Economics
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Fiscal reform
Fix the easy problems first
Feb 28th 2011, 20:55 by A.S. | NEW YORK
WHITE HOUSE officials announced last week that we need not worry about Social Security, for now anyway. They reckon it should not be included in the upcoming discussions on how to reduce the deficit. They figure it’s a future problem, so it has no place in a current deficit reduction plan. But entitlements make up almost the entire structural debt problem. That’s far more dangerous than current deficits from discretionary spending. Leaving Social Security off the table means that reform of the programme probably won't happen any time soon. White House Budget Director Jacob Lew and the deputy director of President Barack Obama’s National Economic Council, Jason Furman, explain:
In a Feb. 22 editorial in USA Today, Lew said the retirement program’s trust fund will have adequate resources to pay full benefits to retirees for the next 26 years, that the nation’s debt “problem is not Social Security” and that strengthening the program should be handled separately.
Speaking to NDN, a Democratic-leaning advocacy group, Furman said talk of a Social Security overhaul “is not one you care about” if “you are worried about our long-run fiscal future.” He said the program is “the bedrock of retirement security” and solvent for another 26 years, until 2037.
I am not sure if Messrs Lew and Furman genuinely believe this or if they’re innumerate. It is akin to saying that since I am working now, earning money, and have a new infant who will probably become a millionaire someday and take care of me, I don’t need to save for retirement. It is true Social Security is not currently adding to the deficit. But it is projected to run an actuarial deficit by 2037. Does it threaten to make the American government insolvent? No, but without reform it does add to the structural deficit. If no action is taken, obligations will run to 3.3% of taxable payroll or 1.2% of GDP. Perhaps not a fiscal crisis, but a non-trival amount of spending. These assumptions look far into the future so there is a fair bit of uncertainty, but that's no reason to feel better. They assume that the American economy will experience the same rates of growth it has in the past. If the American birth rate continues to decline the figures will be even larger.
Restoring long-run solvency will cost money, either in the form of tax increases or benefit cuts, or some combination of the two. The sooner action is taken, the smaller benefit cuts and tax increases must be. Politicians who claim that Social Security is not a problem are really saying they have no qualms about sticking future retirees and taxpayers with an enormous bill and additional retirement insecurity. The alternative is to simply ask everyone to start paying a little more now.
It is true that Medicare is a bigger fiscal threat and harder to solve, but that does not mean Social Security is not a problem. Ignoring it is like not treating a broken leg because the patient already has cancer. As former budget director Peter Orszag points out, fixing Social Security sends a strong signal to bond markets that America is serious about addressing its long-run debt. What sort of message does it send that America lacks the fiscal discipline to solve even relatively easy problems?
In addition to the addition cost delay passes to future taxpayers, a refusal to change the programme now also leaves young people with uncertainty regarding a large part of their retirement income. I often hear people say, “Social Security won’t be there for me”. That’s probably not true; the programme will continue in some form. But until credible reform occurs, it’s impossible to know exactly how large a benefit one can expect. This known unknown makes it very difficult to save and invest for retirement. Evidence suggests that Social Security uncertainty does impact investment decisions. Individuals with private pension accounts have enough uncertainty to deal with as is: asset return rates, life expectancy, and so on. Social Security is supposed to be the thing they can count on. It's unfair to kicking that problem down the road.
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While I don't disagree with the point that SS needs to be addressed sooner rather than later, surely the author is joking by referring to the issue as "easy."
Right, and the sooner we get to fixing social security, the less dramatic the changes will need to be. If we handle it now, most of us might not notice the difference. If we wait until 1930 to get to it, the change will be dramatic. Ask anyone who does business with the State of California.
So the administration's plan for dealing with Social Security pending insolvency...is to stick its head in the sand. Lovely.
But of course, even if the politicians stop kicking the can down the road, they'll certainly kick the cost down the road. Given the immense voting power of seniors, it's ludicrous to think of Social Security as an "easy problem." The only proposed solutions have been to add additional costs and benefits to current young people while holding steady or increasing the benefits for current seniors. Both parties are only interested in "sticking future retirees and taxpayers with an enormous bill and additional retirement insecurity."
Maybe I'm wrong though, and AS knows of 60 senators willing to vote for cuts to entitlements starting in 2015?
Inflation isn't a problem right now so Sumner et al encourage us not to worry about the future. So why worry about the future of SS if it ain't a problem now?
RA needs to provide us a menu of the things we should worry about in the future and those that we should only focus on today. I get confused easily.
Doug
I agree...
If we wait until 1930 'dramatic' won't even begin to describe it!
Goddamn Herbert Hoover!
:)
Fixing the easy problem would give me no faith we would be any closer to solving the hard problem. In fact, it would persuade me the hard problem was simply being put off longer. If we can't solve the hard problem the easy one is of no consequence. If we did solve the hard problem the easy one would present no problem. Solve the hard one first. If you can't do that then wait for the crisis to arrive to solve it. Crisis is a spur to action, not to be avoided. Welcome it.
Beware of bloggers who put words in their opponents' mouths.
I think the math is simple. To make SS solvent the way we did in Canada fifteen years ago, i.e. by raising premiums, Obama would need control of congress, and a certain level of maturity in the media and his opponents. He has neither.
Making it solvent by cutting benefits, he will leave to the Republicans. Not only does he disagree with this approach, he's hardly going to give them a political gift by taking the blame.
So, my bet is he's focused on dealing with Health Care, the Great Recession, two wars, and reforming the Financial sector this term. That's a vast amount all on its own.
Postponing Social Security is acceptable only to the extent that all means are now concentrated on health care.
If there were more than a handful of grownup Republicans, we could plan on increased taxes once the economy has recovered. Were we really overtaxed in 2000 ?
The problems with Social Security are dwarfed by the problems with medical costs. It makes more sense to focus on those first. Fixing Social Security is actually not that hard. All we would need to do is remove the cap on payroll taxes.
I would say this is a political measure which, while technically true, seems more intended to smoke out the GOP's plans to attack entitlements. If people believe - wrongly - that social security is in genuine crisis, then momentum can be harnessed for ripping it apart.
I believe that might be a problem blog post that missing couple of words?
I don't know if any of you or our blogger has read the Trustee Report.
Anyway, it seems coincidental that our blogger brings up Social Security on the same day the media reports Bernie Madoff says the US Gov't is a ponzi scheme.
Assuming the Social Security models work, and the data they guess at comes in on target here are the choices.
Do nothing: Social Security will still pay out 75% of one's benefits after 2036.
Let Congress mess with it: Gamble that they won't cut your benefits more than 25%. (That includes raising the retirement age.)
The choice is yours.
Regards
Foolish is a citizen who covers his eyes hoping childishly for the best...
... neglecting to plan or invest for the future ...
... no education, no career, no savings, no family ...
Alas we have constructed a system and entrusted our civilisation to a band of wise leaders, who have no time horizon beyond next year's election campaign.
Long live democracy!
But sooner will our society perish in its short-sighted foolishness.
Just keep us entertained by the spectacle of partisan battle so we won't notice until it's too late.
Washington and its politicians are in most urgent need of being outsourced to more competent and productive foreign replacements.
bampbs, yes, we were overtaxed in 2000. There are many studies available on the internet concerning the optimum tax rate for growth and job creation. It tends to be around 25% of gdp for most studies. That's 25% for all taxes, local, state and federal. We are currently just under 50%.
La Contra, is that sumbitch still drawing SS?
A couple of thoughts. First, all that's in the SS trust fund is IOUs from future taxpayers (nonmarketable US debt). The payroll taxes the Baby Boomers paid (inadequate nominally as they were given declining mortality) were spent as collected. The 'assets' that will be redeemed to pay benefits must be paid out of federal revenues in the year they are redeemed. So basically SS is broke now if you wave off the accounting tricks that give two names to the same pocket.
Second, I'm not sure that uncertainty about SS' viability is such a bad thing for the younger generations. They assume--rightfully and healthily--that they should plan for their own post-working years. To avert interest rate spikes and a stock market crash as the Baby Boomers start cashing in their 401(k)s and IRAs, the smaller generations following them will need to save/invest a greater percentage of their income. Sadly their important role will be complicated by the taxation/inflation needed to service the debt (including debt to the SS program).
There's just no escaping the come down from the unique and fortuitous place the U.S. occupied during the middle 2/3 of the 20th century. Longer we defer acceptance of that, farther and uglier will be the eventual fall.
If people were to take the time to read the Social Secuirty Trustee Report, the 2037 exhaustion of money lent to the Federal Government is based on a productivity of 1.7%
Q3 2010 productivity 2.6%
Q4 2010 productivity 2.6% (released today)
Will the media ever stop being a tool?
Regards