Should Democrats agree to let President Bush have some small, voluntary face-saving private account scheme, if in return they get a series of changes that restore the Social Security system’s long term solvency? That seems to be the big issue currently facing Democrats.
Michael Kinsley says Democrats would be “morons” to turn down a deal in which the Republicans take the heat for the painful changes needed to save the Democrats’ favorite program. E.J. Dionne and Kevin Drum think the party should walk away, and the arguments they make –the deck is stacked in the GOP’s favor, Bush’s benefit cuts are too severe, Social Security isn’t in such bad shape–would apply even if Bush drops the controversial private account idea entirely and focuses only on shoring up the existing system’s finances.
All my neoliberal instincts favor siding with Kinsley against Dionne on virtually any issue. What’s more, what Bush has proposed is similar to “means-testing”–cutting the Social Security benefits of the more affluent–and I’ve been in the means-testing camp for decades. So why don’t I think the Democrats should seize this seemingly golden opportunity to restore the long-term solvency of our nation’s basic retirement system?
Here’s my reasoning. It’s tentative! Feedback on each proposition is welcomed. I reserve the right to modify these positions or completely reverse field–but I’ll note any retreats or humiliating recantations on this page. [Note: Send criticism and ad hominem attacks to Mickey_Kaus@msn.com. Please indicate which of the following points you are primarily addressing.]:
1. There’s nothing inherently wrong with having a “universal” Social Security program that pays benefits to rich and poor. No principle says government should only help the poor. Social Security was designed as a contributory system in which everyone pays a payroll tax, which in turn earns them the right to get benefits when they retire (or are disabled). Those with higher wages who’ve paid more tax get higher benefits, although not as much higher as the difference in their tax contributions. This universality buys the system some political support–everyone gets at least something out of it. Fine.
2.The only problem with this system is we can’t afford it! Universality is extremely expensive. Currently we’re using 12.4 percent of our national payroll to mail Social Security checks to rich and poor alike. The system may not be in danger of going flat broke, but is sending out these checks the highest and best use of 12.4 percent of our payroll? We have big expenses coming down the road–most obviously, medical expenses. Democrats rightly want to establish some system of universal health coverage giving poor and middle class Americans the same shot at living that rich Americans have. That’s a more profound and substantial expression of equality than universal check receipt! But the Dems will almost certainly have to do this while dramatic technological advances keep health care costs rising faster than inflation. Maybe we can add those ballooning health care costs on top of the 12.4 percent we’re currently taking for Social Security pensions. But will we be able to afford national health care if we let Social Security gobble up even more?
3. We should be sticking it to today’s recipients! The generations that made out like bandits under Social Security are the generations now in their 70s and 80s. They paid into the system during the early, low-tax years and are drawing pensions vastly greater than their contributions. Social Security defenders Peter Diamond and Peter Orszag write:
Benefits paid to almost all current and past cohorts of beneficiaries exceeded what could have been financed with the revenue they contributed.
Diamond and Orszag tactfully call this imbalance “legacy debt.” Their solution? Why, of course–place the burden, not on the generation that got the unjustified benefit, but on the succeeding generations that will be lucky to get back what they put into the system! Protecting current retirees may be politically necessary–the political clout of the elderly is why Congress voted the excess benefits in the first place. Even solvency-obsessed scholars (much less politicians) shy away from cutting grandma’s check, even if grandma is wildly rich. But let’s at least notice that this is not fair. The changes today’s non-retirees must face are more painful because nobody is willing to touch the Greatest Generation’s windfall.
4. Bush’s proposed plan isn’t quite ‘means-testing’: Means-testing traditionally refers to programs that dispense aid to those who need it most. That is, they measure a person’s “means” at the time they get the benefits. If you “means tested” Social Security, in this sense, you’d look at how rich people are when they retire. Affluent retirees (measured by either their assets or their income) would get smaller benefits or even no benefits. Poorer retirees would get full benefits.
The Pozen Plan, which Bush has now endorsed, is different. It reduces the benefits of those who make high wages in their working years by indexing them to prices instead of wages. Low-wage workers would get full wage-indexed benefits. But unless you assume we live in a rigid, static meritocracy, the wages people make will not correspond exactly to their financial status when they reach retirement age. Some low-wage workers will be quite affluent when they retire. (Maybe they owned suddenly-valuable homes, or they’ve saved, or inherited, or had a few really good years, or they’re not poor at all but rather lazy coupon clippers who lived off investment income not subject to the payroll tax.) Some high-wage workers will retire penniless.
The Pozen plan doesn’t care–it pays them all benefits based on how well-off it looked like they were going to be when they were paying in the system. The Pozen plan is really not a means test at all but rather an adjustment in Social Security’s existing benefit schedule, gradually lowering the benefits to which higher-wage earners are entitled, whether they are wealthy or imporverished when they get older (although high-wage workers would still get slightly higher benefits than low-wage workers).
That doesn’t make it a bad plan. Means tests are said to be humiliating–you have to prove you’re poor–and Pozen avoids that. Plus, unlike true means-testing, his plan encourages recipients to save for their senior years. (Means testing would punish them with benefit cuts if they save too much.)
But once we recognize that Bush and Pozen are actually just fiddling with the benefit schedules, we can acknowledge that …
5. Democrats would fiddle with the benefit schedules too! The most frequently cited Democratic alternative plan is the one proposed by Peter Diamond and Peter Orszag–call it the Two Peters Plan. They estimate the total 75 year Social Security shortfall at 1.9 percent of taxable payroll, and would meet it by a combination of tax increases and benefit cuts. Specifically, as best I can make out,, they make three changes in the benefit schedules:
1) They cut benefits for the top tier of wage earners, reducing by a third the amount of wages over about $44,,000 that get replaced by Social Security at retirement. This change alone saves almost 10 percent of Social Security’s shortfall (.18 percent of payroll).2) In addition, they cut overall benefits gradually to compensate for greater longevity–accounting for half of another .55 percent of payroll–or .27 percent. It’s not clear how these cuts would be allocated.3) In addition, they would impose a “legacy charge” of .97 percent of payroll, more than half of which is financed by benefit cuts, or another .50 percent of payroll.