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You have to get up pretty early in the morning to beat Mark Thoma to the blog. He's already got links, excerpts, and commentary on the recent White House and Treasury officials statements on Social Security. The first key story is by Lori Montgomery in The Washington Post, in which Treasury Secretary Paulson discusses how there are "no preconditions" on this round of Social Security reform discussions and OMB Director Portman says that the President wants to listen.

It also means that the White House is willing to listen to other ideas, administration officials said, including personal savings accounts that do not involve diverting Social Security taxes, as well higher payroll taxes to help cover a projected explosion in Social Security costs after members of the baby boom generation begin to retire in 2008.

"We're in a listening mode," said Rob Portman, director of the Office of Management and Budget, who has also been spending a lot of time since the election talking to key Democrats about entitlements. "The president wants to listen. He wants to hear what the leaders on Capitol Hill think is the best way to go. He's not wed to any particular approach."

The other story is by Jackie Calmes in The Wall Street Journal, in which Chief of Staff Josh Bolten's public statements are also being scrutinized:

Some listeners wondered whether Mr. Paulson was signaling administration willingness to quit prescribing the accounts. Administration officials privately said that wasn't the case. Still, a Treasury official said Mr. Paulson wants to approach the issue with an open mind and will suggest to lawmakers, "Why don't we start talking and see where we go, as opposed to prescribing things right away?"

Chief of Staff Bolten got a similar query about private accounts when he spoke last week before more than 100 people at a dinner of the board of the Brookings Institution, a policy think-tank. According to one attendee, Mr. Bolten "came as close as he could in a quasi-public setting to saying that carve-out accounts could be dropped if that were the price of reform." A second audience member supported that interpretation.

Paulson, Portman, and Bolten are the three Administration heavyweights on this--they all understand the issues involved. This is a very good sign.

Mark concludes his post as follows:

As far as I can tell, there's nothing new here. The administration is hoping that by giving in on other issues, it can get private accounts into place, but private accounts will not be dropped as part of any compromise. So long as that's the case, this is nothing but a waste of time, time that could be spent on much bigger problems such as reforming health care.

Here's what's new. The President used to go around the country making speeches of the form, "Social Security is in financial trouble. We need voluntary personal accounts." The speeches made no sense, as many people (like Mark) rightly pointed out. There is no connection between restoring solvency and voluntary personal accounts. (See this earlier post for a more extensive discussion.) The two themes of the speech did not connect.

The President's Commission did give him a plan that restored solvency and had voluntary personal accounts. The restoration of solvency came from gradual (and necessarily steep) reductions in benefits payable from the pay-as-you-go system. He couldn't sell it (or its variants, like progressive price indexing, another rhetorical nightmare) to the weak majorities in his own party that controlled the Congress.

Okay, it's a new day, with new leadership in Congress. The Administration cannot now presume to dictate the terms of the debate. The Administration essentially has to win one key point about the goals of the debate: that the standard for reform should be that under current projections, the final product achieve "sustainable solvency" for the system: a positive and rising Trust Fund balance at the end of the projection period. (See this earlier post for the grueling details.) Nothing short of that should be acceptable, because something short of that would require that the issue be revisited again, even if current projections are borne out (or exceeded).

If the Administration is going to adhere to this goal--and arguments against it will look pretty weak--then it can sit back and wait for personal accounts to be the outcome of the compromise, not a condition of the discussion. It's simple. If you are going to restore sustainable solvency, and you are not going to do it solely by reducing projected benefits, then you are going to need plenty of additional money to do it (note the statements about being willing to raise the cap on taxable earnings). Either the money goes in the Trust Fund or it goes into personal accounts. The former is too unreliable as a store of value (see this post). So you get personal accounts--not voluntary personal accounts unrelated to solvency, but mandatory accounts that facilitate the prefunding of future obligations that is essential to restore solvency without substantially lowering replacement rates.

The message to Democrats is as follows: go find a plan that achieves sustainable solvency without personal accounts and then we can talk. There is basically one plan that has been put forward that does it--Diamond and Orszag. There are plenty of ways to do it without personal accounts (see my early thoughts on it, or just take the Commission Model 2 and get rid of the personal account options).

The problem with these two starting points for political debate is that Diamond and Orszag rely too much on revenue infusions without cutting expenditures enough and the alternatives rely too much on expenditure cuts without raising much additional revenue. Other plans that are more centrist in their approach may be appealing. I suggest that they all start here.

So wonders James Pethokoukis in last week issue of U.S. News & World Report. After some background, he cuts to the "Let's Make a Deal" section of the article:

Striking a deal isn't an absolute impossibility. To prove that a bipartisan agreement is possible if the will is there, Maya MacGuineas, president of the Committee for a Responsible Federal Budget at the New American Foundation think tank, decided to run a little experiment last winter. MacGuineas, a former Social Security adviser to Sen. John McCain's 2000 presidential campaign, brought together Jeffrey Liebman, a former aide to President Clinton, and Andrew Samwick, a former aide to President Bush, to see if they could hash out a reform plan. Some 50 hours later, spread over several months, they had one. The proposal includes beginning to raise the retirement age to 68 starting in 2011, raising the maximum taxable earnings limit to $172,000 by 2017 vs. $94,000 currently, diverting 3 percent of payroll taxes into personal retirement accounts, and reducing spousal benefits for those married to high earners. The plan, already vetted by the Social Security Administration, would return the program to long-term fiscal solvency and create a personal account sweetener to boot. "It's doable," MacGuineas says. "We know what tough choices have to be made. And I think the country is more aware now that something has to happen."

But before anything like that happens in the real knife-fighting world of inside-the-beltway politics, "there is going to have to be an admission among Democrats that highlighting differences on the issue won't play well going into 2008," says Kim Wallace, political analyst at Lehman Brothers, "and a desire not to leave Social Security as an issue for the next president to solve."

Yet if Democrats believe that the next occupant in the White House will most likely be Hillary Clinton, Al Gore, or Barak Obama rather than John McCain, Rudy Giuliani, or Mitt Romney, they have every incentive to stall until 2009. Wallace also thinks that Democrats will be unwilling to work with the White House on the issue as long it continues to push for permanent extension of the 2001 and 2003 tax cuts, currently set to expire at the end of 2010. "Most Democrats think that is not a rational approach," Wallace says. At the same time, he predicts that the next Congress will be the last one able to avoid working on substantial Social Security reform because of the program's obvious and impending fiscal difficulties. Indeed, Social Security surpluses will begin shrinking in 2008 when the first baby boomers become eligible to start drawing checks, just in time for the Iowa caucuses.

Let's hope we get a do-something Congress after the elections, particularly if it's a "do-something-sensible" one at that.

Writing in the American Spectator this week, David Hogberg asks some good questions about how conservatives should react to the LMS plan and Social Security reform more broadly:

Since the LMS plan is a sincere effort at compromise, and since much of the left would still oppose it were Congress to seriously consider it, it would be worthwhile for those of us on the political right to contemplate just how much we would be willing to give up to achieve reform. Of most concern would be the increase in the earnings cap, a tax increase that would fall hard on small businessmen and women, some of conservatives' biggest supporters. Could we, say, accept a plan with only an add-on personal account in exchange for only a minimal rise in the earnings cap and the rest funded via debt? Or should we demand a carve-out in exchange for any increase in taxes?

I think the answer to the last two questions should be affirmative.

I would say that the most contentious issue at yesterday's AEI presentation was the issue of a "carveout," in which some of the revenues that would otherwise go into the Social Security trust fund are allocated instead to personal retirement accounts. You can hear this very clearly in David Certner's comments. It appears that this may be a "line in the sand" from AARP.

I acknowledge that this provision, or any provision that lowers the near-term trajectory of the Trust Fund, is a potential source of concern to AARP. A positive balance in the Trust Fund, though I do not believe it represents an amount by which the government has pre-funded future benefits, does give the Social Security Administration the ability to make benefit payments on time without any additional authorization.

PGL of Angry Bear asks about including a carveout in the LMS plan in a comment on a recent post:

It seems Max Sawicky was present asking his hard question(s) as he decided he was opposed to this plan. No real surprise, I guess - but Max is suggesting your plan would divert resources from the Trust Fund to the General Fund. As you may recall, I oppose any such diversion and I thought you agreed with this general proposition. Is Max confusing this issue - or do we disagree on this?

In the LMS plan, contributions of 3 percent of taxable payroll are made to PRAs, with 1.5 percentage points coming from an increase in the payroll tax and 1.5 percentage points coming from the Social Security system. The latter part is the so-called carveout. However, most (about 2/3 over the 75-year projection period) of that contribution is funded by raising the cap on the maximum taxable earnings level. The rest of it is funded by benefit reductions. We believe that we need PRAs of that size in order to get the right-of-center folks to support the plan.

But it is worth emphasizing that we are making very minor changes to the projected path of the Trust Fund. Tables 2 and 2a in the Actuaries' memo show that the Trust Fund is lower under our plan than present law from 2008 to 2031. During that time, the Trust Fund is always above 250 percent of annual payments. The Trust Fund ratio bottoms out for our plan at 134 percent in 2051 and rises thereafter.

The reductions in the Trust Fund ratios over the next 25 years seem to be a small price to pay to come to a compromise on a plan that, taken as a whole, greatly enhances the retirement security of future generations.

A webcast of yesterday's presentation of the LMS plan is now posted at AEI's website. I thought that the comments by Chuck Blahous and Jason Furman, who compared the plan to other reform proposals that have been put forward recently, were extremely insightful. I thought we held up pretty well, although it gets fairly contentious at the end.

CNN Money has a good summary, appropriately titled, "Social Security: a plan both parties can love (and hate)." Max was there, and I was happy to meet him in person. He's not a fan:

Note that under current projections, somebody's ox is gored in the future. My preference would be payers of income tax. Jeff is afraid it will be beneficiaries who are caught short without savings to replace abruptly lost benefits. This plan requires savings that replace any possible shortfall in future financing.

My reaction is reflected in my question, which you can hear in the video in the Q&A section. The frame for this is defined as a future shortfall that must be covered by some combination of payroll tax increases and benefit cuts, the sooner the better. Once you buy into that I think you're on the road to perdition. In defense of Liebman et al, the plan provides some security of retirement benefits that replaces the uncertainty of current circumstances.

If Max is content to let future generations of income tax payers pick up the slack (or that the projections are too pessimistic and thus less change is needed), then I can see why he doesn't like the plan. I think we are obligated to do something about the problem if we can see it today. To be very clear, this is not the only fiscal problem we are passing on to the next generation. Medicare should have been pared back, not expanded with an unfunded prescription drug benefit. The on-budget deficit should average to zero over a business cycle. I don't support these policies and am not pleased that they are being implemented.

But this is the long-term fiscal problem that is most readily solved if people can find ways to compromise on the method by which it is solved. We think the plan is a step in that direction and hope that a coalition can be formed to move it forward.

A reminder to those in the DC area: Jeff, Maya, and I will be presenting our Social Security plan at the American Enterprise Institute on Monday at noon. Discussing the plan will be Kent Smetters, Jason Furman, John Rother, and Chuck Blahous. Moderating will be Doug Holtz-Eakin A description of the plan and the Social Security Administration's evaluation can be found here. The Congressional Budget Office's report on the plan can be found here.

Jeff, Maya, and I will present our Social Security reform plan at noon on Monday, June 19, at the American Enterprise Institute. Here's the lineup:

The three authors of the proposal will present their plan, which will then be discussed by a panel of experts, including Charles P. Blahous, special assistant to the president in charge of Social Security policy at the National Economic Council; Jason Furman, director of economic policy for the Kerry-Edwards 2004 presidential campaign; John C. Rother, director of legislation and public policy for the American Association of Retired Persons (AARP); and Kent Smetters, AEI visiting scholar and an associate professor at the Wharton School. Douglas Holtz-Eakin of the Council on Foreign Relations and former director of the Congressional Budget Office will moderate.

Register for the event and stop by if you are in DC that day. Thanks to Phill Swagel for setting up the panel.

I'll be giving a lecture this evening in Cleveland about Social Security Reform. For those in the area, the details are:

Date: Thursday, March 16th
Time: 7:30 p.m. Refreshments, 8:00 p.m. Lecture
Place: University School, Lower School Campus, 20701 Brantley, Shaker Heights
Cost: $8 for non-students; free for students
More Info: Kent Mann

Hope to see you there.

Frequent commenter bakho points out that the President's Budget includes modifications to the Social Security system that look like personal accounts plus progressive indexation of benefits:

The President has proposed reforms to address the system’s long-term financial shortfall while making Social Security a better deal for today’s young workers. Under the President's approach, Social Security would include voluntary personal accounts funded by a portion of workers’ payroll taxes. The 2007 President’s Budget includes the estimated impact from the creation of personal accounts. The accounts will be funded through the Social Security payroll tax. In the first year of the accounts, contributions will be capped at four percent of Social Security taxable earnings, up to a $1,100 limit in 2010, increasing by $100 each year through 2016. The President has also embraced the idea of indexing the future benefits of the highest wage workers to inflation while providing for a higher rate of benefit growth for lower-wage workers. This measure would significantly contribute to the solvency of the system. By adjusting the way benefits are calculated, progressive indexing would eliminate nearly 70 percent of annual cash shortfalls by the end of the Social Security Trustees' long-range (75 year) valuation period, trending towards greater improvement thereafter. Because progressive indexing would index benefits for lower-wage workers to wage growth, which generally grows faster than inflation, benefits would grow faster than the poverty level. This will keep a greater portion of future seniors out of poverty than today.

By adopting progressive indexing and allowing young workers to create voluntary personal retirement accounts within the Social Security system, the President’s recommendations would provide future seniors with real money instead of the current system’s empty promises. Indexing benefits partially to inflation rather than wages allows the Government to save significant sums in future decades, money that would be used to maintain faster benefit growth for low-income seniors. Without Social Security reform, benefits for future seniors will have to be cut about 30 percent across-the-board.

I have taken issue in the past with some of the language being used here--a presumption that the poverty level grows only with prices and not with wages and referring to the "empty promises" of the current system. But I still like this plan relative to the status quo (though not relative to the LMS plan).

Writing in today's Washington Post, Allen Sloan discusses the financial impact of the proposal:

Unlike Bush's generalized privatization talk of last year, we're now talking detailed numbers. On page 321 of the budget proposal, you see the privatization costs: $24.182 billion in fiscal 2010, $57.429 billion in fiscal 2011 and another $630.533 billion for the five years after that, for a seven-year total of $712.144 billion.

I view this as a positive step. If the President is serious about the proposal, it should be in his Budget. His Budget is not the law, but at least it gives other policy makers a more concrete place to start, and it competes with other budgetary initiatives for those years. The next step is to specify it in enough detail so that the actuaries at the Social Security Administration can evaluate its long-term effects as a standalone plan, as they have done for other proposals here. Like bakho and Sloan, I share the surprise of having to uncover this in the Budget, rather than hear about it in the State of the Union address.

So goes the title of the latest Econoblog, where Mark Thoma of Economist's View and I discuss the changing resources and expectations of social insurance. The teaser:

For many years, workers could manage their medical expenses with employer-provided health insurance and Medicare and look forward to underwriting their golden years with payments from a defined-benefit pension and Social Security.

But the landscape of social insurance is shifting. Many large corporations are moving their employees from traditional pensions to riskier 401(k)s and asking workers to pay more out of their own pockets for health insurance. At the same time, Social Security and Medicare, the two venerable entitlement programs, are facing growing demographic strains as the vast baby boom generation reaches retirement age.

The Wall Street Journal Online asked economist bloggers Mark Thoma and Andrew Samwick to explore how we how arrived at this point and discuss what workers and retirees might expect in the future, as the composition of the social safety net continues to shift.

Thanks to Mark for exchanging ideas. Enjoy!