Friday, May 23, 2014

Social Security and Budget Deficits: Michael Hiltzik v. Timothy Geithner and Andrew Biggs

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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