Category: social security

In some comments on a post last month, Bibamus makes the following observation about the Social Security reform debate:

Part of the problem with this whole debate is that so many different people are in it for so many different reasons. While there are a thousand different bad arguments for privatization (more than a few with Luskin's name to them), it seems to me that there are at least three good ones, where by 'good' I mean intellectually consistent - not necessarily convincing (to me):

(1) Arguments related to pay-as-you-go Social Security's depressing effect on saving.

(2) Arguments related to the inability of the government to pre-fund its Social Security liabilities.

(3) Arguments related to 'freedom to chose' type beliefs, such as the one that Mankiw makes in his response to BDK.

There may be more but these are the ones that occur to me at the moment.

Stepping back from the details of the present debate, #3 is the most compelling argument. If you believe in limited government, as I do, then you would support a Social Security system that is no bigger than it has to be in order to keep seniors out of poverty induced by chance events. That means that the system would pay a flat benefit as an annuity at the poverty level--and no more. Individuals would then be free to choose how they wanted to prepare for their old age (or not), in accordance with their own preferences. But, as Bibamus noted, the current debate really isn't taking place along these broader themes, and so Mankiw's remark may have seemed out of place.

I first got into research on this subject based on a combination of #1 and #3, where #1 would be augmented to include distortions to the labor market as well as the capital market. In the current debate, a review of the archives would suggest that I am pre-occupied by the projected insolvency and that most of my arguments are motivated by #2. I don't think there is any way to suggest that the government could pre-fund future obligations through running surpluses inside the Social Security system over any sustained period. Whatever lockbox there is has 536 keys, but more importantly no lid.

For me, the debate is becoming less and less about philosophy or efficiency, and more about the inequity of passing such large burdens off to future generations of taxpayers. I freely acknowledge that this burden is coming not just from Social Security, but the growth of Medicare and the inability of the government to balance its budget. A sensible fiscal policy would have the on-budget deficit sum to zero over the business cycle and all long-term entitlement programs to have zero projected long-term actuarial deficits.

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I have been thinking for a while about why the President is gaining such little momentum in his efforts to promote Social Security reform. One reason that is underappreciated, in my opinion, is the disconnect between how reform is being motivated and how it is being designed. Take a look at this website, which is the Treasury Department's guide to Social Security reform and matches up pretty well with what the President has been saying on the road.

The motivation for reform is the projected insolvency of the system--whether you think about it in terms of Trust Fund exhaustion (in 2041), a long-term actuarial deficit (1.92% of taxable payroll), or, as I do, a permanent actuarial deficit (3.5% of taxable payroll). The "Need for Action" page of the Treasury's website characterizes the financial challenge reasonably well and reiterates some of the President's principles for reform. So far, we're doing fine.

But then it finishes with a section titled, "Voluntary Personal Retirement Accounts Are An Important Part Of Comprehensive Reform." This is where it gets confusing. Voluntary accounts, as they are structured here, may in fact be an improvement to the system (more on this below), but they do not necessarily do anything for solvency. Okay, some of you sharp-eyed readers will note, this part of the page doesn't actually say that PRAs do anything for solvency, only that they are important for the reform to be comprehensive. But what in the world is it doing on a page devoted to the "Need for Action?"

This is the disconnect. The personal accounts--which seem to get the lion's share of the coverage and appear to be the only specific component of the reform that the President will discuss--are not structured to address the reason why we are being told reform is necessary--to restore solvency. That isn't helpful, and it is probably confusing a lot of people.

Because the accounts are voluntary, people who choose them have to give up something in return. What they give up is a portion of their benefits relative to those who do not opt for the accounts. As has become standard since the 2001 Commission, future benefits are reduced by the value of all of the diverted payroll taxes, compounded at some low interest rate. In the current discussions, that interest rate is 3% after inflation. This is the projected long-term rate on Treasury bonds held in the Trust Fund (subtract the CPI inflation rate of 2.8% from the nominal interest rate of 5.8%). It would be better specified as the actual Treasury bond rate (so that stocks only had to perform better than bonds, not some absolute level), but that's a minor point in this context, so let's just assume that the two are equivalent for most of what follows.

In order for the the accounts to help with solvency, in the sense of lowering the $11.1 trillion unfunded obligation (over the infinite horizon), the rate at which contributions to PRAs offset the traditional benefit has to exceed the projected Treasury rate credited on the Trust Fund's balance. People opting for a PRA would then allow the Social Security system to earn a higher rate of return on its loans to them than it does on its "line of credit" to the rest of the government.* No one is suggesting that the offset rate will exceed the Treasury bond rate (except indirectly, if the 3% real offset rate is higher than what the Treasury rate will turn out to be), and thus no one is proposing a voluntary account that helps directly to restore solvency.

What about the Administration's explicit claim that voluntary accounts are an "important part of reform," now modified to exclude any connection to solvency? As a start, an economist looking at the financial aspect of the program would say that they do improve efficiency. Currently, there are people who do not save for retirement beyond what they expect from Social Security. As a result, they have little financial net worth that they can invest in equities. Suppose that they would be in this position after the Social Security is reformed to restore solvency. (More would be in it if solvency were restored through higher payroll taxes, and fewer would be in it if solvency were restored through lower future benefits.) The availability of a loan to invest in the stock market that has an interest rate of the Treasury bond (or even a bit beyond) can be appealing to people who currently do not save enough to be in the stock market on their own and are unwilling to borrow at market interest rates to invest in equities.

So the potential improvement from voluntary accounts is that they allow more people to be in the market, thus improving efficiency of risk-bearing according to any neoclassical model of economic decision-making. This may not be a big effect, either for the market or any one individual. (I should investigate this in the Survey of Consumer Finances at some point.) And none of it derives from people like me, who are already saving enough on their own to have already decided how much equity and bonds they want in their portfolios.

To summarize my views:

1. The Administration is motivating reform correctly, based on the need to restore solvency to the system.
2. What we have seen of the Administration's plans for reform involves reductions in the growth future benefits that would appear to restore solvency.
3. The Administration is trying to build a consensus for reform by selling the idea of voluntary personal accounts.
4. That people cannot figure out how #3 is connected to #1 is one reason why the process appears to be stalled.
5. Voluntary accounts can improve the efficiency of risk-bearing in the economy, but this is also not connected to #1 and is not a part of the Administration's rhetoric.
6. The importance of personal accounts to Social Security reform remains their ability to protect current surpluses from being spent (as discussed in yesterday's post) and to allow investments in equities of a sufficient magnitude to meaningfully restore solvency (as discussed in this earlier post).

*For more on this issue, see Peter Orszag's Congressional testimony. Peter also notes that if the accounts are sufficiently large, not all loans will be repaid, further reducing the PRA's contribution to solvency. Subject to the caveat about the legal purpose of the Trust Fund I noted in this post, I am not sympathetic to Peter's other criticisms of PRAs.

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Periodically, an economist working on Social Security reform has to try to succinctly explain to non-economists what the Trust Fund is. I think I'm getting better at it, so let me try the newest version on you.

Think of the Trust Fund as a line of credit that the Social Security system extends to the rest of the government. The balance in the Trust Fund is simply the current value--principal plus interest credited at the Treasury bond rate--of all the withdrawals that the rest of the government has made historically on that line of credit to pay for things other than Social Security. Its projected balance at the end of the year is $1.85 trillion. Under current law, that balance is projected to peak at $3.61 trillion in 2022 before declining to zero in 2041. During those 20 years, the Social Security system will be calling in the loans that it has made to the rest of the government.

Keeping track of the total amount outstanding on these loans is the accounting purpose of the Trust Fund balance. It also has a legal purpose. Specifically, as long as the the Trust Fund balance is positive, then the system can pay the benefits implied by current law. It would require the Congress and the President to execute a new law to interrupt this process. When the Trust Fund hits zero, then it would take a new law to get full benefits paid on time--they would be paid only as tax revenues flow into the system.

This summary suggests three things to keep in mind about the current debate:

1) Contrary to what I suggested in a post three months ago, current beneficiaries and those nearing retirement age do have a stake in these debates, even if their benefits as implied by current law would not change. Any deviation in the path of the Trust Fund from its currently projected path makes the timely payment of their benefits less certain than it appears today. Policy makers will likely have to view this as a constraint on possible reforms if they are to assure those in or near retirement that their benefits are not becoming less secure as a result of reforms. Bye bye carveout PRAs.

2) It appears to be an official White House talking point that the Trust Fund is merely "a file cabinet full of IOUs." Here's an excerpt from a speech last week:

Now, secondly, Social Security is not a savings account. In my travels around the country I hear people say, why don't you just give us the money back we put in. But that's not the way Social Security works. It's a pay-as-you-go system. You pay; we go ahead and spend. (Laughter.) You pay through payroll taxes; we spend on paying for the beneficiaries, the retirees for that year. But if we've got any money left over, we didn't save it for you, we spent it on government. That's the way it works. It's a pay-as-you-go. And then there's -- all that's left over is a file cabinet full of IOUs. I have seen the file cabinet in West Virginia firsthand, and I saw all the IOUs. But the system is not the kind of system where we're holding the money for you. That's not the way it works. We're spending your money and left behind some paper that can only be good if the government decides to redeem the paper. That's a pay-as-you-go system.

Similar phrasing also appears on the Treasury's Social Security website:

There Are More People Collecting Benefits. As the Baby Boom generation begins retiring in 2008, there will be a dramatic rise in retirees who will be living longer. Social Security is a pay as you go system that leaves workers with IOUs, not personal accounts.

Ignore the non sequitur for a moment and just consider how silly the last sentence is. Every financial security--from dollar bills to Treasury bonds to corporate stock--is an IOU, and there would be no more physical evidence of a personal retirement account than there is of the Trust Fund. This is a talking point that needs to be dropped.

(As an aside, we often hear this phrase attributed to the President as having called the Trust Fund "a bunch of worthless IOUs," but I cannot find a link to an official document. Can anyone send me such a link?)

3) The sentiment being expressed in this reference to the filing cabinet is that the Trust Fund is an unreliable way to pre-fund future Social Security obligations, in the sense of paying more taxes now so that future generations of workers will have to pay fewer taxes later. We spend every dime of the Social Security surplus that is building up the Trust Fund. OMB Director Josh Bolten admits as much in this interview on C-SPAN's Q&A program:

LAMB: As you know, Mr. Walker has a 15-year appointment, so he doesn’t have to worry about the job he’s in. Is he saying -- I mean, this whole business of using the Social Security surplus as a way to keep the deficit down, first of all, what do you say about that?

BOLTEN: Well, he’s right, that what this administration has been doing, what this Congress has been doing, and in fact, going back in time, is that as Social Security money has been coming in, there has been a paper IOU sent over a file cabinet in West Virginia, somewhere to the Social Security system, and then government has been spending the money. That’s one reason why I think the president’s Social Security reforms are so important, because I think we put ourselves much more into a system where people get to keep more of their own money rather than relying on a government promise. ...

Republicans have, for quite a while, been saying that the Trust Fund is unreliable, and when they do, they attribute it to "the government spending the money." This may have been okay rhetorically when Democrats were in power, but it is a sham when they control both houses of Congress and the Presidency.

There is nothing inherent in Trust Fund accounting that requires the government to spend the Social Security surplus. The President could announce a policy of balancing the on-budget deficit (i.e., not the unified deficit, that includes the Social Security surplus) over the business cycle, and Congress could pass annual budgets consistent with that policy. Voila! The surplus is saved, and the IOUs in the Trust Fund actually do represent the extent to which the government has repurchased its own debt on behalf of future generations. This policy would have allowed the government to run a deficit during a recession, but it would have also required the government to run on-budget surpluses afterwards (in other words, now) after the recession. It is this last part that we seem to be unable to do.

So, perhaps sadly, the Administration's conclusion is correct: if Social Security is to pre-fund any future liabilities, then this pre-funding needs to be done in a new system such as personal accounts that deprives the government of the cash surpluses to spend. But the Administration's reasoning is all wrong--it is not because Trust Fund securities (like all other financial securities) are IOUs, but because the federal government--including this Administration--chooses not to implement a sensible budget policy.

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I'm getting ready to start a new series of posts on Social Security, and so I have created a second archive page with links to Social Security posts, beginning May 20, 2005.

Access the first set here. Changes in Blogger's technology also enable you to get all references to Social Security here.

• Krugman on Obama on Social Security [11/18/07]
• A Guide to Posts on Social Security Reform [10/07/07]
• Social Security in the Democratic Candidates' Debate [9/28/07]
• Fine Work by the Treasury on Social Security [9/25/07]
• Social Security in France [9/19/07]
• A New Approach to Social Security Reform? [9/13/07]
• Rove and Mythology [8/13/07]
• Quiet Discussions of Social Security Reform [6/09/07]
• The Social Security Coloring Book [3/01/07]
• What Did the Greenspan Commission Do? [1/22/07]
• Some Clarifications [1/21/07]
• Chairman Ben and the Long-Term Budget [1/20/07]
• Look Who's Talking about Social Security Reform [11/22/06]
• Social Security 2.0: Coming in 2007 [10/30/06]
• Which Budget Deficit to Target? [9/05/06]
• First Things First [8/28/06]
• LMS for Conservatives [6/30/06]
• Carveouts [6/20/06]
• Back from AEI [6/20/06]
• See you Monday [6/17/06]
• LMS at AEI [5/12/06]
• Samwick at RadioEconomics.com [4/17/06]
• Social Security Reform Lecture [3/16/06]
• Social Security in the President's Budget [2/08/06]
• Stitching a New Safety Net [2/07/06]
• Three Links for Social Security in the SOTU [2/01/06]
• Answering Questions on the LMS Plan [12/16/05]
• Greg Anrig Shoots the Messenger [12/14/05]
• Nonpartisan Social Security Reform Plan [12/14/05]
• It's Been Mostly Dead All Day [8/01/05]
• In Praise of Senator Robert Bennett [6/28/05]
• But I Can't Follow the Money [6/24/05]
• Inflation and Social Security Finances [6/22/05]
• Testify [6/21/05]
• Gene-tic Differences on Social Security [6/04/05]
• In Praise of Gene Steuerle [6/02/05]
• Getting Back to Bibamus [5/25/05]
• Voluntary Acccounts and Solvency [5/24/05]
• What Is the Social Security Trust Fund, Anyway? [5/23/05]

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I had the pleasure of squaring off in a debate with Government Professor Jeff Smith last evening at the Rockefeller Center. Read about it in The Dartmouth. See also this live blogging by Jon Shea and the promotional materials prepared by Joe Malchow.

Thanks very much to the Young Democrats and the College Republicans for sponsoring the event and for asking thoughtful questions of the two participants.

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Yesterday's update from FactCheck.Org pertains to the assumptions in the Social Security calculator found on Senator Reid's (and other Democratic Senator's websites). I posted about this in February when the calculator first appeared. I listed five things that I thought were missing from the website if its intent was to be a constructive part of the debate on Social Security reform. The post also had some useful back and forth in the comment section. It's worth another look.

Elsewhere in the blogosphere, we Outside the Tent takes FactCheck to task, and Armchair Genius is sympathetic to FactCheck's points.

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Based on this cryptic note at Maxspeak:

P.S. The dog that didn't bark. Nothing on this from Vox, Baby.

And this generous comment at AngryBear:

Greg might have given a citation to Andrew Samwick for this:

If the dividend yield is approximately irrelevant, as Modigliani and Miller tell us, then it is easy to imagine that it could undergo a major change in the years to come. Looking ahead, it seems plausible to me that dividend payouts broadly construed could rise significantly. If we are about to experience a period of slower economic growth because of demographic change, then firms might well have fewer profitable investment opportunities and, as a result, may decide to pay out a larger percentage of their earnings.

It seems like PGL should take Max for a walk to the dog pound.

I'm sure that for those inside the beltway, the Baker-DeLong-Krugman presentation at Brookings, along with the Mankiw comments, was big news. The crux of the matter is simply that the projections of future stock returns can be reconciled with the low economic growth rate in some models only if U.S. corporations do something other than reinvest a large chunk of their earnings domestically. I posted about this issue about two months ago, and subject to minor adjustments, that original post still represents my basic viewpoint. In the absence of additional knowledge and insights, I offer no additional posts.

Elsewhere in the blogosphere, Scrivener raises some interesting points about what happens to bond returns as stock returns fall relative to their historical values. Dean offers some followup comments over at MaxSpeak, and Brad offers some brief comments on his blog. To quote the MinuteMan, "[T]he intellectual ball seems to be advancing."

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Alex Tabarrok at Marginal Revolution tries to give Senator Lieberman an assist:

Brad DeLong and Paul Krugman are taking Joe Lieberman and others to task for asserting that the cost of fixing the social security problem increases at $600 billion a year. I agree that Lieberman is confusing an increase in the nominal present value of the debt with an increase in the cost of fixing social security but in correcting Lieberman both DeLong and Krugman meander towards the opposite error - that the costs of fixing social security is not increasing.

But almost inevitably a fix to social security will involve tax increases and the longer we wait the larger the costs of those increases will be. The technical explanation is that deadweight loss increases more than proportionately with an increase in taxes. The common sense explanation is that you don't want to take all your hits at once - instead, if you must take a hit, it's best to spread it out over time. Thus, the sooner we deal with the problem the lower the total costs will be. Lieberman's message is
correct, even if the details are wrong.

Yes, the $600 billion number is not the right number. For the right number and the right argument, I conjure my first post on Social Security from last October:

At present, the Social Security actuaries project an unfunded obligation of $10.4 trillion in the Old-Age, Survivors, and Disability Insurance (OASDI) program. This number comes directly from the 2004 Trustees Report released in March. (See Section IV.B.5 and Tables IV.B.7 and IV.B.8 in particular.) This is the present value of the projected payments less the present value of projected revenues for the system over the infinite horizon. It is the most comprehensive way to measure the hole in the system's finances.

Note that this is the unfunded part of the obligations--it is over and above all of the payroll taxes (12.4 percent of taxable payroll) and income taxes on benefits that go to support the program under current law. If this gap were to be closed through payroll taxes, it would require them to be raised by 3.5 percentage points, immediately and permanently, with the additional surpluses over the next few decades saved (in Treasury bonds) to finance annual deficits that are projected to grow to about 6 percentage points of payroll over the next 75 years.

This $10.4 trillion unfunded obligation is sometimes referred to as implicit debt, to distinguish it from the federal government's explicit debt issued in the form of Treasury bills, notes, and bonds held by the public. At present, implicit debt from Social Security and Medicare is several times larger than the government's explicit debt. Is having so much implicit debt a problem? I think so, and the reason is that, just like explicit debt, we accrue interest on implicit debt.

[...]

So if we have an implicit debt of $10.4 trillion, and the real interest rate is 3 percent, then next year, the implicit debt will grow by 0.03*10.4 trillion = $312 billion, up to $10.7 trillion, if the assumptions underlying the projection stay the same. Why does this matter? Primarily, it matters because both the President and Senator Kerry have repeatedly stated (see the two speeches in Pennsylvania linked above) that they will not cut benefits for those at or near retirement age. (The Senator's statement may be even more encompassing, including benefits at any time in the future. I cannot tell for sure from his public statements.) This, in turn, means that each year that elapses without reform causes the burden of financing the unfunded obligations to be shifted away from one more birth cohort that crosses the threshold of being "at or near retirement." The more we wait, the larger the burden on future
generations, and the higher that 3.5 percentage point surtax would have to climb.

The $10.4 trillion is about 90 percent of current GDP. In a later post, I made a rough calculation that if we waited until 2042 (the projected date of trust fund exhaustion), the implicit debt would grow (at the 3 percent real interest rate), to about $32 trillion, which would be about 141 percent of that year's (much larger GDP). So even if taxable payroll didn't fall as a share of GDP, the surtax applied in perpetuity would have to increase by a factor of 141/90, or from 3.5 to 5.5 percentage points.

The issue that Alex is pointing out is tax smoothing: for efficiency reasons, it is better to have a surtax rate that is steady at 3.5 percent rather than one that is 0 for 38 years and then jumps to 5.5 percent. The issue is, for me, less about tax smoothing and more about the intergenerational fairness of consigning future generations to pay higher payroll tax rates. We shouldn't be doing that--in Social Security, the General Fund, or Medicare.

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Another commenter on my post on Senator Hagel's plan asks:

I think I understand why you want them [the Democrats] to [put forward an alternative plan] - it would facilitate a bargaining process that would likely lead to an outcome you favor. But why is it so hard for you to see that it is far from obvious that their failure to offer an alternative plan will cost them politically?

The commenter draws an interesting parallel to the lack of a political price paid by the Republicans for refusing to engage on the Clinton health care plan and cites some polling results showing declining popular support for the President's plans for reform. The comment finishes with:

Seems at least possible that Democrats have a lot to gain just by opposing a plan that is becoming increasingly unpopular, no?

First, the commenter has my position essentially right--we are more likely to get a reform that restores solvency along the lines that I like if the Democrats engage. (See these two early posts for how I would do it.)

Second, I don't think the Clinton health care reform debacle is necessarily a good comparison at this point. My recollection is that even very few Democrats on the Hill wanted to touch that by the time the White House was done with it, and the Democrats were the majority party at the time. Much of the backlash also appeared to be directed at the First Lady's involvement in the process. And health care was never much of a Republican's issue--Social Security is very much a Democrat's issue.

Third, we can conjecture as to how the Republicans and Democrats would fare under the three relevant scenarios. I agree that it isn't "obvious" that the Democrats need to engage, but there are some potentially large risks if they don't. Here are my thoughts:

1) The strategy succeeds: Democrats refuse to engage, and the President's initiative fails without them.

What happens in the 2006 and 2008 campaigns? Republicans say that because of Democratic obstructionists, young people don't have personal accounts and the system still faces a long-term financial imbalance. No Democrat has any proposal of substance to say how he or she would have fixed the system. Democrats don't gain much traction on the issue of Social Security itself, but it's not like they campaign on it unless provoked.

On the other hand, the President would suffer one of his few electoral defeats. Who knows what kind of momentum that might generate? It could shift the political focus in the remainder of his term back onto issues where the President and the Republicans may be more vulnerable--chronic deficits on the domestic side, Iraq on the international side.

2) The strategy fails: Democrats refuse to engage, and the President succeeds in passing a reform without them.

Given the outline of the President's plan, we know that he will have two big talking points. First, on the day the plan is announced, the projected $10.4 trillion unfunded obligation in the Social Security system goes away. The President gets to say that he "saved Social Security" while the Democrats stood by and watched. Second, he will have added personal accounts to the system on a voluntary basis. The President gets to say that he transformed a "government program" into an "ownership society," again while the Democrats stood by and watched.

3) The strategy isn't adopted: Democrats engage and reform passes in a form that incorporates some of the Democrats' preferences.

The President still gets his talking points from #2, except that they cannot be made at the expense of the Democrats. The Democrats can also point to their contributions to the legislation and share some of the credit.

So the Democrats' strategic decision may be based on their assessment of the likelihood of each scenario and the electoral advantage or disadvantage in each case. It seems like #2 would be really bad for the Democrats, and if it appears like the President can hold his own party together (lowering the likelihood of #1), then we will get Democrats proposing plans of their own (leading to #3). Literally, Senator Clinton will have a plan with personal accounts.

Other people with more of a partisan interest in the Democratic party are weighing in on the same issue, generally at the expense of Senator Lieberman. Jonathan Chait is blogging for Josh Marshall over at Talking Points Memo and has this piece in The New Republic. (John's second round of comments on my earlier post prompted me to go read it.) Paul Krugman's column today has a similar theme.

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I disagree with a lot of the points raised in a comment on my last post, by a reader named John. I think it is worth addressing each of them in a new post.

The Democratic plan should be...Social Security.

This is a reasonable position. If so, then I think that senior elected Democrats should be able to specify a plan to restore it to solvency.

There's a good chance it will be fine if left entirely alone.

Based on the simulations in the 2004 Trustees Report, there is virtually no chance that it will be solvent if left entirely alone. Please see this chart. It shows that over the 75-year projection period, there is less than a 2.5 percent chance that the cost rate will be below the income rate at the end of the period. So I don't know what "it will be fine" means here.

If a few tweaks are found to be needed, ...

This is written as if Social Security's long-term solvency is still an open question. The discussion of Social Security's long-term solvency problems and what to do about them has been going on for over a decade. Consider the 1994-6 Social Security Advisory Council's Report as a starting point if you like.

... then raising the payroll cap on upper-income taxpayers (the same ones who've benefitted from unfunded, irresponsible tax cuts) will more than suffice.

I don't see how we get "more than suffice," based on current projections. To see why, suppose the cap on taxable payroll were removed entirely, as with the Medicare payroll tax, and that no additional benefits are accrued based on the additional taxes paid. Also assume (heroically) that an additional 12.4 percentage point tax on this payroll causes no reduction in hours of work. This would expand the Social Security taxable payroll base by about 20 percent. (In 2003, Medicare collected $149.2 billion of payroll tax revenue with a 2.9 percent tax. See this table. This implies a base of about $5.14 trillion. In 2003, the Social Security taxable payroll tax base was $4.34 trillion. See this table.) So even in this scenario, uncapping the payroll tax base would be equivalent to about 0.2*12.4 = 2.5 percentage points of payroll. This compares to an unfunded obligation that is 1.89 percentage points of payroll when measured over the next 75 years and 3.5 percentage points of payroll when measured over an infinite horizon (see this table.) This is more than a tweak, and it doesn't really suffice.

Any plan that includes carving out private accounts undermines the Social Security system--Boxer was exactly correct in saying so.

If Hagel's plan is adopted, then the system is solvent for the next 75 years, the normal retirement age is higher starting in about two decades, and workers have the option of voluntarily establishing a personal account. It is not apparent to me how this "undermines" the system, let alone "destroys" it, which is what would have to be true in order for Boxer to have been "exactly correct" in what she said.

More on comments in the next post.

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