Thursday, June 02, 2005

In Praise of Gene Steuerle

Suppose we just got rid of this thorny democratic process of reforming Social Security and appointed one person to handle the job. My nominee for the position of "Social Security Czar" is Gene Steuerle of the Urban Institute. To see why, follow this link (via Arnold Kling) to his recent testimony before the House Ways and Means Committee. Can we exhume the Voxy for Congressional testimony? Let's just call it an instant classic.

He starts as follows:

The Social Security debate could and should be part of a larger one in which we engage our fellow citizens in choosing the best direction for society as a whole as better things happen to us in the way of longer lives and new health care goods and services. How can we really take best advantage of these new opportunities? How can we spread the gains from this increased level of well-being and wealth to create a stronger nation with opportunity for all? And how should we share the costs?

Instead, the debate is upside down. Due to the ways we have designed our programs and our budgets, every year we spend greater shares of our national income in areas where needs have declined, and then claim we don’t have enough left over for areas—such as education, public safety, children, and anti-terrorism—where real needs remain and have often grown. I sometimes imagine sitting in the Ways and Means Committee room when someone from the National Institutes of Health comes in claiming to have found a cure, though expensive, for cancer. The members of committee, trapped in the logic of our current budget, find that instead of celebrating this advance, they commiserate among themselves about the increased cost for Social Security.

As a member of the baby boom generation, I remember youthful conversations among my cohort, regardless of political persuasion, that centered on what type of government we could help create to best serve society. As now scheduled, our legacy is to bequeath a government whose almost sole purpose is to finance our own consumption in retirement. Not only haven’t we come close to paying for the government transfers we are scheduled to receive, but we plan to pay for them by dwindling almost to oblivion the rest of government that would serve our children and grandchildren.
Yes, it does seem to be a question of priorities. He finishes his introductory remarks with:
Social Security is only part of this problem, but it is an important part for four reasons:
  • It sets the standard for how long we should work and who covers the costs
    associated with our longer lives and the new medical care we receive;
  • There are many inequities and inefficiencies in Social Security that are
    independent of its size;
  • By default (in absence of new legislation), Social Security is designed to absorb ever-larger shares of our national income, thereby squeezing out other programs, particularly discretionary expenditures, that are not treated equally in the budget process.
  • A number of related employee benefit reforms would likely increase private saving, enhance the well-being of low- and average-income workers in retirement, and improve the solvency of Social Security.
He addresses each of these in turn, and makes the following recommendations (with my numbering):
  1. Increase the early and normal retirement ages so that at any given tax rate, the system provides fewer subsidies for middle-age retirement and increased revenues, higher annual benefits in retirement, higher lifetime benefits, and a greater portion of resources to those who are truly old.
  2. Backload benefits more to older ages, such as the last 12 years of life expectancy, so as to progressively increase benefits in later ages when they are needed more and to increase labor force incentives for individuals still in late-middle age, as defined by life expectancy.
  3. Provide a well-designed minimum benefit to help low-income households and groups with less education and lower life expectancies, while simultaneously reducing poverty rates (relative to living standards or wages) among the elderly.
  4. Determine family benefits for middle- and upper-income individuals in an actuarially neutral manner by applying private pension standards, making sure that benefits are shared equitably, and reducing or removing significant discrimination against single heads of household, many abandoned spouses, two-earner couples, many divorced persons, those who marry others close to their own age, some who pay significant marriage penalties for remarrying, and those who bear children earlier in life.
  5. Provide a minimum benefit that extends to spouses and divorced persons as well as workers to provide additional protections for groups that are particularly vulnerable, and as an alternative to free and poorly targeted transfers to higher-income households.
  6. Count all years of work history, providing an additional work incentive and removing the discrimination against those who work longer.
  7. Ensure responsible budgetary policy by changing the default rules to guarantee the system automatically moves toward balance—say, through adjustments in the retirement ages or the rate of growth of benefits for higher-income households—whenever the Social Security trustees repeatedly report a likely long-run deficit.
  8. Reduce the tax gaming used with retirement plans when taxpayers simultaneously report interest deductions while deferring or excluding interest and other retirement plan income from taxation.
  9. Provide additional incentive for plans that do a better job at providing a portable benefit for all workers, such as using the FICA tax exclusion to finance increased deposits to retirement accounts and guaranteeing all workers in a qualified plan a minimum level of portable benefits.
  10. Make clearer in the law that employers can use opt-out, not just opt-in, methods of encouraging retirement plan participation—without threat of lawsuit.
  11. Focus retirement plan incentives more on lower-wage workers, for instance, through an increase in a modified savers credit, which should be adjusted so that it is available for employer, as well as employee, contributions and so that the credit is deposited in retirement accounts.
  12. Provide safe harbors from lawsuits for designated types of retirement and other benefit plans offered by employers who hire or retain older workers.
  13. Restore the earnings base for Social Security by increasing the portion of cash wages subject to Social Security tax, capping the tax-free levels of health insurance that can be provided, and dealing with tax preferences for other employee benefits.

Numbers 1 - 7 & 13 deal explicitly with Social Security. Some of them are quite similar to ideas I have expressed in various forms in earlier posts. In brief: raise retirement ages, raise the maximum taxable earnings level, remove disincentives to current work, rationalize the spousal and minimum benefits, and put future solvency on autopilot through modest changes triggered by deterioration in the system's long-term health.

Numbers 8 - 12 deal with changes to private pension plans. With the ongoing growth in defined contribution plans relative to defined benefit plans, it is becoming less clear to me that employers need to be so fundamentally involved in pension plan design. So setting up a universal, lifetime savings account for each person (to which employers could contribute if they want to and with default options that encourage at least modest saving rates) may be the way to go.

Other blogs commenting on this post


PGL said...

Interesting. And his discussion might even get a favorable mention from Daniel Gross who recently had fun with the "Free Lunch Bunch" (see my Angrybear post for a taste of why Daniel was sharpening his pencil).

JG said...

Steuerle has for years been writing the best regular column by any economist anywhere on government policy, IMHO.

It's in the expensive "pay" section at Tax Analysts, so it hasn't gotten a whole lot of popular exposure.

But his archives now are available free to the public.

They are well worth scanning through -- worth a lot more than the archive collections of many of the more famous I could name, for my money (and my money helped get them there).

Patrick Sullivan said...

I doubt that Daniel Gross will ever face up to this from Steurle:

'The facts are simple. Social Security’s current dilemma centers almost entirely on labor force issues—the drop in scheduled workers per retiree.'

Anyone who can't handle that is a true 'free luncher'.