10:16 a.m. Friday 7/19/96
Herb Stein asks whether the payroll tax, reduced by 2 percentage points and by the current excess of revenues over spending, would pay for Social Security.
The answer is that it would not come close to paying for benefits promised under current law. Those benefits would have to be slashed. Of course, it would pay for something. Unless taxes are also increased, it is not possible to pay both for an adequate Social Security system and for individual accounts.
The reason is quite simple. Dollars used for one purpose cannot be used for another. That is why all privatization plans that do not slash Social Security benefits must raise taxes. A big tax increase, that lasts about 70 years.
10:23 a.m. Friday 7/19/96
Carolyn Weaver seems pleased that the privatization plan she supports is opposed by only eight of 13 members of the Advisory Council on Social Security.
I am also encouraged that a majority of the Council find her proposal unattractive. The other members, it seems, are more concerned than she that her plan would leave benefits for low-income households politically exposed. The simple fact is that viable, long-lived political coalitions have to involve more than a small minority of the population. She cheerfully endorses a plan that would have little chance of surviving but willingly jettisons a plan that has commanded overwhelming support of the American people for six decades.
10:37 a.m. Friday 7/19/96
At this point in our discussion, it is worth noting that certain facts I have advanced have not been contested.
1) The increase in the cost of Social Security from today until the last baby-boomer reaches retirement age–a period of forty years–is smaller than the decline in defense spending in the last six years. This is not a big deal. A lot of dollars? Yes, of course. But not really much in the economy as a whole, a burden that can be met with modest adjustments.
2) Privatization by itself brings no benefits to the economy as a whole.
3) All of the supposed benefits of privatization come from the so-called transition tax increases. These tax increases have to last for several decades.
4) Segregating benefits for the poor in a separate program, as privatizers advocate, exposes benefits for the poor to political risks that current proposals to slash aid to the poor indicate clearly are extremely serious.
We can get every bit of the benefits the privatizers seek within the Social Security system by investing part of Social Security reserves in a passively managed index fund of private securities at lower administrative costs, with less risk to individual workers, and with more security for low earners.
Why replace a system that has served the American people admirably for more than half a century and that requires only modest adjustments to serve them well in the future? If some people want to force others to save more than they do under current law, let them come forward and honestly espouse this view. They don’t need to tear down the most successful social program in the nation’s history in order to do it.
2:15 p.m. Friday 7/19/96
For readers who are unfamiliar with the Social Security Advisory Council that will be issuing a report including the proposal for partial privatization, it may be useful to know that this is a bipartisan panel appointed by HHS Secretary Donna Shalala. Its 13 members were selected to represent the interests of employers, the self-employed, organized labor, and the public. Advisory councils have been appointed throughout the history of Social Security.
It may also be useful to know that there is majority support on this Advisory Council for no single plan. Instead, three plans will be offered. One plan, which basically maintains present-law benefits and would have the government begin investing up to $1 trillion (by 2020) directly in private equity markers, has the support of six members. One plan, which scales back benefits and increases the payroll tax 1.6 percent (bringing the total OASDHI tax rate to 16.9 percent) to fund individual accounts that are held and managed by the federal government, has the support of two members. The final plan, which creates a new flat benefit for full-career workers and basically privatizes half the retirement program, has the support of five members. These five people represent both political parties and range in age from 20-something to 60-something, They were willing to take seriously new ideas for giving workers at all income levels the opportunity to invest in their futures, while maintaining social protections for the lowest-wage workers. The majority of council members support individual accounts in one form or another.
For readers unfamiliar with budget history and the impact of Social Security on national saving, I would simply note that unless the federal budget, excluding Social Security, is in balance, there is no way to directly observe or to know whether–or to what extent–the Social Security surpluses increase government saving, let alone national saving. The surpluses only increase government saving if Congress forgoes the opportunity to relax fiscal restraint in the rest of the budget, in which case there would be less new debt issued to the public. That takes quite a disciplined Congress.
2:23 p.m. Friday 7/19/96
My credit to Herb Stein for a solid week of moderating a very tough, emotionally-charged panel.
I agree, we should start with the points of agreement as we move toward implementing new Social Security policy. But let’s not deceive ourselves. The 1994-’95 advisory council has been wrestling with this issue for two years, and its final report will show profound differences among three camps of reformers. This week’s debate appears to be a miniature version of that council’s Balkanization.
The word on the street is that whoever’s elected president in November is likely to name a commission to look into reforming Social Security–or, more broadly, try to figure out how to retire the Baby Boom without having Medicare and Social Security bust the budget. Unlike the Entitlements Commission, though, this group should be empowered, like the Base Closure Commission, to make policy recommendations on which Congress will vote up or down.(It’s doubtful Congress could make these changes without the political cover a high-level commission would offer.)
This commission, like the Greenspan Commission in the early ‘80s, should be bi-partisan. And, in addition to having members from Congress and the administration, it should also include innovative thinkers from outside government and across different age groups. But most important, it will need a chairperson of impeccable stature who can coax a majority of its members into agreeing on a generationally fair and actuarially sound plan that Congress can adopt.
Anything less, and I think we’re sunk.
2:26 p.m. Friday 7/19/96
In response to Herb Stein’s question on individual vs. collective investment, there is no more important issue in the privatization debate than the issue of who controls the investment of assets–the federal government or individual worker-contributors–subject to what restrictions. Dr. Stein is right that “the collective plan would permit preservation of … substantial redistribution,” whereas the individual method, which would not, would give workers private ownership of their investments and improve work incentives by tightening the link between workers’ tax contributions and future benefits. But there are other, even more important considerations.
Centralized investment of a massive reserve fund raises a host of difficult questions about how to preclude political manipulation of the allocation of capital in the economy. Proponents say “it’s easy; just invest passively in one or more index funds.” Not so easy when we are talking about investing a trillion dollars or more in private equity. Which equity index fund would be used–the S&P 500? If so, why would the federal government wish to favor large corporations over small? How quickly would a passive investment strategy turn active as Congress bowed to pressure to withdraw certain companies from the index (say, tobacco companies or companies with unfavorable practices from the standpoint of the labor unions), or to pressures to dump equities when the market falls–and the reserves lose tens of billions of dollars in value? What would be the effect on corporate governance of the government owning 5 percent-10 percent of the shares of the nation’s largest corporations?
Centralized investment would have great potential for distorting the allocation of capital in the economy and putting at risk workers’ taxes (and retirees’ benefits). Concerns of this kind led a majority of members of the Advisory Council to oppose centralized investment.
Another problem with the collective approach is that the reserve fund needn’t bear any particular relationship to accruing liabilities. This leaves open the possibility that money accumulated for the purpose of lightening the burden of benefits in future decades could be used instead to fund current consumption–possibly to help bail out Medicare or to fund some other seemingly worthy program or benefit increase. Individual accounts, by contrast, like an IRA or 401K plan, are always fully funded, ensuring that the overall system of accounts remains fully funded. This enforces the obligation on each generation to save for its own retirement rather than passing the cost along to future generations.
At a time when public skepticism is running high, I believe Congress and the administration would have a hard time convincing each other–let alone the American public–that they could serve as honest brokers in managing a trillion dollar fund of private equities.
2:31 p.m. Friday 7/19/96
Regarding the Kerrey-Simpson bill, I would be delighted to see a personal investment plan financed by 2 percentage points of the payroll tax, but, for all the reasons mentioned earlier, I would find it highly desirable to create even larger personal accounts. Larger accounts would: offer workers the potential for higher retirement benefits and a better rate of return on their Social Security taxes, and on net should result in significantly larger economic benefits; give workers keener incentives to make informed investment decisions and to monitor the performance of their investments; and be relatively less costly for financial institutions to administer. And, yes, personal accounts would strengthen workers’ incentives. No less important, though, personal accounts would allow workers to shed at least a portion of the political risk attached to their non-contractual, long-term benefit promises by government.
One major qualification is in order: The Kerrey-Simpson bill would allow workers to invest in either one of a narrow set of index funds held by the government, as in the Thrift Saving Plan for federal retirees, or in privately-managed accounts. This latter provision is essential if the accounts are mandatory: It gives workers an escape hatch in the event the funds offered by the government fail to perform as expected, the information and management services are inadequate, or the range of investment options is too narrow to provide the desired mix of portfolio risk and return. (Participation in the Thrift Saving Plan, it is important to note, is entirely voluntary. If displeased with the restrictions imposed on, or the performance of, one or more funds, workers can reduce or stop making contributions.) Individual choice and mobility of resources place real limits on the inefficiencies that can be imposed by Congress or by its designated governing board.
2:33 p.m. Friday 7/19/96
On reform in the 21st century
When all is said and done, Mr. Aaron’s prescription for reforming the nation’s giant retirement program boils down to making “slight” reductions in benefits, possibly coupled with some “slight” increases in taxes–a bold plan indeed for moving into the 21st century and taking advantage of the great expansion of and improvements in financial institutions and instruments, the great expansion of private pension plans, the explosion of 401K plans and other self-directed savings vehicles, and the array of government safety nets now in place for the elderly that, while not doing everything that some would want, are as generous and extensive as for any other age group in society.
Scaling back benefits for younger workers–who are starting their careers with a payroll tax of 15.3 percent–would do little to reduce the vulnerability of the system to a new round of deficits–and benefit cuts to enhance the value of the system for younger workers, or to bolster the security of benefits 30 or 40 years down the road.
Of all the options considered by the Social Security Advisory Council, none had less support than this. (One out of 13 members supported a proposal to scale back benefits. He subsequently rethought this position and added a personal accounts components that would be payroll-tax financed and layered on top of the current tax. He picked up one more vote.) A large majority, 11 of 13 members, recognized the need to move much more aggressively into equity investment. The sharp difference of opinion was over how to accomplish this–through centralized investment of a massive reserve fund or through a highly decentralized, privately-managed system of personal accounts–and this ultimately split this group six to five.