Wednesday, February 08, 2006

Social Security in the President's Budget

Frequent commenter bakho points out that the President's Budget includes modifications to the Social Security system that look like personal accounts plus progressive indexation of benefits:

The President has proposed reforms to address the system’s long-term financial shortfall while making Social Security a better deal for today’s young workers. Under the President's approach, Social Security would include voluntary personal accounts funded by a portion of workers’ payroll taxes. The 2007 President’s Budget includes the estimated impact from the creation of personal accounts. The accounts will be funded through the Social Security payroll tax. In the first year of the accounts, contributions will be capped at four percent of Social Security taxable earnings, up to a $1,100 limit in 2010, increasing by $100 each year through 2016. The President has also embraced the idea of indexing the future benefits of the highest wage workers to inflation while providing for a higher rate of benefit growth for lower-wage workers. This measure would significantly contribute to the solvency of the system. By adjusting the way benefits are calculated, progressive indexing would eliminate nearly 70 percent of annual cash shortfalls by the end of the Social Security Trustees' long-range (75 year) valuation period, trending towards greater improvement thereafter. Because progressive indexing would index benefits for lower-wage workers to wage growth, which generally grows faster than inflation, benefits would grow faster than the poverty level. This will keep a greater portion of future seniors out of poverty than today.

By adopting progressive indexing and allowing young workers to create voluntary personal retirement accounts within the Social Security system, the President’s recommendations would provide future seniors with real money instead of the current system’s empty promises. Indexing benefits partially to inflation rather than wages allows the Government to save significant sums in future decades, money that would be used to maintain faster benefit growth for low-income seniors. Without Social Security reform, benefits for future seniors will have to be cut about 30 percent across-the-board.

I have taken issue in the past with some of the language being used here--a presumption that the poverty level grows only with prices and not with wages and referring to the "empty promises" of the current system. But I still like this plan relative to the status quo (though not relative to the LMS plan).

Writing in today's Washington Post, Allen Sloan discusses the financial impact of the proposal:
Unlike Bush's generalized privatization talk of last year, we're now talking detailed numbers. On page 321 of the budget proposal, you see the privatization costs: $24.182 billion in fiscal 2010, $57.429 billion in fiscal 2011 and another $630.533 billion for the five years after that, for a seven-year total of $712.144 billion.

I view this as a positive step. If the President is serious about the proposal, it should be in his Budget. His Budget is not the law, but at least it gives other policy makers a more concrete place to start, and it competes with other budgetary initiatives for those years. The next step is to specify it in enough detail so that the actuaries at the Social Security Administration can evaluate its long-term effects as a standalone plan, as they have done for other proposals here. Like bakho and Sloan, I share the surprise of having to uncover this in the Budget, rather than hear about it in the State of the Union address.

8 comments:

Anonymous said...

It wasn't in the SOTU because it's the same as last year's plan, although I believe the numbers are new.

See, e.g.,

Social Security Reform: President Bush’s Individual Account Proposal
(April 25, 2005)

http://www.opencrs.cdt.org/rpts/RL32879_20050425.pdf

PGL said...

Since Kevin Drum has already taken on that "empty promise" garbage, let me focus on the 1st sentence of the quote from the Administration. What is says simply put is that the government can spend LESS and yet have young workers receive MORE. Unless there is some enormous inefficiency out there that this plan is eliminating (which there is NOT as Barro, Becker, et al. note) then this sentence is the usual free lunch lie we here from this White House. Just say it - the Administration has been lying and continues to lie. My only question is WHY do they do so. What are they are trying to pull over the voters eyes?

Hey - I'm for reform but I suspect this Administration has something else in mind.

Arun Khanna said...

It should have been mentioned in the SOTU.

Anonymous said...

it wasn't in the SOTU because nobody in their right mind thinks Congress would touch this with a ten foot pole in an election year - when Republican incumbents are already vulnerable, and when this concept was already trotted out at length last year & roundly rejected. it's a fake-out, plain and simple.

question is, what is it in there to cover for? the administration is always very deliberate (although thoroughly misleading) about what assumptions it includes in it s budgets & what it leaves out. War in Iraq, AMT relief - out. Private accounts in SS - in. Why?

My theory is that the proposal is in there to give them an $82B placeholder in the last two years of the budget window, when the cost of making the tax cuts permanent really kicks in. The private accounts placeholder gives them something that they KNOW they can drop or reduce in their next budget or budget update(with little notice or carping because nobody's actually expecting it to happen). Result: when the fake spending cuts they've projected don't come to pass, they can drop or defer this item to free up some room in the forecast, so they can continue to maintain that the tax cuts are affordable in perpetuity.

I never used to think like this about the Federal budget. I guess deviousness is contagious.

Lord said...

As Iraq is out, I think congress should use this opportunity to zero budget it and start bringing the troops home.

Arun Khanna said...

I don't know about others but I prefer that people don't use SS to stand for social security. We should not be so quick to forget Nazi SS. Taking the time to write social security is a modest tip of the hat to never again.

Luther said...

Crazy:
President 'Just Fine' With Cheney Explanation

http://www.foxnews.com/story/0,2933,185062,00.html

liberty said...

>government can spend LESS and yet have young workers receive MORE. Unless there is some enormous inefficiency out there that this plan is eliminating (which there is NOT as Barro, Becker, et al. note) then this sentence is the usual free lunch lie we here from this White House.

Yeah, or unless the current plan allows government to spend the money and not invest it and the new plan allows the individual to invest the money via a savings account, such that the government "spends" (via taking your money and putting into an investment account) less and you recieve more.

Yes, it is enormously inefficent, but its not a matter of just changing an inefficiency, but of changing the system from a pyramid scheme government program to an investment program (although, in truth, the propsal only allows you to invest a portion of your money, the rest is allowed to stagnate or be spent as per the usual old version).