Friday, June 24, 2005

But I Can't Follow the Money

A group of Republicans from the Ways and Means Subcommittee on Social Security (Chairman McCrery and Representatives Johnson, Shaw, and Ryan), joined by Senators Sununu and DeMint, have offered a proposal to do ... something ... with the Social Security surplus. Here's the press release. Here's the accompanying summary. Here's a page that will have the video from C-SPAN for a while. Here's a valiant attempt by the New York Times to make sense of this.

Let's start with the summary. It begins with three principles:

  1. Social Security taxes should only be used for Social Security.
  2. The Social Security surplus should not be used to fund other government programs.
  3. The surplus should not be used to mask the true size of the national deficit.
I don't know if we have three unique principles here, but we get the idea. The presence of surpluses in the Social Security system should not facilitate higher expenditures elsewhere in the government's budget. One way to do that would be to proactively announce and adhere to a policy that balances the budget--measured excluding the Social Security surplus--over the business cycle. I noted this in my testimony to the Subcommittee on Tuesday.

This proposal doesn't seem to go that far. Instead, it requires that all Social Security surpluses be used to fund accounts invested in Treasuries. Here's where my confusion comes in. It cannot simultaneously be the case that:
  1. Actual money goes into these accounts;
  2. The trajectory of the Trust Fund is not lowered;
  3. The reported budget deficit is not increased; and
  4. Government expenditures are not lowered.
The hope is the #4 is the one that won't hold--government expenditures should fall. This crew needs to show me how they expect #4 not to happen before I will believe the other 3 will happen. If they can, I will applaud very loudly.

But I remain confused about the rollout of this plan. For example, about 15 minutes into the press conference, a reporter asks McCrery (the key question of) how he will fund the programs that are now being funded by the Social Security surplus once the SS surplus is channeled to these accounts. He gives a non-answer and then says that "there is no change in the deficit whatsoever as a result of this legislation" but that "there will be an increase in the debt." That seems like a gimmick to get around #3 above.

I see that I am not alone in my confusion--see Mark Thoma and William Polley in response to DeMint's version of this proposal.

If anyone working at the Subcommittee would like to explain what I am missing, I would be happy to post a follow-up.

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PGL said...

There is a #5: raise income taxes. Yes I know the GOP is trying to rule out #5. But one would have to reduce government spending massively to eliminate the General Fund deficit. NRO has Hunter-Kerpen oped that suggests only $27 billion per year in pork reductions will do the trick. See Angrybear for why their math is wrong. See DeLong for a total dismissal of this NRO oped. No- Bill Polley's comment about "no free lunch" is spot on.

JG said...

There's nothing complicated about this, it's basically just the AEI/Pollock proposal.

It leaves the finances of the gov't totally unchanged. Compared to the status quo the change in government tax revenue is $0, there is no change in the government's use of its tax revenue, and there is $0 change in the government's liability on its bonds issued to finance future benefits. So what's to follow?

The only difference is that the Trust Fund bonds now actually do obtain "full faith and credit" treatment, since when they become tradable the gov't will become obligated to actually pay them off. Thus the gov't in 2030 won't be able to close its then financing gap by cutting SS benefits to avoid having to incur the cost of redeeming the bonds.

And isn't this what liberals want? Shouldn't this make them happy? Haven't prominent liberal blogs been claiming lately "Bush is preparing us to default on the Trust Fund bonds"? Well, this would end that risk.

In effect, there is zero change from the status quo, except that SS participants become vested in their share of the SS bonds. That's a marginal improvement, surely.

The only logical reason liberals could have to be against that is if they want to preserve the option of cutting SS benefits in the future. (Which is indeed an argument made by Orszag & Co.. ) Any other faults in the proposal also exist in the status quo, so how can defenders of the status quo argue against them?

(No, it does zero to close the post-2042 funding gap in the status quo -- but that's hardly a persusasive crtitique coming from defenders of the status quo who refuse to make any proposal of their own to close that funding gap.)

The Repubs' mistake here is that they greatly overdescribe the benefits from this modest proposal as doing everything from ending the budget deficit to assuring your coffee tastes better in the morning.

If they just said: "This is a clear incremental improvement to SS that (1) secures everyone's share of the trust fund bonds, which otherwise is clearly at risk when the budget crunch hits; while (2) offering higher than the negative returns that so many people can expect from SS now; (3) all at zero transaction cost", they could have a very credible introduction to private accounts.