Raising the Soc Sec Cap: Bad policy, worse politics, worst economics

Lifting the cap on Social Security is widely seen among progressives as a "no brainer. Well sorry that view is simply wrong. At least once you examine the actual numbers in play and think through the financing. Detailed arguments after the jump, the abbreviated version here:

On Policy. Raising the cap actually opens the door for privatization. Obama's  economic advisor Jeffrey Liebman is pushing the Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan which uses a cap increase to help fund PRAs-Personal Retirement Accounts. This Plan is very worker unfriendly and predictably this is more true as you work down the income scale.

On Politics. Raising the cap simply serves to alienate potential progressives who happen to be successful. Do we really need to alienate every tenured professor, every labor lawyer, every head of a social service non-profit in the country while giving capital a pass? Raising the cap while providing no other benefit is designed as a wedge issue.

On Economics. Raising the cap actually works to weaken Social Security going forward. Taken to extremes it amounts to abrogating the Trust Fund and so stealing all of the surpluses accumulated to date. Moreover the current system is not regressive, thinking that it is is just to fall into a frame established by privatizers.

I'll take the Economics piece first, leaving Policy and Politics for later.

The Social Security Trust Fund is often thought of as a Savings Account. Under this conceptualization raising the cap and putting the resulting funds into it seems a simple matter of topping off the account for a rainy day. Well that is not really how it works. Social Security taken as a whole works more like a Checking Account with dollars being deposited every payday and checks written out. The Trust Fund itself serves as the Balance, an amount held in Reserve for expected and unexpected contingencies. By law the Social Security Trustees are supposed to target Short Term Actuarial Balance, meaning at least a year in reserves for each of the next ten years. By that measure the combined OAS and DI Trust Funds are currently in balance and are projected to remain so until about 2027.

While the Trust Fund could hold assets in other asset classes it currently holds them in the form of interest earning Special Treasuries. Given that the system is running high levels of surplus today and for most of the rest of the decade the effect of raising the cap is simply to lend even more money to the General Fund with the side effect of creating a greater interest burden going forward. Certainly you can push back the date of shortfall but only at the risk of creating every greater tension between the General Fund and the SS Trust Fund.

Tags: LMS, obama, Social Security (all tags)

Comments

15 Comments

More Economics

What Social Security needs is a policy of year by year monitoring. On balance both Shortfall and Depletion have been pushing back in time, the latter at a rate of more than a year per year. The reason is pretty simple, the economy has been outperforming the forecasts and given how dismal those numbers are can be expected to continue. At this rate any amount of Real GDP above 2.2% medium to long term backfills the entire projected gap. Nobody has made a principled case of why we can't grow at the rate needed.

by Bruce Webb 2007-11-14 07:47AM | 0 recs
Re: Raising the Soc Sec Cap: Bad policy, worse pol

Exactly right!

Given that the system is running high levels of surplus today and for most of the rest of the decade the effect of raising the cap is simply to lend even more money to the General Fund with the side effect of creating a greater interest burden going forward.

This is the sort of sentence one should read and reread until the message sinks in.

The idea that "if we act now, it will be much easier to deal with" sounds like common sense, but it is a myth.

by Steve M 2007-11-14 07:52AM | 0 recs
Policy: Why SS is not regressive.

The idea that Social Security is regressive has been taken up by many progressives, but really in origin this was a Right talking point designed to subvert support for Social Security among workers. Another version of this is the "Unfair to Blacks" theme. Both fall apart on examination.

Social Security is a system of government administered insurance funded by workers for the benefit of workers. Viewed as such, from within the system if you will, the insurance plan is actually mildly progressive, lower income workers gaining a slightly greater share of gains from future productivity than higher income workers. It can only be seen as regressive if it is viewed as another Government welfare plan. Well it is not welfare, it is insurance. Which is what gives Social Security its fundamental strength. Since it demands nothing from capital by rights they have no right to meddle. If people keep this distinction in mind they can see by Huckleberry Fred's plan is outright theft, he is cutting promised benefits well before there is any need to do so, with the only beneficiaries being a reduced need for the rest of the country to replay the money we lent it. Well no, as long as there are assets in the Trust Fund I want my full benefit. If we collectively have to take a mild cut in benefits after 2041 (which is all that 'Crisis' is in context), well so be it.

The Right likes to divide spending into two categories. In one is spending we can't afford, like SCHIPS. The other is spending we can't NOT afford, like anything military. The only reason they have not been able to move Social Security into the latter category is that they have not actually been paying for it. Raising the cap simply allows them to assert a measure of control that is both unneeded and unwanted.

by Bruce Webb 2007-11-14 08:02AM | 0 recs
Re: Policy: Why SS is not regressive.

If SS should be viewed as insurance, then you need to identify the fortuitous risk that this program is intended to insure against. I don't think turning 67 counts as a fortuitous risk. Turning 67 without any savings, however, may be a risk, but if we're going to treat this as insurance then payment should only be triggered in the event this risk is realized. Yet, everyone who turns 67 gets paid.

Instead, I would say that SS is really two kinds of programs in one. First, it is a welfare program intended to provide a safety net for the retired. Secondly, it is a regime for forced savings for the young. I think both of these objectives are justifiable state interests, but they suggest different approaches to how the program should be structured. And, neither should really be called insurance, unless we're using a unique definition of insurance.

by DPW 2007-11-14 09:04AM | 0 recs
Insurance companies sell annuities

If you want to argue that annuities are not insurance then fine.

Social Security is legally two Insurance Plans. One is OAS, Old Age Survivors, the other is DI, Disability. OAS is a blended plan. While you are working it provides insurance coverage for your minor children should you die (your fortuitous risk), when you retire it converts to an annuity for you and in most cases your spouse. DI is insurance in case you get disabled prior to full retirement age (fortuitous risk again).

It is hard to see that Social Security is welfare in any form. All payments are currently funded by participants, absent outside transfers from uncovered parties it simply doesn't meet the definition of welfare.

Which is my point lifting the cap converts it to welfare, which is why it should be avoided.

by Bruce Webb 2007-11-14 09:22AM | 0 recs
Re: Insurance companies sell annuities

I'm only addressing the retirement aspect of SS because that seems to be the focus of current discussion. The DI part of SS is a welfare plan, in my view. The retirement part of SS is often defended as a safety net as well, even though its structure reveals that it is more like a paternalistic measure to protect individuals from their possible failure to save. I think the only way to call this kind of paternalism "insurance" is to make an argument based upon a hypothetical social contract (like Rawls or Gereld Dworkin), to wit: rational people considering the design of their social institutions (from behind a "veil of ignorance" perhaps) would include publicly administered insurance to protect themselves against the risk of irrationality with respect to retirment savings. That may be a solid justification for paternalism of this kind, but the argument employs an unconventional conception of insurance. It's more appropriate to just call it paternalism.

I'm not addressing your actual arguments here, although I will say that I favor reform for more drastic than anything proposed by Obama. In essence, because I think the safety net objective of SS (retirement part) is far more important than the paternalistic purposes, the program should be structured to reflect this priority. Details about what that would look like and the feasibility of transition will have to wait.

by DPW 2007-11-14 09:49AM | 0 recs
I'll say

"I am not addressing your argument"

The issue is the cap increase. If you want to elevate this into some discussion about Social Justice as explicated by Rawls and Dworkin then fine.

But the fact is that OASDI operates and is financially structured like any other insurance plan. Your argument works equally well against government mandated auto insurance.

The question at hand is whether self-identified progressives should support a cap increase based onwhat we know about the numbers in play. If you want to present an alternative plan then great. Just show how it works up and down the income ladder and be sure to show your growth assumptions.

by Bruce Webb 2007-11-14 11:49AM | 0 recs
Re: Insurance companies sell annuities

Just to add to what I've said above, by discussing the various objectives of SS as distinctive state interests, I don't mean to suggest that SS is structured along thos lines. Indeed, I don't believe it is. I'm just more interested in conceptualizing the various functions of the program, so that justifications, priority, and program design can be discussed with more clarity.

by DPW 2007-11-14 09:56AM | 0 recs
Everything is simple

If you ignore the complexities.

Certainly if you ignore the specifically insurance portions of OASDI it looks less like insurance.

Plus you show no signs of understanding how DI works and what its eligibility requirements are. Really you are just lazily issuing right talking points

by Bruce Webb 2007-11-14 11:33AM | 0 recs
Re: Everything is simple

"Right talking points"? What the hell are you talking about? I'm just responding to your claim that SS isn't welfare but rather insurance.  My contention is that it's not insurance--even if it claims to be--according to conventional understandings of insurance. Rather, in its current form, it is better characterized as paternalistic intervention. At least this is the case when we're talking about the retirement security provided by SS. Why can't good liberals make that claim? It's just a semantic point, not an ideological one.

My other point was that, given the fact that it's also frequently defended as a social safety net, one might expect it to resemble a welfare plan. Yet, SS--again, only referring to its retirement scheme--doesn't accomplish any significant redistribution, as a welfare plan would. From the standpoint of liberal distributive justice, the most primary needs of the citizenry generally are given priority, so I just suggested that I would like to see such priority reflected in the system's design. What's right-wing about that? It doesn't reflect well on you to dismiss legitimate perspectives like that.

by DPW 2007-11-14 12:23PM | 0 recs
Typical

You made a claim based on the fact that Social Security wasn't insurance because it lacked the key element, per you mind you, of 'fortuitous risk'. When I pointed out that both OAS and DI did in fact have that element at their core you backed off into bluster and bullshit.

It's insurance. Insurees pay premiums for defined benefits. Its not welfare which was my point. Perhaps you think the point of Social Security should be redistribution, perhaps you think that because Social Security is described as something like a "social safety net" that it should include every element of what you would define as  social safety net. Well I don't agree.

I don't know where you are coming from. First you seem to be denigrating Social Security as "paternalistic intervention", suggesting you are coming at this from a libertarian perspective, then you complain that it is not accomplishing redistribution and start posing as a Social Democrat.

It doesn't reflect well on you that having your initial claim refuted that you simply try to shift ground and take this from a pragmatic discussion of the mechanics of a given insurance system into some hazy feature free discussion. Show me a concrete alternative plan that provides better benefits for workers at a comparable cost and then we can talk.

by Bruce Webb 2007-11-15 04:52AM | 0 recs
Diary highly recommended

Not sure if this diary makes it to the recommended list, but it deserves to up there...

Bruce, could you also talk about the effect of undocumented workers paying into the social security system. Also, my dad who is retired and is still working, also pays into social security. But now that he collects social security already, the FICA taken out of his check does not contribute to his social security benefit level. I think a lot of baby boomers/recently retired people will be in the same position as my dad--working even after collecting social security. That pile of money like undocumented workers isn't accounted for in the social security actuaries is it?

Thanks....

by ademption 2007-11-14 08:06AM | 0 recs
$7 billion a year

Seems to be the accepted figure. But this I think is only for people using fake numbers. That is if a legal immigrant took some time off and lent his name and card to an illegal I don't see any mechanism that would capture that. Not I think that significant in the overall scheme of things.

I am not an expert on the internal administration of benefits. Soc Sec maintains a pretty through website. This page says that if your Dad's current year income is one of his highest 35 that they will recompute the amount each year. http://www.ssa.gov/pubs/10069.html#incre ase
I don't know whether this would offset the current cost, it would depend on how much more his current income is over the average. All in all though the system was much improved. Previously there was an outright penalty for people working over full retirement age (just as there still is for people working after early retirement).

by Bruce Webb 2007-11-14 09:13AM | 0 recs
Politics of a cap increase

There is rather an odd sense that raising the cap is politically feasible, that the popularity of Social Security will simply carry the day. But what raising the cap does in practice is to add 6.2% to the top marginal rates for whatever range of wage income the cap increase covers.

The Right is dead set against letting the Bush tax cuts lapse, yet somehow they are going to roll over and let the 33% rate effectively revert back to Clinton levels? Politicians may not understand that this is the effect of a cap increase, and some economists either, but you can bet their accountants do.

Bring it down to earth. You are expecting every member of Congress to simply accept a 6.2% tax increase-for themselves. Man if we actually had that much political mojo we wouldn't even be talking taxing hedge fund managers at 15%, that job would be done.

Yet certain politicians and commenters simply assume that this cap increase is the simplest thing in the world. Well when you actually bring it down to dollars and cents plenty of powerful people are going to squeal. This is a fight we don't need. If we really think we have the power, then lets get SCHIPS done.

Moreover people who make their money on earnings from capital are grinning ear to ear. Raising the cap means Free Lunch, the General Fund gets bailed out all at no cost to them. That ain't progressive.

by Bruce Webb 2007-11-14 08:16AM | 0 recs
Re: Raising the Soc Sec Cap: Bad policy

Thanks for this diary.  I will certainly recommend it.

by Kingstongirl 2007-11-14 09:06AM | 0 recs

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