What US Republicans mean by "reform"
About a year ago, if I remember correctly, the ever-more-disappointing David Brooks suggested that "reform" should be the key Republican theme for a second Bush term. (I think he may have meant actual reform, rather than "reform," but in practical terms this analytical difference is immaterial.) Unfortunately, it looks as though this will be the case. As we all know, Social Security appears to be the next target for "reform."
These two recent pieces sketch out some of the reasons why we should all be alarmed. None of the points they make is particularly new or startling, but they still seem to be off the main screen of most public discussion.
New Republic Online
Post date: 11.09.04 (Only at TNR Online)
On No Account
by Jonathan Cohn
President Bush has usually talked about his Social Security privatization plan as a painless way to keep the cherished program going. As he typically explains it, allowing young workers to invest some of their Social Security money in the stock-market would keep the program from going bankrupt while providing even larger retirement benefits. And when you put it that way, what's not to like?
But during his post-election press conference last week, Bush finally seemed to acknowledge what economists have known all along: With or without private accounts, preserving Social Security over the long term will involve raising taxes, cutting benefits, reducing spending on other government programs, or some combination thereof. The question is not whether to cause financial pain but how. Thus, Bush has a new, more nuanced defense of his Social Security plan: It won't hurt as much as the alternatives. "There are going to be costs," Bush said. "But the cost of doing nothing is ... much greater than the cost of reforming the system today."
That kind of talk certainly sounds refreshingly honest. But it's not. The Social Security scheme President Bush has in mind represents a particularly unappealing solution to the program's shortcomings, one that has less to do with saving the program than with undermining it for ideological reasons.
Let's start with the nature of the Social Security "crisis"--which, as it turns out, isn't really such a crisis after all. Money comes into Social Security as payroll taxes; it goes out as benefits. Right now, the taxes coming in are bigger than the benefits going out, so the government uses that money to cover other expenses while taking out a bunch of IOUs that make up the Social Security Trust Fund. Sometime in the not-too-distant future (2018, according to the latest projections) benefits going out will exceed taxes coming in, and Social Security will have to cash in those IOUs--which means the government will have to start shoveling actual cash from somewhere else back into Social Security. Those same estimates show that in 2042, the IOUs themselves will be gone. At that point, money coming into the program will cover only about three-fourths of the benefits going out. Either the government will have to come up with more money to make up the difference (by borrowing, raising taxes, or cutting spending elsewhere) or it will have to stop paying full benefits.
That's not a great situation. But it's not such an awful one, either. Social Security was in similar shape during the early 1980s. The government, acting upon the recommendations of a bipartisan commission led by Alan Greenspan, pushed back the date of insolvency by raising the payroll tax by 2 percent. Higher taxes are never fun, but the public accepted them and Social Security survived.
Note what the government didn't do in 1983: It didn't alter the fundamental structure and purpose of Social Security. When Franklin Roosevelt enacted the program as part of the New Deal, large portions of the nation's elderly were living in poverty because many had not saved enough during their working lives, and even those who had saved frequently lost money on bad stock market investments. The idea of Social Security was to insulate the elderly from the whims of the stock market and business cycle by guaranteeing a safe income. Social Security was also deliberately redistributive, paying out relatively higher benefits to those with lower incomes as another hedge against the fact that chance (whether in the form of bad business luck or poor inherited skills) left some people destitute as they entered old age.
So the first question to ask of any proposed reform is whether it would similarly remain true to the program's founding ideals. When it comes to private account schemes, the answer is no. At a time when many Americans already fret over how recent Wall Street dips affected their 401(k) plans, privatization would tether their financial security even more closely to the economy and stock market. In general, privatization schemes envision people converting their accounts into annuities (which pay out a fixed sum of money every year) once they reach retirement age. But that means people who retire at the bottom of a bear market will be locked into benefits much lower than those who retire at the top of a bull market.
Privatization advocates insist that the accounts will yield so much interest that even those retiring during downturns will end up better off than they would under the present system, in which interest accumulates much more slowly since Social Security's money is invested in ultra-safe, relatively low-yielding government bonds. But that's a questionable argument, in part because people would likely reduce outside savings as their Social Security accounts grew, leaving them even more vulnerable to last-minute downturns in the market. It's also fair to wonder whether seniors would even tolerate fluctuations in benefits from year to year or whether they'd demand that the government make up the difference. As it is, some privatization schemes envision the government guaranteeing a minimum return on benefits--a guarantee that would push the program's costs even higher.
And that's only the beginning of the financial problems with privatization. Remember, most of the money coming into Social Security right now goes right back out as benefits. If some workers use that money instead for their private accounts, the system will run out of money even faster than it would now--forcing the government to make up the shortfall of several trillion dollars. Privatization advocates euphemistically call this a "transition cost," arguing that it simply means paying off now a debt that must be paid off later anyway. Others say it simply means making the debt that Social Security owes over the long term "explicit" rather than "implicit."
But what's so simple about that? If the government chooses to take on the entire long-term deficit of Social Security right now, it's got to find the money for it. Since it's safe to assume Bush would neither cut spending nor raise taxes to come up with this cash, the government would likely borrow it. That might have been fine just a few years ago, when the government was running budget surpluses and actually paying down its existing debt. But now, thanks in good part to the Bush tax cuts, we're back to running high deficits and accumulating debt--enough, many experts fear, to cause economic calamity (by, say, pushing up interest rates) if Bush suddenly throws a few trillion dollars more on the pile. "If interest rates go up four or five times in a few weeks or months, it's a real shock to the system," says Henry Aaron, a Brookings Institution economist, "and you could have yourself a merry recession or even a depression."
A better way to address Social Security's long-term financial problems is to pay off that debt in a way that spreads the financial pain over a large group of people and, preferably, over a longer period of time. And, as it happens, some very smart people have some very good ideas of how to do that. Among them are Peter Diamond, a well-respected economist from the Massachusetts Institute of Technology, and Peter Orszag, a former Clinton administration economist (and two-time TNR Online contributor) now at Brookings. Their plan involves a series of tweaks, including raising the retirement age as life expectancies increase and taxing higher incomes (right now individuals owe payroll taxes only on the first $87,000 of income).
Because Diamond and Orszag are intellectually honest, the solution they propose is not painless. It would be fair to say that it involves both raising taxes and cutting benefits, which, in addition to being unpopular, presumably would have repercussions on the economy. But compared to the alternatives, the plan is not so painful as to be unbearable to any one generation or any one group of people within a generation; plus it's particularly generous toward those who need help the most.
The Diamond-Orszag plan also has the virtue of being adjustable as time goes on. Long-term projections about Social Security's solvency fluctuate considerably because of the relative unpredictability of the economy and population growth. Under the plan, it's easy to add minor changes in benefits or taxes as the need arises. Most important, Diamond-Orszag avoids drastic changes in Social Security's design. Such drastic changes, of course, are precisely what Bush has in mind when he commits himself to "strengthen" and "protect" the program.
Jonathan Cohn is a senior editor at TNR. He is currently writing a book on the U.S. health care system.
Post date: 11.24.04 | Issue date: 11.29.04
SOCIAL SECURITY LIES
by Noam Scheiber
The best way to gauge whether the White House believes it is in a strong position to push Social Security privatization isn't to listen to what the president says--as when he claimed a mandate for reforming the entitlement at his first postelection press conference. It is to consider what the White House is actually doing. And, so far, the only practical step the White House has taken is to search frantically for political cover from congressional Democrats. "At this moment, they're trying to find Democrats to embrace privatization, at least conceptually," says Representative Bob Matsui, the top Democrat on the House Ways and Means Committee's Social Security panel. "So far, they haven't had any Democrats that I'm aware of say they would embrace this."
Of course, as Republicans' continued discussion of privatization attests, their behind-the-scenes skittishness hardly dooms the idea. But it does reflect an important political reality. Up until now, the media has portrayed the debate on Social Security as a toss-up between a number of vastly different privatization plans--from those requiring deep cuts in benefits to those that promise painless reform by relying on hazy financing--any one of which could carry the day. In truth, the political constraints on Social Security reform are such that, if Congress passes any privitization plan, it will involve the kind of accounting gimmickry that will make Bush's first-term shenanigans look tame by comparison. And that could be the worst outcome of all.
The obvious sticking point in privatizing Social Security is how you finance the transition from the current system--in which today's workers fund the benefits of today's retirees--to a system in which workers save partly for their own retirement as well. The problem is that any dollar you divert to fund private accounts is one less dollar available to pay for what remains of the existing system. So the burden is on privatization advocates to explain where they will get the money to bridge the gap.
Social Security wonks distinguish the various plans floating around Capitol Hill by the degree to which they acknowledge this financial hurdle. At one extreme are so-called free-lunch plans, like those sponsored by Representatives Paul Ryan of Wisconsin or Clay Shaw of Florida, or Senator John Sununu of New Hampshire. These create private accounts while guaranteeing that no one will receive fewer benefits than they do today. Proponents intend to finance this arrangement through huge borrowing (as much as $7 trillion over the next several decades) or vague budget cuts, or some combination of the two. At the other end of the spectrum are the tough-love plans proposed by representatives like Arizona Republican Jim Kolbe and (recently defeated) Texas Democrat Charlie Stenholm, who want to finance the transition with deep cuts in Social Security benefits and modifications to the payroll tax. In the middle are plans like those of GOP Senator Lindsey Graham, which rely on substantial benefit cuts but also some slightly dubious budget savings from measures like closing corporate tax loopholes. The different plans require infusions of anywhere from $750 billion to nearly $4 trillion to pay for the initial decade of the transition, during which time no benefits would be cut.
As a general rule, the more honest the accounting (i.e., Kolbe-Stenholm), the more draconian the cuts to the current system. Which means that, given the political reality, the most honest proposals are the ones least likely to be enacted. Privatization advocates like to argue that, having now been through three consecutive elections in which candidates--not least of them the president--ran on privatization and won, Republicans have proved the "third-rail" status of Social Security to be a thing of the past and paved the way for more honest reform. But this proposition is dubious at best. The president has always been extremely vague about his Social Security plans and has never embraced the kinds of benefit cuts necessary to fund privatization, which are what make the idea so politically untouchable.
More problematic is the fact that the House GOP leadership, which has to protect its majority status every two years, still has deep reservations about taking up any privatization proposal, much less one that calls for sharp benefit cuts. "On the House leadership side, they'd just as soon not do this," says one Republican Senate staffer who works on Social Security issues. "I think they'd be the first ones to tell you that." Worse yet for advocates of responsible Social Security reform, the member of the House leadership who will exert by far the most influence on any proposal is the famously independent Ways and Means Committee Chairman Bill Thomas. "Thomas in the past has been skeptical and resistant to things requiring tough choices," says an aide to one pro-privatization Democratic congressman.
Pretty much the only way to prevent Congress from embracing a gimmicky approach to privatization is for the White House to throw its weight behind a more responsible alternative. But, at this point, it's not clear the White House has any intention of even entering the debate. Both Kolbe and Sununu say the White House has yet to contact them with ideas, and a Republican staffer on the Senate Finance Committee acknowledges that the White House has yet to provide any instructions. The Washington Post recently reported that, at a meeting between Stenholm and White House aides this summer, the White House actually asked Stenholm for direction, rather than the other way around. (As thanks for his advice, the president and vice president promptly went out and campaigned against him.) If and when the White House does offer a specific plan, it is hard to imagine it will include benefit cuts. "The reason you have seventy percent support for PSAs [personal savings accounts] is that it doesn't say, 'PSA and modest rejiggering.' You do that, and all of a sudden the focus is lost from the PSAs and shifts to, 'What's this modest rejiggering?'" says Grover Norquist, head of Americans for Tax Reform. "It's a very bad idea to have any benefit changes." Norquist adds that his conversations with White House officials lead him to believe they agree.
On top of all of this, it is widely presumed that, within the GOP ranks on Capitol Hill, the advocates of privatization care more about passing some kind of personal-account setup than they do about making sure the accounts are adequately financed. "I don't think, in the end, you risk losing the [Lindsey] Grahams of the world. The people intrinsically in favor of individual accounts will swallow one with a bad budgetary impact," says Michael Tanner, who heads the Social Security privatization effort at the Cato Institute. On the other hand, skeptical House Republicans are worried enough about the prospect of deep benefit cuts to bolt from any effort to mandate them. That dynamic clearly pushes the discussion in the direction of gimmicky financing.
Ultimately, the effort to "reform" Social Security could end up looking a lot like last year's effort to "reform" Medicare. In that case, the White House had initially hoped to bestow a goodie on seniors (a prescription-drug benefit) while introducing more competition into the program, which could have produced big savings (and big cuts) in the coming decades. But the president only laid out vague principles. And, when the political pressure became intense, the GOP stuck with its prescription-drug benefit, kicked its competition proposals years into the future--thereby winning the support of the American Association of Retired Persons (aarp), the 800-pound gorilla of entitlement interest groups--and then monkeyed around with its numbers to make them appear to check out. Along the way, Republicans also managed to reward a key interest group--the pharmaceutical industry--by preventing the government from negotiating lower drug prices, which could have saved billions of dollars.
This time around, the president is likely to be no more specific than necessary to get the ball rolling on the Hill. Once he places Social Security on the agenda, Congress can coalesce around a plan that establishes private accounts--this year's goodie for seniors--but with few or no benefit cuts and no way to pay for it over the long term. (Aarp recently announced that it opposes privatization but left the door open to private accounts that are "added on" rather than "carved out" of the existing system, leading some to suspect the organization is open to a deal.) The sop to conservatives, suggests Norquist, would be a vague promise to impose benefit cuts through future legislation, similar to the backloading of the "pain" in the Medicare bill. Then, to make the numbers work out, the GOP will once again cook the books--this time exploiting a quirk in the way the Social Security actuaries evaluate the solvency of the trust fund. (The actuaries only consider whether the trust fund has enough money to pay benefits, not where the money comes from; the GOP can simply propose borrowing trillions of dollars from the rest of the federal budget and the actuaries will be forced to sign off.) And, of course, the GOP will take care to reward this year's choice interest group--the securities industry--on which it will likely rely to make the final lobbying push on the Hill. (According to a recent University of Chicago study, the securities industry could reap up to $10 billion a year in fees from administering private accounts.)
The only real difference between last year's Medicare reform and the likely outcome of Bush's second-term Social Security reform is that the economic consequences of the latter could be far, far more severe. Bond markets and currency traders assume the government will eventually take the steps necessary to prevent Social Security from bankrupting the country. A plan that moves in the opposite direction by issuing trillions of dollars in new debt without any meaningful long-term cuts would shatter that assumption, driving down the value of the dollar, driving up interest rates, and potentially triggering a deep recession. Then again, what's a little economic crisis when your legacy is at stake?
Noam Scheiber is a senior editor at TNR.