Saturday, June 04, 2005

Gene-tic Differences on Social Security

When I read this column by Gene Sperling over at Brad DeLong's site, I did a double-take when I got to the last sentence in this part:

What non-political reason, I am often asked, could there be for someone like myself who supports Universal 401(k)s outside of Social Security to so stubbornly refuse to even consider private accounts within Social Security?

The answer is twofold. First, Social Security is simply the wrong vehicle for pushing the worthy and important goal of increasing ownership and savings among working Americans. In our three-legged retirement system -- which includes market-sensitive private savings, home equity and pensions -- Social Security is the only leg free of market and economic risk.
Did he just write that Social Security is free of economic risk? That's clearly not true, even if all benefits scheduled in current law are eventually paid. The amount I get from Social Security will rise or fall with the growth of the average wage in the economy (literally, the average wage in OASDI covered employment) over the rest of my career. This is obviously a growth rate that is subject to economic risk. And it is not likely that all of the benefits scheduled in current law will eventually be paid--the extent to which they are likely to be cut depends on how well the economy does, since that helps determine how much revenue there will be to pay benefits. Victor over at the Dead Parrot Society has two excellent posts showing the fallacy of Sperling's statement. The first is "Risk in the Current Social Security System" and the second is "Here We Go Again."

I think it is kind of ironic for Gene to be overstating the security of the current system in a post where he goes on to say:

That is why those of us who support new investment incentives like Universal 401(k)s should be the ones most adamant about the importance of keeping the Social Security leg of our retirement system completely risk-free.

The second substantive rationale for a hard "no'' on privatization is that virtually every private-account plan is designed to make Americans undervalue the social-insurance benefits of Social Security and overvalue their private accounts.


But I don't want to be too hasty to judge. I don't know Gene, and he didn't actually write anything that would be at odds with, say, this plan. I'd give up personal accounts if he'd give up tax increases--maybe there is room for compromise. And his sin is overstatement more than anything else--there is both less risk and less return in a system tied to the growth in average covered wages than there is in a system tied to financial market returns. The risk is just not zero. This is certainly not as bad a misrepresentation as suggesting that the bonds in the Trust Fund have no value.

But I wonder what the strategy is for Sperling, following similar advice given by Robert Rubin a week earlier, to admonish the elected Democrats in Congress not to engage in the policy process. Here's an interesting excerpt from the Hill News, covering Rubin's speech to Democrats:
“Putting out a Democrat plan on Social Security would be a horrible mistake because right now it’s the president’s principles against our principles,” Rubin said, according to a Democratic leadership aide. The aide added that Rubin told his party colleagues that it would be hard to win a battle of specifics.

You don't want to put your principles up against the other side, and you don't think you could win a battle of specifics? And your compelling reason for the American electorate to return you to office is what?

I wonder what future electoral success the Democrats are contemplating that would allow them a better shot at restoring solvency to Social Security than they would get by engaging today. Suppose that they win control of both houses of Congress in 2006. They would then have more bargaining power with a President intent on legacy-building in Social Security. But that seems like a slim possibility. Suppose that, by 2008, they have control of both houses of Congress and win the Presidency. Even then, Democratic majorities in Congress would be slim, and Republicans would have as much bargaining power as the Democrats have now. So compromise is inevitable if any reform is to get done, and that compromise is likely to include personal accounts.

So why not engage now, and look for a deal that included these three elements:
  • Accepting personal accounts, but getting the President to agree to smaller accounts (like 3% up to a ceiling),
  • Accepting reductions in the growth rate of future benefits, but smaller or more progressive than what the President has suggested,
  • Insisting that, as a trade for the first two points, the President raise the maximum taxable earnings or impose a surtax above it to fund a portion of the accounts.
And then we could move on.

Other blogs commenting on this post

15 comments:

JG said...

"'Putting out a Democrat plan on Social Security would be a horrible mistake because right now it’s the president’s principles against our principles,' Rubin said, according to a Democratic leadership aide.

"The aide added that Rubin told his party colleagues that it would be hard to win a battle of specifics..."

Yes, when your specifics are losers your principles must be great! ;-)

This is the Democrats' problem -- and they know it -- for now they can talk about nice sounding principles, but in time the specifics will become clear.

JG said...

"This is certainly not as bad a misrepresentation as suggesting that the bonds in the Trust Fund have no value."

The typical endless go-around about this can easily be avoided whenever someone brings it up anew by having all parties agree on a specification: value for what purpose?

If I write up a legally enforceable note for $X, secured by my bank account and other assets, does it have value?

If instead of exchanging it on the market for equal value, I decide to keep it in my own lock box to fund my future retirement, does it have value for that purpose so it will serve in lieu of other savings of equal dollar amount?

If I go to the bank for a loan and tell them I have it in my lock, will the bank count it as an asset on my balance sheet?

The answers are not the same.

IOW, before getting into an argument with someone about whether the Trust Fund has any value, ask that person exactly what he/she imagines the trust fund is going to do.

Usually, that's the root of any argument over the bonds. In my experience it's much more productive to argue about that instead. Once people agree on what they think the trust fund is going to do, the value of the bonds for that purpose tends to become pretty self-evident.

Roland Patrick said...

Regarding Victor's post about market risk; what difference does it make whether we call it market or political? Benefit cuts and tax increases by any other name.... As in 1983.

alphie said...

The SS trust fund represents only about half of the $3 trillion worth of promises the government has made to its own citizens. The other half is promised to Medicare patients, federal and military retiress and victims of various diseases.

I don't see how letting workers invest 3% of their income in stocks is going to alter their retirement funds that much. It will make wokers on Wall Street and current holders of stocks and options wealthier, though. I'm sure that these people are big Republicans supporters is pure coincidence.

What if the effort to get Americans to save goes to far? If Americans began saving 25% of their income like the Japanese do, would it hurt rather than help the economy?

Bibamus said...

You are misreading Rubin; what he means by the (ambiguous) statement you quote is pretty clear if you read further:

“Another leadership aide said, ‘From a political standpoint, he said, hold firm because you have a difference in principles; their principle is a privatization plan, ours is not to add to the deficit, and there’s not a whole lot of room for compromise.

’They control the playing field. We can’t get into this debate without compromising our principles.’”

Clearly, Rubin isn’t counseling against putting up principles, he is counseling against compromising them, and he thinks that engaging in a negotiation process that will lead to private accounts is tantamount to compromising principles.

If you read your quote again you’ll see that it is the act of putting out a plan that he thinks is a mistake, and the reason is because the two sides differ in principle.

We can debate about whether this is correct or wise, but we should be clear what we are debating first. What Rubin is saying that the compelling reason for the American electorate to return Democrats to office is precisely because of stated differences in principle.

As for the issue of being unwilling to engage in a battle of specifics: this is becoming maddening. Your side (the President) has itself refused to engage in a battle of specifics. This is a strategic decision that indicates nothing of substance. The bottom line reason not to fight a battle of specifics is that policy battles are not won on the field of specifics. Specifics may sway your vote, but they mean little to the median voter. That vote is won or lost on platitudes and sweeping generalizations (“ownership society”?). Continuing to insist that the Democrats are uniquely guilty of this type of behavior is nothing short of bizarre.

Speaking for myself, the political calculation that justifies stalling is really pretty simple: it is difficult to imagine Democratic bargaining power getting any lower than it is right now. So we will hold out for as long as we can. In particular, I think you vastly underestimate the difference controlling the White House (and the agenda setting power that goes along with it) and controlling Congress, in particular assignments to the conference committee (which doesn’t depend on the size of the majority), would make. I just plain disagree with your assessment that a deal cut after your 2008 scenario (Dem White House and Congress) would look anything like a deal cut today.

Andrew Samwick said...

Bibamus,

I appreciate the comments. There is a difference between compromising one's principles and the principle of compromise.

Almost every legislative issue involves people starting out with different principles. Even if the two parties' principles are as stated in the article, there are ways to have personal account plans without increasing the deficit. I finished the post with an outline of one that could be feasible (cover the personal account contributions by raising the MTE, get the rest of the solvency by phasing in benefit reductions). Others are certainly possible--it would be nice if people like Rubin and Sperling were actively engaged in putting them forward.

I take your point about the Democrats now having the least political representation that they are likely to have for a while. But do you envision an electoral outcome in 2006 and 2008 that could allow them to push through a reform in which they wouldn't have to induce Republican participation by including personal accounts?

I don't. And given that, I think it makes more sense for them to get the best reform they can now, so they can actually campaign on it in upcoming elections.

Roland Patrick said...

"From a political standpoint, he said, hold firm because you have a difference in principles; their principle is a privatization plan, ours is not to add to the deficit, and there’s not a whole lot of room for compromise."

So, in 2009, when the Boomers begin to retire and the SS surplus begins to decline, what do the Democrat's principles tell them to do; raise taxes or cut benefits?

Bibamus said...

For what it is worth, I think you undervalue the advantage of holding the White House or at least one house of Congress. These leads you to make what I think are two, related, errors:

(1) The first is that you underestimate the extent to which not having the White House or a House of Congress leaves the Democrats vulnerable as well as the difference it would make if they had control of one of those institutions. As long as the Dems hold out, they have some measure of control (largely because lots of Congressional Republicans don’t want to go forward without ‘bipartisan’ cover). The flip side of this is that once the Dems agree to deal, they have played their only card. Agreeing in public to a deal is the last time the Dems have any formal say; after that there is essentially no way for them to stop the process. The media cycle is largely determined by the Republican White House. The parliamentary apparatus that will get the bill through Congress (including the conference committee) is controlled by the Republican Senate and House. And the last fail safe, the veto pen, is also in the hand of the Republicans.

After the Dems agree to a deal, the Republicans have a lot of opportunities to screw them, and the Dems have nothing they can do to stop it. Their choices will be to either vote for whatever comes out of conference, or vote against it (or try to filibuster) and set up the 2006 elections as Karl Rove’s dream come true. The commercials practically write themselves: “The Democrats went back on their word/voted against/filibustered a compromise that would have saved Social Security for generations to come. In November, vote Republican, so we can finally fix Social Security once and for all”. Each side knows this and each side knows the other side knows this. Thus for the Republicans, screwing the Democrats is a strictly dominant strategy. The Democrats would be fools to kick off this process by agreeing to a compromise.

If the Democrats had control of the White House or just one House of Congress, no matter how narrow the majority, this would be a vastly different situation because the Dems would be assured of having some way to defusing the process in a way that weren’t so politically disastrous if things started to go awry.

(2) The second is that you overestimate the extent to which Democrats could take credit for reaching a compromise. At this point, any movement on Social Security clearly benefits the President and the Republicans. In part this is due to the natural tendency for the party in power to get credit when things get done. This is especially true now: after months of debate, the public firmly associates Republicans with ‘do something’ and Democrats with ‘do nothing’ on Social Security. If something gets done at this point, the (not inaccurate) impression will be that it was over the Democrats’ objections.

For the record, I don’t envision an electoral outcome in 2006 or 2008 where things are much better for the Democrats. I think the Democrats are destined to wander in the desert for quite a while now. So the options aren’t great: getting screwed for (almost) sure in 2005 versus possibly not getting screwed quite so badly in 2009. But I am willing to wait and see. I don’t think the Democrats lose anything by putting this off, and I think the country is better off with a good fix in 2009 rather than with a bad one in 2005.

Andrew Samwick said...

Bibamus,

Thanks for your follow up. This is a point that I had not appreciated:

If the Democrats had control of the White House or just one House of Congress, no matter how narrow the majority, this would be a vastly different situation because the Dems would be assured of having some way to defusing the process in a way that weren’t so politically disastrous if things started to go awry.

You have convinced me that I was underestimating the importance of some control over the conference committee (at the least). But I do believe that there are other options open to them--they could reach across the aisle to get assurances from their moderate Republican colleagues to also vote 'no' if the conference committee returned something that violated a few basic points. Such coalitions, I think, are in all of our best interests. I was saying that here as well.

On your second point, the inability of the Democrats to claim credit even in a compromise--which is becoming more true with passing days--is, in my view, linked to your view that they will "wander in the desert for quite a while now." I think that Democrats who come forward with the compromise plan in the post (or something better) would have a better chance at electoral success in 2006 or 2008 than those who refuse to engage. I say this because, under those circumstances, I (someone not now in the Democrat camp) would be more inclined to vote for them.

It's not an easy hole for the Democrats to be in. They would be better off if they could wait for electoral success to strengthen their hand. However, their refusal to engage will likely do nothing to bring about that electoral success.

econorat said...

Although you are correct that Social Security benefit LEVELS depend on the performance of average OASDI wages, Social Security is still a risk proof system. The key is that replacement rates are constant, regardless of fluctuations in the average wage index. So, Social Security guarantees a certain standard of living in retirement.

Andrew Samwick said...

Econorat:

You are correct that the Social Security formula provides a replacement rate that is invariant to the growth of average OASDI wages. But that does not make the system risk proof, nor does it guarantee a certain standard of living in retirement. It is a given replacement rate of a quantity that is subject to economic risk.

Bibamus said...

It's not an easy hole for the Democrats to be in. They would be better off if they could wait for electoral success to strengthen their hand. However, their refusal to engage will likely do nothing to bring about that electoral success.

Touché.

I agree with pretty much all of your last comment. And from a policy perspective I agree that coalitions of moderates and compromise solutions are better than inaction. It is just that from a political perspective, I am more (perhaps too) cynical.

And thank you for replying to my comments; this was an interesting exchange.

cyberike said...

Some excellent posts here, little of which I disagree with. However, let me change the subject back to the main focus of the presidents plan, personal accounts. I believe this is a very bad idea.

As AS mentions, there is risk in social security. That risk, however, is bounded by both political and economic power that government (and the people) have. There is no boundary on the risk of an investment in the stock market. As a matter of fact, the risk increases the more successful the investment becomes.

Lets face it, there is little the market can do to control a free fall should the market drop. And the market will drop when there are more sellers than buyers. The point is that there is no way to control the downside.

Here is my point: no system is sustainable when promised benefits exceed the ability to pay. I would rather have the social security system collapse in its current form than risk the entire economy through a stock market collapse. Perhaps the risk is small; it is still a risk we should not take.

fester said...

I want to get involved here, running a bit late --- I agree with Bibamaus that the Democrats have no real effective leverage once there is an agreement in principle to move forward because even if they are able to peel off half a dozen 'moderate' GOP Senators to get a good bill out of the Senate, they have absolutely no power to do anything to the conference bill. And once an atrocious bill comes out of conference, who has more power to enforce agreement on those compromising GOP Senators --- the entire GOP party apparatus which has future agenda power and significant funds to spend, or the Democrats who can barely aid themselves, much less give cover to their colleagues across the aisle --- so an atrocity is passed 51-49 and the Dems get screwed.

Andrew Samwick said...

Fester:

Thanks for joining in. I have two follow-up comments.

1) Do you regard Commission Model 2, or any of the changes that have been made to it in the President's road show (Progressive Indexing, 4% accounts essentially uncapped) to be examples of "atrocious" bills? If so, which elements need to be removed, in your opinion, to get something that isn't "atrocious?"

2) Interesting question about whether contracts with moderates in the GOP are enforceable. Most of those moderates need to be moderate to survive electorally. Maybe there's hope.