Tuesday, July 8, 2008

Obama versus McCain on Social Security

This morning's Washington Post has a front page, above the fold story by Perry Bacon, Jr. on "Candidates Diverge on How to Save Social Security." The story does briefly quote Dean Baker to the effect that it does not need "saving" now, a view I hold along with Bruce Webb and others on the basis that reality has more closely tracked the low cost projection under which there are never even any deficits, in comparison to the MSM blared intermediate cost projection under which they appear in 2017, with "bankruptcy" in 2041. The storyline hews to this, quoting unnamed "experts" to criticize Obama for "only covering half the cost of the 75 year shortfall." As it is, Obama is sticking with his primary season proposal, to charge social security taxes on those making more than $250,000 per year, otherwise no changes, no benefit cuts, no privatization. McCain is for some muddled version of Bush's muddled plan: raise the retirement age, cut future benefits, "allow" young people to transfer their taxes into private accounts, but no tax increases.

While I support no change, Obama's plan is the least damaging of any put forth by any of the candidates during the primary season. McCain's plan is a route to destroying social security as his allowing of private accounts with no tax increases will certainly bring on a fiscal crisis for the system, which will probably not happen at all if it is just left alone. We already have the voluntary tax-incentivized IRAs and so forth, but the privatizers want a mandatory private accounts system for their Wall Street buddies to manage. I say, if we insist on having mandatory private accounts, then do it as the Swedes do, a separate add-on system to social security, supported by its own set of new taxes, which is certainly not what McCain is proposing.

11 comments:

Bruce Webb said...

Headline and "financially fragile" in the lede aside, this was quite the balanced article by MSM standards. First we got the 2041 date introduced into evidence followed by Dean's "leave it alone" comment. Then we have Furman apparently ruling changes in retirement age and benefit cuts out. Then Bermen saying in round about ways 'rich people don't like paying taxes', followed by Aaron pointing out the dangers of moving it from an insurance model to welfare (my terms, not his).

I don't support either across the board increases in FICA or a cap increase, mainly because neither is needed to achieve an acceptable result, but either would be a better choice than a change in the benefit schedule. Because the latter change would be difficult to reverse simply on the principle of 'better safe than sorry'. Whereas if the proponderence of evidence starts falling on the overfunded side of the equation nothing is easier to sell politically than a tax cut. That is while I don't particularly fancy taking a .85% tax increase (assuming an employer/employee split of the current 1.7% projected gap) it would be worth it to remove 'crisis' and hence privatization from the policy table.

And Barkley, you might want to check out our friend Biggs. He seems to be inching his way over to a targetted approach along the lines suggested by the Technical Panel of the SSAB. Maybe he is not exactly at the Paul on the Road to Damascus moment but he does seem to be inching his way towards the mend side of the 'mend don't end' spectrum.

Anyway there are some signs that the worm is turning here, at long last we may be getting some signal heard through the noise.

rosserjb@jmu.edu said...

Bruce,

I confess to not keeping close track of Biggs's blog. I follow too many as it is and have been trying to cut back some, given my state of general overcommittedness. But, probably will have to pop in, especially to see how he reacts to the new round of commentaries coming out of this WaPo story. I also agree with you and Dean (who has posted) that the headline was worse than the story itself. Dean is right that WaPo really has a bug up its editorial ass about social security. Kind of like what asses they have made about themselves on Iraq (and continue to make).

I would note that I had not really thought that much about Henry Aaron's point about disconnecting benefits from paying in, which is an implication of the Obama proposal. Again, as with you, I would prefer to do nothing, but see the Obama proposal as the least damaging of the specific ones that have been tossed around.

It should also probably be noted (not sure if Dean is reading this, who used to be a co-blogger on Maxspeak along with Furman, before he set up his own shop at Beat the Press), that Dean's position is not exactly the same as yours and mine. We are the real hard core, the people who hang their hats on there being a high probability that the low cost projection will work out. Dean tends to hang his hat on the projections made by the CBO, which still have financial problems arising for social security, but at a much later date than the IC projection. But for the shorter term he says that the problems are so far out in the future there is no point in messing with the system now. Like us he says, "wait and see." After all, we could be wrong and things could not go so well, but I think there is plenty of time to make the various adjustments if that proves to be the case.

And it should be kept in mind that the Bush-McCain proposals, if they can even be called that, are simply incoherent and set the system up for serious failure with their withdrawing revenues for private accounts for the young. That is a barn burner. If the young want their private accounts, then let them pay for them with higher taxes.

Barkley

Jack said...

Barkley,
I've asked this question on AngrBear before, but have not gotten any clear cut answer. Maybe there is no clear cut data that would provide the answer.

The question is what has been the over-all performance of the current
"private" accounts, IRAs and 401ks?
I aske the question knowing full well what my personal accts are currently doing and what they did in the year 2000. My point being that the currently measurable performance of such accounts is not likely to show any good result in comparison to social security. If that can be demonstrated I would
expect that the privatizers would have a bit of wind let out of their argument.

rosserjb@jmu.edu said...

jack,

That is all a matter of time periods: from when to when? Certainly recently those accounts have put in a pretty bad performance. In the 1990s they went great guns. Privatizers like to argue that the stock market has always done well over 20 year periods, but one can find periods pretty near to being 20 years when it was a terrible loser: e.g. July 1966 when the DJI first hit 1,000 and July 1982, when it was around 700. There are plenty of other such periods, some of which go on for long periods of time.

However, I think really that this comparison misses the point. Social security is not an investment, it is social insurance. We never expect to make positive returns on insurance in the private market. Insurance is there as a backup against risk, the risk of very bad outcomes. In fact, that social security offers positive returns if one lives long enough has it doing a lot better than most kinds of insurance.

Again, those who want to privatize mostly do not want to completely eliminate social security, although some do. They just want to cut it back and increase the government-subsidized part of private investing. As I have noted, and many easily forget, we are already doing that with IRAs and their relatives. We have gobs of this. The problem arises when people talk about reducing social security in order to increase a mandatory version of this. Let those folks simply add their government-mandated private investment program on top of and in addition to social security, which is really something else entirely.

Barkley

Jack said...

And further more,
"Again, as with you, I would prefer to do nothing, but see the Obama proposal as the least damaging of the specific ones that have been tossed around."

That's the but that leads down the road to perdition. Honest people have been accepting the compromises of put forth by the wheeler dealers for too long a time, and we see the results all around us. If there's nothing broken then there's no need to use tape rather than glue. What Obama has to understand is that his core, those who are the only reason he has gotten this far, are expecting him to do the right thing, not the expedient political thing. If he suggests that there is some reason to make adjustments, then he is saying that the system needs tampering with. Negotiating with the wheeler dealer has to be on their terms. They know to ask too much and brow beat their adversaries into a compromise that wasn't warranted to begin with.

The point of focusing on the less than stellar returns of the IRA types of private accounts is to offer additional weight to the argument that the social insurance aspect of SS is necessary as a counter balance. In addition to which IRA types of accouonts don't really meet the needs of the lowest paid workers. Only SS can do that.

Also, while the private accouonts did well during the '90s I'd venture to guess that most, if not all, such gains were given back over the last decade.

Bruce Webb said...

Barkley I would agree that until recently there would not have been much point for you to monitor Biggs regularly, because mostly he has confined himself to repeating the company line. Which is all the more reason to check him out on those occasions that he shows signs of leaving the reservation. I found the following to be quite interesting not for what it does but for what it implicitly abandons, which is to say private accounts as a replacement for Social Security (which I maintain is still the ideological goal of most privatizers, they are just required to hide behind the curtain of 'solvency')
http://andrewgbiggs.blogspot.com/2008/07/new-paper-policies-to-reduce.html

Biggs' proposal of auto-correction is in principle quite close to my proposals for targetting, and while it doesn't rule out private accounts as a part of Social Security it pretty much abandons the idea that the system is inherently broken beyond repair but instead that it can be monitored and adjusted to meet particular goals (which may or not coincide with the current schedule).
_________________________
Jack you cannot take the wind out of privatizers' sails by deploying numbers because their fundamental argument is not economic at all. The whole concept that they are deeply concerned about the welfare of seniors after mid-century and verily onto the Infinite Future is a joke. These same people seem to have no problem opposing heating oil assistance for seniors today or health care for the kids who will in fact be those post mid-century retirees.

Some of this drive to get private accounts whether as carve out or add on is in fact due to them wanting to get their hands on this pool of money and some of it is sincerely driven by a concern that we don't have enough national savings. But most of it seems fundamentally driven by Norquistian 'drown it in the bathtub' 'Big Government is the Problem' motivations.

Showing them that once you add up all risk, then discount for the disability and survivors component , that you get a better guaranteed return from Social Security than some balanced portfolio of equities isn't going to persuade someone who is fundamentally convinced that Social Security is Socialism and that Ayn Rand was a genius.

Much of the day to day beliefs of the followers of the Economic right are not driven by data analysis, instead they know what they know because they know it. You might as well argue with a goldbug (which I did this morning) and point out that someone who bought gold in 1981 would have been underwater on a current dollar basis until 2006 and God knows how much underwater he still would be once adjusted for 25 years of inflation. No matter what happened in the past a goldbug will tell you the future is bright as, well as bright as gold itself.

Who needs data when you have faith?

Bruce Webb said...

Aaron's point is important though from my perspective is looking at the wrong end.

The payroll gap exists for two reasons. One at some level the government interest in insuring retirement security should yield to an individual's own choices of investing or not. Which isn't to say that $102,000 is the perfect point for that passover of responsibility, it may in fact be either too high or too low. But just as the government requires drivers to carry some level of liability insurance, it doesn't insist on them further insuring against all financial risk, at some point it really is your money.

But the second reason for the cap is in my view more important. It serves as political insulation for Social Security, it prevents the interests of capital from putting retirement security into the category of spending we can't afford. Which after all is ostensibly why we don't have the extention of SCHIPS. It is kind of the flip side of the argument above, that money simply does not belong to them. Social Security owes nothing to capital and allows the wealthy to invest their own money as they choose. In return we ask capital and the wealthy (largely overlapping) to leave Social Security alone. Removing the cap, with or without increasing benefits, simply serves to increase tension between the classes and so undermine long term support for Social Security among those segments of the middle class which after all could reasonably insure themselves outside the system. The cap is our friend, leave it alone.

Plus I don't buy into the argument that Obama's plan is the least damaging. A cap increase without accompaning diversification into other asset classes at a time the system is in cash surpluses in fact is damaging long term to Social Security. It seems counterintuitive that increasing the flow of cash to Social Security simply results in extra intergenerational debt going forward with no real benefit to the systems financing but that is the net effect. I discussed this at length in post XIV of my AB Social Security series Why Benefit Cuts and Cap Increases Backfire. It is an odd artifact resulting from holding the Trust Fund Assets in Special Treasuries.

Jack said...

Bruce,
You are certainly correct in making the point that evidence has never persuaded any one with a hidden agenda. My point has more to do with what the general public has to know about the relative performance of these various forms of retirement preparation. People like Norquist are paid propagandists who care not for the details nor the data, but if the evidence of their deceit is spoken of widely and loudly there is some small possibility that it may become part of the general conversation.

Keep hammering away at the fact that dire predictions are based on flawed data from malicious intent.
Be repititious of the point that SS is not in danger and that there is no reasonable data that support the claim of insovency now or in the future. The truth repeated often enough might actually drown out the lies. But be sure that the liars have no shame about repeating their deceptive analysis. That's the entire point of their efforts.

rosserjb@jmu.edu said...

Bruce,

I think you overstate the problems with Obama's plan, although we are in accord that doing nothing is better than it. Those Treasuries the SSA would hold would offset others issued to the public. The social security surplus does help offset the general budget deficit, just as our old pal Brooks argues.

Bruce Webb said...

Barkley there is no real world evidence that Social Security cash surpluses actually reduce public borrowing even on a dollar to dollar basis still less in ways that offset additional interest costs incurred.

Instead we have the real world example of Newt et al arguing that Unified Budget surpluses justified tax cuts on the General Fund side leading to Clinton having to plead 'Save Social Security First'. I see exactly zero evidence of the offset effect you and Brooks suggest.

Bush took Social Security surpluses to sell cuts on gains from capital. Obama's proposals risk the same result. Dedicated dollars suddenly become fungiable.

rosserjb@jmu.edu said...

Bruce,
That the surpluses endogenously lead to idiots pushing tax cuts that would not otherwise happen is a different matter. It remains the case that the surpluses themselves do directly offset deficits elsewhere in the budget.