Monday, March 28, 2011

Why not wait to fix the deficit?

Greg Mankiw explains what the future might look like.

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Thursday, March 24, 2011

New working papers from the Center for Retirement Research

The Center for Retirement Research at Boston College has released seven new working papers:

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New paper: The Case against Raising the Social Security Tax Max

I have a new paper in AEI's Retirement Policy Outlook series titled "The Case against Raising the Social Security Tax Max." Here's some background:

With Social Security deficits increasing and the US population aging, policymakers today face a choice. If they raise Social Security's maximum taxable wage--a common proposal--individuals will respond by working and saving less, which weakens the economy and does not fix the problem. Instead, we should reduce Social Security benefits for middle- and high-income earners to encourage more working and saving--and free up the government to focus on the daunting challenges of Medicare and Medicaid.

Key points in this Outlook:

  • Eliminating Social Security's maximum taxable wage ("tax max") is an alluring solution to Social Security's problems, promising to restore long-term solvency with few effects on the typical worker.
  • But a higher tax max discourages work and saving and fixes Social Security's long-term problems only on paper.
  • A better solution is to reduce Social Security benefits for middle and high earners while encouraging greater individual saving and longer work lives.
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Wednesday, March 23, 2011

White House to sit out Social Security debate

Talking Points Memo reports that "The White House will not prominently inject itself into congressional negotiations on Social Security reform until after key legislators in both the House and Senate unveil their plans to reduce projected long-term deficits, according to administration officials." This isn't surprising, given the political risks involved with engaging on Social Security reform and the desire of some Democrats to use Social Security as an issue in the 2012 elections.

TPM reports that

At a roundtable meeting earlier this month, a senior Treasury official described the landscape to about a dozen reporters and bloggers. The optimal moment for President Obama to substantively weigh in on Social Security reform proposals, the official said, will come when House Republicans unveil their budget resolution for fiscal year 2012 and a bipartisan working group in the Senate unveils its deficit reduction package, assuming they reach an agreement.

Those two proposals will force Republicans to grapple with the tensions between their broad opposition to increasing federal revenues and their professed goal in these discussions of reducing the deficit. It's put them in a bit of a box, the official said, and it's possible they may abandon their efforts, and lay the blame at Obama's feet, before unveiling anything. But if their efforts are serious, Obama's economic team sees an opening -- to take pressure off the non-defense discretionary portion of the budget, and to send a signal to markets that the U.S. government isn't so paralyzed that it can't address larger, looming fiscal challenges.

While it's understandable that the administration would wish to wait to gauge the lay of the land before engaging, this forgets the President's ability to shape the lay of the land by showing leadership on the issue. If the administration makes clear its seriousness to both Republicans and Democrats in Congress – a large group of whom now seem intent on trying to make progress on entitlements and the budget – that may spur these groups on toward compromise and harden their resolve against the inevitable pressures to kick the can down the road.

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Thursday, March 17, 2011

Gokhale and Schoenbrod : OMB must release budget numbers

The Cato Institute's Jagadeesh Gokhale and AEI's David Schoenbrod write for Politico that the White House should release the data behind its long-term budget projections:

President Barack Obama says he wants an "adult conversation" about the budget. He also wrote that the "administration is committed to creating an unprecedented level of openness in government." This commitment was in his first official action as president: a memorandum on "transparency and open government."

Yet the White House's Office of Management and Budget is keeping secret the detailed and long-term budget projections and parameters that it uses to forecast the deficit in future years, unlike the previous administration--which divulged this information yearly.

I think they have a point. Last year, I argued that – for the first time – OMB was ignoring the health care cost growth estimates made by the Medicare actuaries and trustees in favor of numbers that favored their arguments for health reform. The FY 2011 budget assumed that Medicare costs would grow at a rate 2 percent faster than GDP, versus the Medicare Trustees figure of "GDP plus 1." The FY 2012 budget assumes a Medicare growth rate of GDP plus 0.3 percent, far lower than the historical rate. This obviously results in a far more favorable long-term picture.

There's a difference between these two numbers, however: the first is essentially an estimate of the growth of health costs in the economy as a whole, which is then projected onto Medicare to determine the increase in program outlays. The second, lower cost growth estimate is the result of constraints placed on Medicare outlays as part of the health care reform act. In other words, it doesn't imply that we've actually solved the problem of rising health costs – that we've "bent the cost curve," as they say – so much as simply assumed that Medicare will no longer pay for them. As the Medicare actuaries have pointed out many times, this leads to significant problems down the road as providers find that Medicare compensation rates won't be sufficient to cover their costs. If providers start refusing to give Medicare coverage – a problem that already occurs for Medicaid recipients – that would truly lower costs, since retirees wouldn't get the care they need, but I don't think that's what anyone, including the administration is looking for. So in the end, health reform is sure to need to be revisited.

But I think this issue buttresses Gokhale and Schoenbrod's argument for the administration to release more data rather than less. Past administrations have done so and there seems little reason this one should not follow suit.

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Should Social Security continue to be funded only by the payroll tax?

At, the New America Foundation's Michael Lind makes the argument that the current practice of funding Social Security only through payroll taxes is a major impediment to enacting reform:

The almost certain lack of political support for major benefit cuts and/or major payroll tax increases means that the shortfall in Social Security revenues cannot be solved according to the assumptions underlying today's bipartisan debate. The assumptions of the debate must therefore be changed. At some point in this century, Social Security must be funded by both the payroll tax and another stream of tax revenue.

Although the architects of Social Security in the 1930s assumed that general revenues would become necessary at some point, most liberals and conservatives today oppose the idea of making up the future Social Security payroll tax shortfall with other taxes. Liberals are afraid that weakening the link between payroll tax contributions and benefits would undermine the legitimacy of Social Security. Conservatives don't like the notion of shoring up Social Security with non-payroll tax revenues because they would prefer to abolish Social Security altogether, for reasons of right-wing ideology. Failing that, they prefer to use the inadequacy of the payroll tax as an excuse to shrink the program as much as they can, in the name of "saving" it. 

There is, of course, the possibility that – in addition to conservatives "right-wing ideology" – they actually share some liberals concerns that shifting away from the payroll tax will make Social Security appear more like a "welfare" program, as well as undermining the financial discipline that a dedicated tax provides. But Lind nevertheless makes a good point. Whether the pros of shifting away from solely payroll tax funding outweigh the cons, I don't know, but it's something worth thinking about.

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Coburn: “We Will Need Honesty to Solve Debt Problem”

Sen. Tom Coburn (R-OK) over at

I voted to force the Senate to take up the Deficit Commission's recommendations along with Senators Kent Conrad (D., N.D.), Mike Crapo (R., Idaho) and Dick Durbin (D., Ill.) because we all looked at the same demographic problem and agreed Congress cannot keep kicking the can down the road.

Democrats are right that there are other areas of the budget that have a greater impact on the deficit. But if we can't talk honestly about Social Security, how will we ever deal with Medicare, which is facing a far more serious shortfall?

Check it out here.

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The Economist: What can be done about rising disability costs?

The Economist has a good review of what's driving disability costs upwards and what people are thinking to do about it:

Ageing would seem another obvious explanation, as those aged 50-64 account for almost 60% of DI awards. But the rolls grew quickly even when the share of 50- to 64-year-olds was steady, according to David Autor of the Massachusetts Institute of Technology and Mark Duggan of the University of Maryland. Obesity does not seem to be the main cause either. Beneficiaries claiming problems such as diabetes and heart disease comprised a sliver of the awards in 2009.

A more likely culprit is the programme's structure. Messrs Autor and Duggan show that DI awards have become more attractive to those struggling in the labour market. Those awards, meanwhile, have become more accessible. In 1984 Congress made it easier for DI applicants to claim mental illness and musculoskeletal disorders such as back pain—both inherently subjective ailments. In 2009 these two conditions accounted for 22% and 31% of DI awards, respectively, about double their share in 1981. Even if an applicant does not meet DI's basic medical requirements, he may eventually win payments for other reasons. DI's rules, for example, allow an older worker unlikely to retrain to get benefits instead. Persistent applicants can seek the help of lawyers. Of those who appeal their case to a judge, almost 90% are successful.

Given DI's design, it should come as little surprise that enrolment jumps during recessions. Till von Wachter of Columbia University offers three explanations. First, impaired workers may be among the first to be sacked. After they are laid off, they may find that they qualify for DI, as is the case for many of Mr Scully's clients. Second, DI's criteria explicitly include economic factors, such as the ability to retrain. Third, those desperate for cash may use more subjective criteria, such as mental illness and "bad back", to try to win benefits. Many will fail, but they can appeal.

Read the whole article here.


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Wednesday, March 16, 2011

Who Will Win the White House Social Security Split?

The Hill
reports that "Social Security reform is splitting President Obama's economic and political advisors." The president's policy team, including Treasury Secretary Timothy Geithner, National Economic Council Director Gene Sperling, and National Economic Council Deputy Director Jason Furman, argue that now is the time to work with Republicans to craft a Social Security reform deal. Ideally, they have argued, Social Security would have been addressed while Democrats still controlled the House, but now is better than never.

In the other corner stand President Obama's political advisors, including David Axelrod, David Plouffe, and Jim Messina, who argue that "backing benefit cuts could prove disastrous to his 2012 reelection hopes."

Which side will win?

Please. While I am rooting for the pro-reform camp, which has the better of the argument, who thinks that President Obama would put a bipartisan deal to address a large and looming entitlement shortfall ahead of his own electoral prospects?

Remember, this is the guy who started his primary campaign for president stressing the need to address a Social Security "crisis." Then, after some pushback from the Left, he clammed up and ruled out everything except for tax increases on the rich.

Obama then entered office talking up the need for a Social Security reform commission. After pushback from the Left, he put the commission on ice.

Later, to defend against GOP charges of budgetary mismanagement, he brought the fiscal commission back from the dead. But, again after pushback from the Left, he promptly ignored the bipartisan commission's deal on Social Security reform, which included sign-on from Senator Dick Durbin (D-Illinois) on the left and Senator Tom Coburn (R-Oklahoma) on the right.

See a pattern here? For what it's worth, President Bush was at least willing to talk about things he and the Republican base didn't like, such as increasing the Social Security tax "cap." Agree or disagree (count me in the latter camp), Bush at least showed some leadership. President Obama? Not so much.

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Tuesday, March 15, 2011

Krauthammer vs Lew on Social Security

In the Washington Post, columnist Charles Krauthammer took issue with OMB director Jacob Lew's claims that Social Security was safe for a generation due to assets held in the trust funds:

The pretense is that a flush trust fund will pay retirees for the next 26 years. Lovely, except for one thing: The Social Security trust fund is a fiction. If you don't believe me, listen to the OMB's own explanation (in the Clinton administration budget for fiscal 2000 under then-Director Jack Lew, the very same). The OMB explained that these trust fund "balances" are nothing more than a "bookkeeping" device. "They do not consist of real economic assets that can be drawn down in the future to fund benefits." In other words, the Social Security trust fund contains - nothing.

On the OMB's blog, Lew responded:

Krauthammer is correct when he writes that there is no "lockbox" that keeps the money sent in by workers for until they retire. By design, when more taxes are collected than are needed to pay benefits, funds are invested in Treasury bonds and are held in reserve for when revenue collected is not enough to pay the benefits due. Yet these Treasury bonds are backed by the full faith and credit of the U.S. government in the same way that all other U.S. Treasury bonds are, making them anything but "worthless IOUs" as Krauthammer suggests. The government has just as much obligation to pay back the bonds in the Social Security trust fund as we do to any other bondholders.

This back-and-forth plays off a predictable misunderstanding regarding the trust fund: it is, as Lew says, an asset to Social Security. It also is, as Krauthmammer says, a liability to the rest of the government and, by extension, the taxpayer. So while we can't say that the trust fund is worthless, in the sense that benefits will be cut today because the system is running cash deficits, we also can't say that it makes taxpayers' job of funding Social Security benefits any easier.

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Monday, March 14, 2011

Is Social Security Middle-Class Welfare?

I must be getting soft in my old age, but – over at The American – I say no.

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Friday, March 11, 2011

Rep. Lummis introduces Social Security plan

Rep Cynthia Lummis of Wyoming has introduced a Social Security reform plan that would gradually increase the full retirement age from 67 to 70 for individuals born today. Here's how it would affect individual by current age:

  • Today's 50-year-olds and those older: NO CHANGE FROM CURRENT LAW
  • Today's 49-year-olds – Retirement age increase: 1 month
  • Today's 35-year-olds – Retirement age increase: 1 year
  • Today's 19-year-olds – Retirement age increase: 2 years
  • Today's 4-year-olds – Retirement age increase: 3 years

Click here to read an AP blurb on the plan.

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