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Author: Andrew Samwick

Published on Leave a comment on Social Security Archive

I haven't found the hack in blogger.com that allows me to make subject-based archives automatically, so I am trying a manual alternative. Listed below are all of the posts that I have made about Social Security, in reverse chronological order. I'll update this post as the thread continues, and I have put a permanent link to this post in the sidebar to the right (after the monthly arhives).

UPDATE: This now represents the first set of posts. Part II of the archive is here.

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Published on Leave a comment on More on the Tax Treatment of Health Insurance

In a comment on my earlier post, Adam O'Neill points me to another article by Jon Gruber, this time co-authored with Michael Lettau,** that is relevant to my argument that a more rationale tax treatment of health insurance would replace the current exclusion* of health insurance premiums from income by refundable, progressive tax credits.

Quoting from the article (p. 1275):

[O]ur results imply that complete removal of the tax subsidy to health insurance spending would lead to about 15 million fewer workers being offered health insurance, and a total reduction in insurance spending on the order of 45 percent.

Note that this is a only half of the policy change that I discussed. Specifically, it does not incorporate the use of the new revenue to provide low-income workers with a refundable tax credit if and only if they spend it on health insurance. I conjecture that doing so would undo the reduction in the number of workers offered the insurance. Although I cannot speculate as to the magnitude of this offset, the Gruber-Lettau article also reports (p. 1286) that the probability that a firm offers health insurance is lowest when low-income workers are prevalent at the firm. This result obtains controlling for the tax subsidy to offering health insurance. By providing "use-it-or-lose-it" resources directly to the lowest earning groups, we increase the likelihood that they will join with higher earning workers to demand that the firm shift some compensation into group health insurance, even if the marginal tax incentive is gone.

*A comment on Brad DeLong's blog corrects my terminology--premiums are excluded from income. They are not a deduction, in the sense of an itemized deduction, from taxable income.

** My apologies to Michael--in the original post, I confused him with Martin Lettau.

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Published on Leave a comment on An Answer from Max

I think we are ready to close the books on the back and forth between Max/Dean and me on Social Security reform. We could go another round of long post/longer reply, but I think the issues have been laid out by both sides in enough detail. In particular, Max answers my challenge about how he would reform the Social Security system to remove the unfunded obligations. Here is the key excerpt:

Andrew challenges us to pick some time frame over which we can confidently project, reckon with the implicit debt in the program, and provide solutions. This is very easy to do, since I do not have to stand for public office. If backed to the wall, I would simply increase taxes to meet the estimated shortfall. A percentage point on worker and employer would probably do the job. Better would be to expand taxable payroll continuously by indexing the cap, or eliminating it altogether. Some increase in the retirement age along the lines suggested here by Andrew would not be out of the question, depending on the rest of the package. An expanded estate and gift tax could be dedicated to the trust fund.

The Trustees Report tells us that all of these measures would have to add up to the equivalent of 3.5 percent of taxable payroll (as it is currently defined) or 1.2 percent of GDP. I'll assume this is the size of the increase Max would levy, unless Max tells me why he thinks there is a bias (not just imprecision) in the projections that would cause it to be otherwise. Based on his response, I think it is safe to say that Max, "if backed to the wall," would endorse the Diamond and Orszag plan (with perhaps a few changes), which meticulously lays out a way to raise a lot more revenue and reduce benefits somewhat to restore solvency. I would be happy to see a legislative debate that put the Diamond and Orszag plan up against alternatives like this one, which restores solvency without additional revenues and which does not have personal accounts, and some others that restore solvency and incorporate personal accounts.

Why the reluctance on Max's part to have that debate occur? It seems like taking a particular side in a debate over the size and nature of government would be the core activity of an organization like EPI, where Max is affiliated, or CEPR, where Dean is affiliated. I know he is familiar with the old saying in Washington, "You can't fight something with nothing." (Jim Glass points us to George Will's discussion of the Democrats' current "do nothing" approach at his blog.) In the wake of the 2004 elections, it now appears that this issue is going to move. If the Democrats refuse to offer a plan of their own, then we may very well get the plan that the Republicans put forth with little modification. I would think that such a prospect would motivate Max and Dean to get involved sooner rather than later in a more constructive way than just "going to the mattresses."

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Published on Leave a comment on The Tax Treatment of Health Insurance

Brad DeLong is disappointed in Jonathan Weisman's recent Washington Post story on likely directions for economic policy during Bush's second term, motivated at least in part by CEA Chairman Greg Mankiw's speech at the American Enterprise Institute last week. I'm going to guess that the offending paragraph, in Brad's view, is this one:

The argument points to a certain truth about President Bush's free-market economic policies that Bush supporters say is unappreciated: In crafting a broad agenda for his second term, Bush is trying to adhere strictly to economic theory, perhaps even more so than during the Reagan administration's early battles over deregulation and taxes.

Brad goes on to point out elements of economic theory that would argue against removing the tax deductibility of employer-sponsored health premiums. I'll get to those in a minute.

I don't recall having met Jonathan Weisman while in DC, but I spoke to enough reporters to know the sort of assignment he may have had in writing about this: Mankiw gave a high-profile speech, in which he laid out some key issues and linked them with theory; so go get some alternative viewpoints and try to tie them together in a story to keep the discussion going. There are bound to be problems with a story that tries to string together viewpoints rather than, say, evidence. I don't envy the task of writing such a story--it's neither art nor science.

What Brad (and I) would like reporters to be good at is doing something like this, the first entry of which would lead to this paper by John Sheils and Randall Haught, which estimates the total cost of providing the tax-deduction to employer-sponsored health premiums and its distribution by income. In addition, we'd like for the reporters to know where to look for solid economic research, for example, by keeping up with this publication every month. Searching that page for the words "health insurance" leads to a summary of this paper by Jon Gruber and Ebonya Washington on the extent to which tax subsidies induce people to purchase health insurance.

Now we're ready to start talking about how to craft policy with an eye toward economic research. The question at hand is whether we can positively affect the market for health care by removing the tax-deductibility of premiums, or, more specifically, the differential tax treatment of premium relative to out-of-pocket expenses. The fact that premiums are deductible while out-of-pocket expenses are not (if they are not reimbursed by a flexible spending account) causes health insurance plans to have high premiums and generous first-dollar coverage of health expenses. At the margin, individuals and their doctors do not pay for the treatments that are undertaken. This should cause more treatments to be undertaken. This is the economic theory part. It is recognized by all of the sources in the article, and it is the "moral hazard" problem listed as #3 on Brad's list.

There are two ways to remove this distortion--by allowing both types of expenses to be deducted or by allowing neither type to be deducted. The introduction of Health Savings Accounts (HSAs) in the Medicare bill last year was a way to do it based on the former. I favor the latter. Here's why.

The deduction exists because there is a notion that the government ought to encourage people to get health treatments that they need. Deductibility is a terrible way to do this, on equity grounds. Take a look at Exhibit 1 in the paper by Sheils and Haught. It estimates that $209.9 billion of tax receipts are foregone in 2004 because of deductibility, with $188.5 at the federal level and $21.4 billion at the state level. Of the federal portion, $101.0 billion is due to the income tax deductibility, with another $66.4 billion due to exemption from the payroll tax for Social Security and Medicare. That's one large chunk of change.

Who benefits from this deductibility? Exhibit 2 in their paper shows that the average family with $100,000 or more in income receives a benefit of $2,780. Compare this to an average benefit of $1,231 for a family with $30,000 - $39,999 in income. Because tax rates are higher at higher income levels, and those with higher incomes are more likely to have coverage, the benefit goes up with income. Exhibit 3 in their paper estimates that, in the aggregate, the 14 percent of the families with incomes over $100,000 receive 26.7 percent of the federal tax benefits, compared to 28.4 percent of the benefits received by the 57.5 percent of the families with incomes below $50,000.

The portion of this disparity that is due to the progressivity of the tax system is ridiculous. Subject it all to tax, and take some portion of the $100 - $200 billion saved and use it to provide refundable tax credits to purchase health insurance, whether through an employer or an individual policy. The credits should phase out at higher income levels. (Credits offset a tax liability dollar-for-dollar. Deductions offset taxable income dollar-for-dollar, and are those more valuable to people who pay higher tax rates on that income.) This is a far more equitable way to use tax revenues (or their absence) to promote health insurance coverage, in addition to its efficiency consequences for reducing moral hazard.

Brad's concern, which is expressed in the other 4 pieces of economic theory that he says are relevant for the article in the Post, pertain to possible consequences of making such a shift. He writes:

The other four principles of economic theory strongly suggest that trying to push the country out of its current pattern of health-care financing into one in which individuals bargain one by one with insurers for their coverage would be a very bad idea.

It is worth pointing out that replacing deductions with credits as I have described does not necessarily push us to a situation where there is no group coverage. In fact, it may not be appreciably less of a group market than it already is. Would Dartmouth (or Berkeley), for example, now drop its group health coverage? Not a chance. Would the lack of a marginal subsidy to purchase health insurance cause the ranks of the uninsured to swell? Not if I am reading the paper by Gruber and Washington correctly. The authors estimate that a 10 percent higher tax subsidy for premiums increases voluntary take-up of health insurance by only 0.2 percent. This is a tiny response, and it seems reasonable to assume that it would also apply to a policy change that lowered a tax subsidy as well.

With the tax deductibility eliminated, we would have a more progressive means of offsetting health insurance costs across families and a more efficient means of delivering the care, since employers would have good reason to substitute toward plans in which employees pay more of their costs at the margin, for a given average cost.

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Published on Leave a comment on The Dean and Max Show

Dean Baker of the Center for Economic and Policy Research makes a guest appearance on MaxSpeak to continue the discussion about using the infinite horizon measure of Social Security's unfunded obligations. Dean is a frequent visitor to Capitol Hill and carries quite a bit of influence with people who are not interested in adding personal accounts to Social Security, so I am happy to have him along. His post is also provided as a comment on my last post on Social Security below.

First, Dean lays out the problem as he sees it:

Suppose that we write down a schedule of taxes and benefits in which the taxes stay constant as a share of GDP and the benefits rise at the rate of 0.1 percentage point a decade. Obviously this system will eventually run a deficit, and at some point a very large deficit.

This is effectively what we have done with Social Security. The reason the benefits keep rising through time is that life-spans are projected to increase for the indefinite future.

So far, we agree (see this post from October). Dean continues:

The question is, how do we think about a deficit over the indefinite future. The Social Security trustees give us projections over the program's 75 year planning period, which we know to be 0.73 percent of GDP over this period.

Andrew prefers the dollar measure (@ $3 trillion) and would have us look over an infinite horizon, which takes it to more than $10 trillion. The question is, how concerned should we be about the deficit that is projected beyond the 75-year projection period.

This is where we start to disagree. I would not refer to the 75 years as a "planning period." Here's how the 2004 Trustees Report defines its "long range" projections:

Long range

The next 75 years. Long-range actuarial estimates are made for this period because it is approximately the maximum remaining lifetime of current Social Security participants.

This definition has nothing to do with solvency or the accuracy of the projection. In fact, the Trustees are quite clear about whether we should be concerned about what happens after the 75 years. In Section II.D, they write:

Even a 75-year period is not long enough to provide a complete picture of Social Security's financial condition. Figures II.D4, II.D5, and II.D6 show that the program's financial condition continues to worsen at the end of the period. Overemphasis on summary measures for a 75-year period can lead to incorrect perceptions and to policy prescriptions that do not move toward a sustainable system. Thus, careful consideration of the trends in annual deficits and unfunded obligations toward the end of the 75-year period is important. In order to provide a more complete description of Social Security's very long-run financial condition, this report also includes summary measures for a time period that extends to the infinite horizon. These calculations show that extending the horizon beyond 75 years continues to increase the unfunded obligation, indicating that much larger changes would be required to achieve solvency over the infinite future as compared to changes needed to balance 75-year period summary measures.

This is why I prefer the infinite horizon measure. One should never use an average over a fixed period to summarize a series that has a trend over that period. The required increase in the payroll tax to restore solvency only over the first 75 years is 1.89 percentage points. Acknowleding the continued widening of the annual deficits over that period, the required increase is 3.5 percentage points over the infinite horizon. (See this table for the comparison.)

In my last post, I tried to give Max a way to be specific about a reform plan without relying on the specific calculation of the $10.4 trillion infinite horizon present value or the full 75-year horizon. I put the challenge this way:

Choose a projection period over which you feel confident in the accuracy of the underlying economic and demographic assumptions, subject to the constraint that it is long enough to cover the retirement of the baby boom generation. Provide specific reforms to the system such that the Social Security trust fund is positive and trending upward in the last years of that projection period. Do not use any gimmicks related to benefits or costs in those last few years.

This is very similar to what the Trustees suggest in the fourth paragraph of the Report:

In recent years the Trustees Report has characterized sustainable solvency as maintaining a trust fund balance that is positive and either level or increasing as a percent of the annual cost of the program at the end of the 75-year period. The report also provides measures of the financial status over the infinite future.

Why the difference in wording? As the Trustees acknowledge, all of the key economic and demographic assumptions reach their ultimate assumptions within the first 5 to 25 years of the projection period. For all practical purposes, they could define sustainable solvency as a postive and increasing trust fund at any year after the 25th.

And now Dean gets the same challenge as I put to Max. I'll look forward to seeing the specific proposals from both of them in their next posts on this topic.

Published on Leave a comment on The Employment Situation: November

This being the first Friday in December, the Bureau of Labor Statistics has released the Employment Report for November. Let's take a walk through the key numbers, most of which are provided in Table A in the summary.

1) The top line number is the change in nonfarm employment measured from the establishment (or payroll) survey in November. That came in at +112,000.

2) In each release, the data for the previous two establishment surveys are subject to revision. These revisions were -20,000 in September and -30,000 in October, so the total increase in nonfarm payroll employment in November compared to what was reported last month for October is 112,000 - 54,000 = +58,000, from 132,017,000 to 132,075,000.

3) Continuing with the establishment data, the workweek for private production or nonsupervisory workers fell from 33.8 to 33.7. This may not seem like much, but consider the following. Production and nonsupervisory workers account for four-fifths of nonfarm payroll employment. So every tenth of a decline in the workweek generates a reduction in labor utilization that is equivalent to:

(0.1 hour/prod worker) x (4/5 prod worker/total workers) x (132 million total workers) = 10.56 million hours

Since production and nonsupervisory workers averaged 33.8 hours per week, this is equivalent to a reduction in labor input equal to 10.56/33.8 = 0.312 million or about 312,000 workers. This more than outweighs the increase in the number of payroll jobs added (acknowledging that it is a bit of an approximation, given the rounding of the numbers to get the "four-fifths" and 0.1 numbers).

4) Finishing up the establishment survey, average hourly earnings for production or nonsupervisory workers increased by $0.01, to $15.83. This figure does not adjust for inflation, which would swing it to a decline. In addition, because of the reduction in the workweek, average weekly earnings for these workers fell by $1.25 to $533.47 (again before adjusting for inflation).

5) Turning to the household survey, the top line number is the unemployment rate. It fell by 0.1 percentage point in November, down to 5.4 percent of the workforce. However, this is rounding error again, since the change was really from 5.46 (rounded up to 5.5 in October) to 5.41 in November. Here's how the BLS (appropriately) wrote this up:

The jobless rate has been either 5.4 or 5.5 percent in each month since July. This is slightly below the rates that prevailed in the first half of 2004.

6) It is also of interest to see how the change in the unemployment rate occurred. It breaks down as: 439,000 more people in the labor force, due to higher employment of 483,000 workers and lower unemployment of 45,000 workers. There were also 209,000 fewer people "not in the labor force." The employment-population ratio and the labor force participation rate increased by 0.2 percentage points each, to 62.5 and 66.1 percent, respectively.

7) Note that the household and the establishment survey will often measure different numbers for the change in the number of people employed (here: 483,000 vs. 112,000). Part of this is due to different samples (e.g., household survey includes the self-employed, establishment survey counts multiple job holders). The rest is that they are both estimates of an underlying population number. In general, the establishment survey is to be preferred for the purpose of counting the change in the number of jobs, because that number is estimated more precisely in the establishment survey (it's a bigger survey and it uses administrative data).

8) We also care about the nature of unemployment. In a set of earlier posts (the last one is here), I discussed alternative measures of unemployment. The broadest one included all people who are not in the labor force (i.e., not actively looking for work) but who do "want a job." This group fell from 5,345,000 to 5,118,000 between October and November. If we reclassified them as unemployed (and thus in the labor force), this augmented unemployment rate would have fallen by about 0.2 percentage points, from 8.8 to 8.6 percent.

There are certainly other elements of the report to explore, but these are the highlights in my view.

To summarize, the top line number is payroll jobs, which came in positive but weaker than expected. Combined with a reduction in the workweek and small downward revisions to previous months, this is not a strong report. It shouldn't put any upward pressure on interest rates, via the pace of the Fed's tightening or the market's reaction. The information from the household survey was more positive, but month-to-month changes in the household survey are less reliable.

You can read media coverage at WSJ.com($), as well as see some video from CNBC's broadcast with alternative views (Mankiw, Zandi, Wessel).

UPDATE: Elsewhere in the blogosphere, the employment release is being discussed by Angry Bear, Econopundit, Macroblog, and Wizbang.

Published on Leave a comment on Spread the Love … Field

Via Roland Patrick, I learn of Virginia Postrel's woes in trying to book a non-stop from Dallas to Philadelphia (to attend next month's AEA meetings, no less). At issue is the Wright Amendment, which limits the states to which an airline can fly from Love Field in Dallas. Note that it is not limiting the size of the planes (which are regulated by a local ordinance)--only the destinations. Sadly for Ms. Postrel, Pennsylvania is not among the privileged states, and so she cannot avail herself of Southwest's new low fare, non-stop service from many of its airports to Philly.

If you can believe it, this legislation was designed 25 years ago as a protective measure for Dallas-Fort Worth Airport, which is so "punctuality-retardant" that Southwest opts not to fly there, despite the restrictions at Love Field. After citing a number of studies that show just how important Southwest is to ensuring competitive fares in a market, Virginia gets to the real issue at hand:

The Wright Amendment offers an excellent test of Texas politicians, including the Bushies: Are they just crony capitalists? Or are they pro-market, pro-growth, and pro-consumer? For the past 25 years, the consistent answer has been "crony capitalists," more interested in protecting DFW Airport and American Airlines than in letting market competition serve the public (including a lot of Dallas businesses). A few politicians, including Rep. Pete Sessions, have come out for repeal. But, astoundingly, Dallas Mayor Laura Miller is defending the federal law that puts her own city at a competitive disadvantage. Or maybe it's not so astounding. It's Texas politics as usual.

In one of my earliest posts, I explained why I think Southwest's business model is superior to that of the so-called major carriers. It bears repeating: Southwest's market value is about the same ($12.6 billion) as the total market value of every other domestic airline. Check it out for yourself.

And then join the movement to repeal the Wright Amendment. Free trade begins at home.

Published on Leave a comment on 2004 Weblog Awards

Brought to us again by Wizbang, it is time for the 2004 Weblog Awards. On occasions such as this, I recall the three questions of Rabbi Hillel:

If I am not for me, who will be?
But if I am only for me, what am I?
And if not now, when?

Vox Baby is a contestant in the "Top 2500-3500" category. I am grateful for any votes that come my way, as I am for readers, comments, trackbacks, and links.

More importantly, this is a great opportunity to find some additional blogs to add to your regular or occasional reading. It was nice to find some new blogs that I haven't yet read, listed in a host of categories by topic and by size.

And remember that the voting period ends on December 12, so by all means, start now.

Enjoy!

Published on Leave a comment on Commerce and Agriculture

On Monday, the President nominated Carlos Gutierrez, CEO of Kellogg, to be the next Secretary of Commerce. From all accounts, Mr. Gutierrez is a wonderful American success story and an exceptional businessman. He breaks a pattern of promoting from within and seems to have had few ostensible ties to Republican politics. My hope for our new Secretary is that he is an advocate of free trade and not particularly beholden to interests groups like the National Association of Manufacturers, who in my view look to the government way too often for trade protection. I'll watch his confirmation hearings with that in mind.

Today, the President nominated Mike Johanns, Governor of Nebraska, to be the Secretary of Agriculture. He is not an insider and also seems like a successful executive. My hope for our new Secretary is that he is up to the task in two key areas. First, I am concerned that we are not moving fast enough to identify and contain mad cow disease and otherwise protect the food supply from disease. A lot of the remedies (like more testing of the herds) would act like a tax on beef production. Not a popular policy for the governor of Nebraska. Second, I want all tariffs and other barriers to the import of sugar from other countries to be eliminated. These barriers are a giveaway to the corn industry, and they are, in my view, the reason why we are lagging in our development of ethanol as a renewable fuel source. We should be making it out of Brazilian sugar, not import-protected domestic corn, at a much more competitive price. Again, dropping these barriers would seem to be a tough sell for the governor of Nebraska. This particular endorsement doesn't make me too optimistic, but I'll reserve judgement until I see the new Secretary in action.