeping his campaign promise not to raise taxes on anyone with incomes less than $250,000 (you know, that very “fat” definition of “middle class”).

So that’s why I immediately was reminded of David Stockman’s “Triumph of Politics” book when Peter announced he was leaving. But it turns out I didn’t have to build any bridge to make that connection between Peter Orszag and the Bush/Obama tax cuts and David Stockman (and the Reagan tax cuts).  Stockman himself built it for me, in his opening paragraph of his recent op-ed in the New York Times:

IF there were such a thing as Chapter 11 for politicians, the Republican push to extend the unaffordable Bush tax cuts would amount to a bankruptcy filing. The nation’s public debt — if honestly reckoned to include municipal bonds and the $7 trillion of new deficits baked into the cake through 2015 — will soon reach $18 trillion. That’s a Greece-scale 120 percent of gross domestic product, and fairly screams out for austerity and sacrifice. It is therefore unseemly for the Senate minority leader, Mitch McConnell, to insist that the nation’s wealthiest taxpayers be spared even a three-percentage-point rate increase.

And later, Stockman bemoans the fact that whether tax cuts fail and are undone (in his Reagan era), or tax cuts fail and are continued (in the Bush-int0-Obama era), tax cuts continue to earn praise and deflect criticism by the “free lunch” fiscal policy types:

Through the 1984 election, the old guard earnestly tried to control the deficit, rolling back about 40 percent of the original Reagan tax cuts. But when, in the following years, the Federal Reserve chairman, Paul Volcker, finally crushed inflation, enabling a solid economic rebound, the new tax-cutters not only claimed victory for their supply-side strategy but hooked Republicans for good on the delusion that the economy will outgrow the deficit if plied with enough tax cuts.

By fiscal year 2009, the tax-cutters had reduced federal revenues to 15 percent of gross domestic product, lower than they had been since the 1940s. Then, after rarely vetoing a budget bill and engaging in two unfinanced foreign military adventures, George W. Bush surrendered on domestic spending cuts, too — signing into law $420 billion in non-defense appropriations, a 65 percent gain from the $260 billion he had inherited eight years earlier. Republicans thus joined the Democrats in a shameless embrace of a free-lunch fiscal policy.

I think it’s funny how history repeats itself, how fashions come back in style, and how old budget directors sound new again.

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