Tuesday, November 23, 2004

Social Security Reform and the Budget

Brad DeLong levels some accurate criticism of the Administration's unwillingness to put Social Security reform in the budget. The crux of the matter is summarized in Jonathan Weisman's story in the Washington Post:

Republican budget writers say they may have found a way to cut the federal deficit even if they borrow hundreds of billions more to overhaul the Social Security system: Don't count all that new borrowing.
The issue is that it does not appear that the Administration will raise new revenue to fund personal accounts that will eventually substitute for a portion of Social Security benefits as stipuated in current law. As I have discussed before, this does not mean that the reform is infeasible. But it does mean that the unified budget deficit--which includes the Social Security and Medicare surplus or deficit--will be wider over a period of decades as debt is issued to cover the personal account contributions. Eventually, the unified budget deficit and total federal debt will be smaller, as the other measures included in the reform (if it is the President's Commission's Model 2, for example) reduce future benefits by enough to restore solvency and repay the debt issued during the transition. (See Chapter 6 of the 2004 Economic Report of the President for a full discussion.)

The Washington Post article goes on to quote Senator Judd Gregg of New Hampshire, the incoming chairman of the Senate Budget Committee:
"You cannot look at Social Security in the context of a five-year budget," the window that current White House and congressional spending plans cover, Gregg said. "To do so is naive and foolish. . . . If this is simply scored as a five-year exercise, we're never going to solve the problem."
I think he's right, in a political if not economic sense. We could avoid these five-year budget horizon issues if we funded, rather than borrowed, the money to contribute to the personal accounts. But even with additional funding, for a program that spans all generations of workers and beneficiaries, an alternative perspective may be a more useful guide to long-term budget policy.

I have argued that the virtue of reform is to eliminate the unfuded obligations of $10.4 trillion in the Social Security system. It would seem simple enough for the Administration to say that the goal is long-term solvency, this plan restores long-term solvency, and the additional deficits and debt are just a temporary (i.e., only a few decades) phenomenon that disappears when they are repaid out of program saving. If it's so simple, why is the Administration now contemplating accounting acrobatics to try to move its policy forward?

The answer appears in (among other places) the Fiscal Year 2005 Budget released in February. The budget target announced in the President's budget message was to "cut the budget deficit in half in five years." The budget deficit here is the unified budget deficit--which includes the Social Security surplus--and that's the rub. Look at Table S-12 in the Summary Tables of the budget to see why. That table shows:

Deficit Measure20042009
Unified Deficit–521–237
On-budget deficit–675–501
Off-budget surplus154263

The "cutting in half" is taking the $521 billion down to $237 billion. However, this reduction in the unified deficit involves a reduction of only $174 billion in the on-budget deficit, combined with an increase of $109 billion in the off-budget surplus. When the Administration announced its budget target, it fully incorporated not just the level of the off-budget surplus, but the projected growth in that surplus over the five-year period. (To me, this qualifies as "spending the Social Security surplus," but that's a topic for a later post.) The Administration did not announce, "we can cut the on-budget surplus by a quarter" (i.e., 174/675). That would not have appeared to be an aggressive enough position to take on fiscal discipline.

The Administration is relying on the Social Security surplus (and its growth) to reach its near-term budget target, but it does not want to acknowledge the impact of personal accounts on that unified budget deficit. Had it stated its budget target in terms of the on-budget deficit--to cut it by a quarter over five years--then it would have a much freer hand now in putting the reform of Social Security off-budget. Doing that would be an example of an "alternative perspective" that would be a reasonable guide for long-term budget policy. What is not reasonable is to shift between two budget perspectives in order to make stated targets easier to achieve.


JG said...

The problem here is the government's cash-basis accounting method.

If the government used accrual accounting, as the private sector is required to do, then the unfunded liabilities incurred for SS and Medicare each year would be reported as expenses making the budget picture visibly way worse than it is presented in the accounts now -- and nobody would ever have believed we were running a surplus back around 2000.

OTOH, current funding that reduces the current value of the future SS and Medicare obligations would *improve* the picture on the government's financials.

Those who bring up the "transaction cost funding" objection to private investment in SS play with a double standard -- funding SS's financial gap with private investment creates an additional expense because it is on-budget, but the unavoidable closing of SS's financial gap if the status quo is retained somehow isn't an expense because it is off-budget.

The answer is for the government to prepare an honest set of books -- literally honest by the standards of the private sector, books that wouldn't send the owner of anything but the smallest business to jail -- which reflect the current value liabilities of various reform proposals *in comparison* to those of the SS status quo. The accrued and continually accruing liabilities of the SS and Medicare status quo should be *on the books*, just like those of General Motors and IBM and the grocery store down the street from me are.

If the goverment prepared, published and publicized such a set of books, supplemental to the "official" ones, it would help inform the political debate about entitlements greatly, I believe.

Of course the government should have an honest set of books anyhow. IIRC, a few years back the world's central bankers at one of their conventions in Aspen said the best single reform governments could adopt, for the most benefit at least cost, would be simply moving to accrual accounting. I hope to live to see the day, but hardly expect to.

Roland Patrick said...

Prof. DeLong's criticism of the Bush administration is clearly disingenuous. He, after all, worked in the Clinton Treasury Dept, and they didn't do what he now chides Bush for not doing.

The problem is entirely political. Most people couldn't tell you how the current SS systems works. Neither party wants to be the messenger of the bad news. Does anyone think that if Bush did exactly what Krugman and DeLong want him to do that the Democrats wouldn't jump on him for it?