Social Security: A Debate J. Bradford DeLong, John Shoven, Jim Wilcox

1
Social Security A DebateJ. Bradford DeLong,
John Shoven, Jim Wilcox

• J. Bradford DeLong
• U.C. Berkeley and NBER
• June 14, 2005
• AP Giannini Auditorium
• 555 California St.
• San Francisco, CA
• 700 PM

2
Social Security The Context

• Why is Americas political system focusing its
  attention on Social Security?
• There is no good reason
• We have other, bigger fiscal policy problems.

3
Our Other, Bigger, Fiscal Policy Problems

• The current 4.5 of GDP on-budget deficit
• Extensions of expiring tax cuts that will blow
  further holes in the budget
• Risks--crisis, recession, slowed long-run
  growth--created by this Bush-league fiscal
  policy.
• The generational explosion of federal health-care
  costs.
• Problem or opportunity?
• How much publicly-funded health care for the
  non-rich do we want to buy?
• How do we want to finance it?
• Both of these are bigger and more urgent than
  Social Securitys funding gap.

4
Social Securitys Long-Run Funding Gap

• Fixable
• Raise the retirement age by 18 months.
• Cut benefits by 10.
• Raise the Social Security tax base to 95 of
  payrolls.
• Raise the Social Security tax rate from 12.4 to
  14.0
• Some combination of these.
• Still leaves a post-2080 problem
• But sufficient unto the day is the evil thereof.

5
Six Things to Know About Social Security

• Disability insurance.
• Survivors benefits.
• Welfare for the elderly.
• Defined-benefit pension plan.
• Pay-as-you-go.
• Wage tax.

6
Thinking About Social Security Reform

• Disability, survivors, welfare--works well.
• Defined benefit--now a very valuable thing.
• Pay-as-you-go--we need to think about this.
• Pay-as-you-go vs. prefunded
• A wage tax?
• Best tax policy broaden the base, lower the
  rates. Tax on bottom 85 of payrolls not that
  broad.
• A stable program.

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Tests for a Worthwhile Reform

• Its private accounts it offers people must be a
  good deal for beneficiaries.
• It must raise national savings.
• It must preserve the valuable defined-benefit
  nature of the current program.
• It must restore long-run solvency, and put in
  place mechanisms for automatic adjustment should
  the system fall further out of balance.
• We must have confidence that the plan will be
  competently implemented.

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Private Accounts a Good Deal?

• Need to do three things
• Keep people from churning their accounts.
• Keep people from pledging their accounts.
• Invest accounts sensibly.
• Bush private accounts plans worrisome
• 3 real clawback.
• Rhetoric of its your money.

9
Boost National Savings?

• Snuck in as a goal
• Help to deal with our bigger, broader fiscal
  problems.
• Bush plan doesnt help
• At best, its neutral for national savings.
• At worst, people regard their private Social
  Security accounts as close substitutes for
  401ks.
• No Plan B.

10
Preserve Defined Benefit Character?

• You have a very hard time getting a DB plan
  anymore.
• Nevertheless, people think they are very
  valuable.
• Bush plan over the long run eliminates DB
  character
• This is a significant loss.

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Long Run Solvency?

• Bush administration hasnt released its numbers.
• Jason Furman off frantically calculating away.
• His current estimate take everything Bush has
  proposed, and it closes 35 of the 75-year
  funding gap. (60 if you offset private account
  balances.)

12
Competence at Implementation?

• Very hard to have any confidence at all
• a blind man in a room full of deaf people
• Sent Bush out there to talk about how you could
  safely invest your private account in Treasury
  bonds--when they paid 1.7 and there was a 3
  clawback.
• Deficit
• Steel tariff, farm bill, corporate tax boondoggle
• Tommy Thompson on the Medicare drug benefit
• didnt know the difference between Medicare and
  Medicaid

13
Legislative Outlook

• Grassley and Thomas are going to try to move
  solvency bills through their committees
• Not a Reconciliation process--hence 60 votes
  needed in the Senate
• Where are they to come from?
• Democratic payback for 1993 and 1994
• What features will tempt centrist Democrats?
  Cant see any