In his new lengthy book, Stress
Test, former Secretary of the Treasury Tim Geithner has a brief passage
concerning a White House official (Dan Pfeiffer) suggesting he say that Social
Security does not “contribute to the deficit” on the Sunday morning network
talk shows. Geithner refused because, in his view, Social Security “wasn’t a
main driver of our future deficits, but it did contribute.” While this is a
brief passage in a book which focuses on financial crises and not Social
Security, conservative commentators jumped all over this, some
even saying that the White House encouraged Geithner to lie.
The debate over whether Social Security contributes to the
deficit is uninteresting once one understands what is in fact going on, but it is
representative of public policy advocates of various stripes taking advantage of
a confusing subject in order to score political points rather than trying to
clarify the issue while making a cogent argument.
The first thing to notice is that what Geithner writes is
ambiguous and vague. For example, he does not clarify what deficit he or
Pfeiffer are referring to. If it is the on-budget deficit, Pfeiffer is correct,
since Social Security receipts, including interest payments from the Treasury,
are higher than expenditures. It is nonetheless true, that if you net out
intragovernment transfers, such as interest payments to government trust funds,
as is done in the unified budget, Social Security then contributes to the
deficit as measured in the unified budget in the sense that currently its
expenditures are higher than its receipts with interest payments excluded.
The ambiguity, though, is worse than that. Note that
Geithner does not take a position on whether Social Security was currently
contributing to the “deficit,” but rather that it would “contribute” to “future
deficits.” This does not make much sense. If the discussion with Pfeiffer was
taking place in 2011, as
Fox News indicates it was, then Social Security was currently running a
deficit if one did not include its
interest payment receipts of $114.4 billion. If deficit refers to the
on-budget deficit, then Social Security will deplete its funds in 2033
according to the latest
report of the Social Security trustees. (The Disability Insurance fund will
be depleted in 2016 according to the Report, but it seems to be a common
assumption that Congress will solve this by transferring funds from the other
Social Security trust funds.) However, under current law, this does not mean
that Social Security would increase the on-budget deficit; rather, it means
that benefits would be cut, perhaps by 25 percent. That, of course, is unlikely
to happen, because the political costs to any Congress or Administration of letting
that happen would be too great. Geithner does not say, though, that he is
making a political forecast. In fact, in an attempt to minimize the minor
political damage he apparently inadvertently inflicted on the Obama
Administration, he indicated to Fox News that he is just speaking about math: “Asked,
though, whether Social Security does contribute, he said: ‘To the long-term
fiscal problem? Yeah, because, as is obvious, it's just a math thing.’”
Michael Hiltzik, a liberal columnist for the Los Angeles Times, weighed in on the
Social Security budget deficit with a
column criticizing both Geithner and conservative commentators for not
understanding that Social Security does not contribute to the budget deficit. Of
course, he is talking about the on-budget deficit and does not mention the
projections of the Social Security trustees that benefits will have to be cut
in about 19 years absent any changes in the law.
Hiltzik’s column did not sit well with Andrew Biggs, who
works at the American Enterprise Institute. He wrote a blog
post on this, attacking what Hiltzik had written. While it is clear from a
post he wrote in 2012 that Biggs understands the distinction between the
on-budget and unified budget deficit, he does not explain that distinction in
his attack on Hiltzik, though he does refer to places where he has written
about it. He also seems to think that quoting Charles Blahous, a Republican who
is currently one of the two public trustees for the Social Security trust
funds, asserting that Hiltzik is “flat wrong” settles the matter. That is an
assertion, not an explanation.
What Biggs does not recognize is that when Social Security
was running a surplus, whether or not you included interest, there were some who
argued that it should not be included in the budget deficit because it masked
future liabilities. He does seem to indicate some sympathy to the view, though,
that the Social Security surpluses were spent not saved.
Hiltzik subsequently
responded to Biggs, arguing that it is legitimate to include interest when
determining whether Social Security is contributing to the deficit. If you have
had the patience to follow this, you can see why I think this whole debate is beside
the point. The real issue going forward is what level of benefits do we want
Social Security to pay and, if the current level of payroll taxes along with
the accumulated trust fund assets built up in prior years are insufficient to
finance the preferred benefit level, then what changes are made to finance the
program.
It is mostly Republicans but also some Democrats who argue
that we need to reform Social Security now because it will be harder and more
painful if we delay. For example, Charles Blahous and Robert Reischauer, his Democratic colleague
on the board of trustees for the Social Security Trust funds, jointly wrote in a message accompanying the
release of 2013 Report:
“Social Security’s long-term income shortfall is now larger
than it has been at any point since before the landmark program reforms of
1983. The dates of projected depletion of each of its trust funds are unchanged
from last year’s report. It is important to grasp that the amount of time
remaining to enact a financing solution that is both reasonably balanced and politically
plausible is far less than the amount of time projected before final depletion
of Social Security’s combined trust funds. Toward that end, this year’s report
contains new illustrations of the magnitudes of benefit changes required if
lawmakers wish to preserve solvency without affecting current beneficiaries.
Importantly, even if a Social Security solution were enacted today and
effective immediately, it would require financing corrections that are
substantially more severe than those enacted in the 1983 program amendments.
Each passing year of legislative inaction reduces the likelihood that a
solution can be found that is acceptable to lawmakers on both sides of the
political aisle.”
Part of the reason for the hurry though is that most people
do not believe that there will be a 25 percent cut in benefits come 2033 or so
if no changes are made until then. James Kwak is persuasive in making the
case why we should not plan on this happen. Therefore, if benefit cuts are
part of what you advocate, you want to do this now before it becomes
politically impossible.
It is interesting, though, that some Democrats have
concluded that the best defense of Social Security is to go on the offense.
Most prominent among this group is Elizabeth Warren, but there are others, who
argue that Social Security should be expanded, not contracted.
Ultimately, all the accounting discussion is smoke which is
an attempt to hide the real debate. Some liberals, as well as some
conservatives, use arguments about accounting and current law to hide the real
issues when they argue about this. As for issues that are on the table, they
include removing the cap on payroll taxes, taxing more sources of income, and
reducing benefits, at least marginally, for high income retirees. There are
lots of other ideas out there, some better than others. One thing I would not
be in favor of is increasing the payroll tax rates. The Greenspan Commission of
the 1980s already succeeded in raising these rates too much, and as currently
structured it is a regressive tax, even if Social Security as a whole is arguably
not regressive.
There are, however, more pressing issues than Social
Security reform, which can be handled one way or another. A more serious
problem is the increasing share of the economy being devoted to the medical
sector because of demographics and health care inflation. Whether or not the
government is paying the costs through Medicare and Medicaid or private
insurance companies are paying the costs with the premiums they collect, this
is a burden on the economy that needs to be addressed. The Affordable Care Act
did not do enough in this regard. This is, though, a more difficult problem
than Social Security, and in the current political climate, there doesn’t seem
to be much likelihood of addressing it in any meaningful way.
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