In this country, we seem to revisit the same topics over and over again; it’s the price of living in a democracy, I suppose. The charlatans want you to forget that we’ve been over the same terrain many times; they hope that your attention span is short. If they pound the same terrifying sound bites into your head over and over, they hope that you’ll eventually fear what they want you to fear. [1]
So it is with Social Security. It doesn’t matter how many times people explain that there is no Social Security crisis. There’s always going to be someone who hates it, so there will always be a market for mendacious arguments against it.
That’s where Diamond and Orszag come in, reminding us of exactly why Social Security is the way it is. It’s an annuity, which is to say that is pays you a fixed amount for the rest of your life, no matter how long your life lasts; that way you can’t outlast your savings. Better than that, it’s an inflation-protected annuity, meaning that your Social Security savings won’t be decimated as the years pass. And it provides benefits if you become disabled. And it’s a joint-and-survivor annuity, meaning that your spouse will get a fraction of your Social Security benefit after you die. Maybe better still, if you’re of a liberal cast of mind: it’s progressive, in that people who’ve earned little throughout their lives get a larger percentage of it back when they retire than do wealthy people.
So if you know nothing else about Social Security, keep that one-sentence rough definition in mind: Social Security is a progressive, inflation-protected, joint-and-survivor annuity. Anyone with a plan for “saving” Social Security had better explain either a) how they’re going to keep those attributes, or b) why a system lacking those attributes still deserves to be called “Social Security”.
Social Security has some problems, of course. The biggest is that the ratio of current workers to current retirees is falling. There are a few obvious responses to this. One is to cut benefits. Another is to increase the retirement age (which is, in fact, synonymous with cutting benefits). A third is to raise taxes. Diamond and Orszag, being affiliated with the Brookings Institution, pick the middle way: some taxes, some benefit cuts. Along the way, they lay out, in sober, quantitative detail, some other financing problems. One is that Social Security only taxes income up to a certain limit; because we live in a society suffering from rising inequality, the fraction of income subject to Social Security taxation has been falling (see chart at right).
There seem to be some obvious solutions here. One is to do whatever we can to raise the ratio of current workers to current retirees. How about allowing more people into the country, for instance, by liberalizing immigration laws? That’s entirely off the table in Diamond/Orszag. Next up: how about adjusting the taxable maximum (the “tax max”, as the SSA apparently calls it) so that the same fraction of U.S. payroll is always below it? Or how about removing the tax max altogether? That’s what we did to the Medicare tax starting in 1994.
Diamond and Orszag consider some variant of the former (increasing the tax max). Removing it altogether is just not centrist enough for them. It’s not at all clear why. I have to imagine that it’s because they wanted to put together a proposal that would appeal to some Republicans and some Democrats, and for that I have to salute them. I also, though, have to wonder if it’s a fool’s errand to try to woo a party that has been trying to sell us on Social Security privatization.
Diamond and Orszag devote one of the best chapters of [book: Saving Social Security] to these private accounts (the book dates from 2004, right in the thick of the Bush Administration’s push to privatize). With as much force as responsible scholarship will allow, they tear the idea of privatization to shreds. First, privatization would subject retirement savings to the ups and downs of the market. Riding the market may, as a general matter, be a fine idea, but that’s not the purpose that Social Security is supposed to serve. Social Security is supposed to provide a base level of savings that keeps the elderly out of poverty. Social Security is supposed to — and does — avoid financial mistakes that many of us make. For instance, when we cash out our 401(k)s upon retirement, we should convert them immediately into annuities so that our savings don’t end before we do; Social Security does this for us. If you claim that you want to replace Social Security with a system of private accounts to “strengthen” Social Security, but you don’t impose some sort of requirement on people’s private retirement savings — e.g., you don’t require that they buy an annuity, and you don’t require their savings to shift from equities to bonds as they age — then you’re not actually strengthening it; you’re replacing it with something else. If, on the other hand, you impose a number of restrictions on people’s private accounts, such that those accounts are just as constrained as the existing Social Security system is, then what problem are you solving? The cynical answer is that you’re solving the problem of insufficient fees going into mutual-fund companies’ pockets. Diamond and Orszag are not nearly so cynical. Or maybe they’re just very polite.
I’d be curious what Diamond and Orszag would write today, now that the White House and Senate are under the control of the Democratic Party. (Diamond was President Obama’s nominee to serve on the Federal Reserve Board. Orszag was Obama’s Director of the Office of Management and Budget.) More to the point, we’ve just gone through a financial implosion that decimated many people’s retirement savings. Now would seem to be the right time to push to strengthen — truly strengthen — Social Security in automatic ways that would be hard to roll back. For instance, how about mandating automatic adjustments to the retirement age that factor in the poverty and race of the recipient? The poor don’t live as long as the wealthy, and black people don’t live as long as white people; why not allow everyone to have an approximately equal-length retirement by setting the retirement age to life expectancy minus a fixed amount? And why not eliminate the tax max? Diamond and Orszag don’t really argue the merits of an all-liberal (e.g., only increase taxes on the wealthy and don’t cut benefits) or all-conservative (the reverse) policy; they merely nod in the direction of both and then say that they’re aiming for something in the middle. Nowadays it’s not clear that they would claim many admirers on either side from this approach. (One of the book’s first footnotes cites Dean Baker’s book [book: Social Security: The Phony Crisis], which apparently argues that there’s no problem to solve. It goes on the wish list.)
The following will probably sound snarky, when I don’t mean it to at all: [book: Saving Social Security] would be the Bible in a technocratic world. To quote Cosma Shalizi (who was writing on a different topic): Diamond and Orszag would love to be arguing from “just a little bit to the left of a technocratic center, and to debate those just a little bit to [the] right about optimal policies within a shared objective function, and pretend[] that it is a technical and not a political discussion. But … shit is fucked up and bullshit”. Such is the fallen world we’re in.
Generally speaking, I don’t know how to deal with Brookings these days. They seem like technocratic centrists in a world that uses technocratic centrists as its tools, if it uses them at all. With any luck, the world will shift back to a place where Brookings and friends can go back to being a central part of the discussion.
[1] – This just came up today, when Rick Santorum explained his opposition to ObamaCare in the same breath that he lauded Nelson Mandela, along the way telling us that the size of government keeps increasing. Never mind that the government is only large because we’re in a recession, and that if you instead look at government expenditures as a percentage of potential GDP, we’re right where we were in the era of the sainted Reagan.
Steve Reads 