Thursday, October 28, 2010

Social Security First or Second?

Noam Scheiber guesting in J. Chaits blog giving kudos to a Social Security fix proposed by Jed Graham of Investor's Business Daily. Scheiber says that he would prefer to deal with Social Security after Medicare and Medicaid have been addressed....because they are a far, far greater problem for the long term budget deficit. He is correct that the third rail has become the easy fix, because of how hard the Medicare fix will be.

From a strategy standpoint, my gut is the opposite of Scheiber's. We should go ahead and focus on Social Security using momentum (assuming there is some,or if not we need to create some) coming out of the President's Deficit Commission that will report on Dec. 1. I was helping one of my kids with homework planning the other day and told them to complete the easiest assignment first, then move to the next, and so on. Waiting to address Social Security until after Medicare and Medicaid are fully addressed doesn't seem wise, and it would be good for us (the 310 Million version of us) to actually address a big problem and come up with a solution and prove the concept still exists. Maybe doing this will provide some momentum for Medicare and Medicaid fixes.

The problem with Social Security is that the Baby Boomers had fewer children than did their parents. It is one purely of demographics. The reason Medicare is more complicated is that it shares the demographic problems of Social Security, but it covers health care as opposed to simply mailing checks. The benefits paid out by Social Security are indexed to inflation in one way or another, while health care costs in both Medicare and private insurance have risen two or three times faster than inflation. Medicare is a promise to pay for health care, some of which has yet to be invented. This isn't proof of a sinister plot, just a practical reality of a program who was created because society thought it was unacceptable for half of the Seniors in this country to be uninsured. So, thank you Medicare....the third rail is now the easy fix!

The essence of Graham's plan, endorsed by Scheiber is that benefit cuts to young, affluent retirees should be used to shore up the program while maintaining the retirement age and the benefit levels of lower income workers. In this way, you maintain the safety net, while incentivizing more affluent persons to work longer.

One benefit of this option is that it does not increase the retirement age beyond the 67 to which this age is going by 2025. I have written and supported increasing the eligibility age of Medicare to unify it with Social Security, but do not think the Social Security age should be raised further than planned. I think this is important because while a professor like me might easily expect and be able to work to a much older age than 67, for persons with manual labor jobs it is not so simple.

The CBO has a list of 30 policy options to address Social Security, and I have generally been saying that while I have preferences we just need to pick one/some and shore up Social Security and move on to the next steps after PPACA needed to make Medicare and the entire health care system sustainable. I think I favor extending the essence of the compromise that was the Greenspan Commission fix of Social Security in the early 1980s that extended the life of the trust fund until 2039.....which is now in the future but not that far away. Greenspan et al. set the wage level to which the OASDI payroll tax was applied to the 90th percentile of wages (wage point at which 90% of the population has a lower wage). This level has been indexed by average inflation ever since. The problem is that high end wages have risen much faster in the past 25 years than have average wages, so the OASDI payroll tax now is set to the 83rd percentile of wages. In 2012, the OASDI tax is set to be applied to the first $113,700 dollars of wages. If increased that to the 90th percentile (around $156,000) then the benefit structure and retirement age wouldn't have to be changed (the rate would remain the same, just be applied to more wages). You would also update the wage level to which OASDI was applied to be the 90th percentile going forward.

I could live with either of these, or a blending of the two. One is a cut in benefits, the other an increase in taxes. Those are the two choices.

Update, 10am: Austin Frakt, asking me two very good questions. I will restate and then try and give an answer.

Question 1: Is public policy like homework, meaning if you expend all your energy on the easy fix (Social Security), then you might not have anything left for the harder part (Medicare)?
  • Maybe. If we could only do one thing, we would be better off addressing Medicare. In the end, if we do NOTHING on Social Security, what we are saying is that in 2039 (or so) when the reserve funds collected the past quarter Century and redeemed by the government over the next 30 years are exhausted, that the outlays of Social Security must equal the payroll taxes in a given year (that is current law). The worst year is probably around 2045 or so, when this would mean that around 80% of the promised benefits would be paid out in that year, when I will be 72 if still alive, so this is not theoretical for me! So, the default is a large benefit cut (but anyone saying there will be nothing when you retire etc. either doesn't know what they are talking about or is being purposefully misleading).
  • If we have a Social Security fix, I am imagining it to be more of a 'lets hold hands and jump together' type of fix coming out of the Deficit Commission, and not a long protracted 'war'. This would seem to come relatively quickly or not at all. This is what I mean by we need momentum around the Deficit Commission....make some compromises and find some solutions, holds hands and jump and then fight it out over health care (implement v. repeal, how to amend and improve, etc).
  • The next step in addressing Medicare cost inflation is to implement PPACA, and especially the IPAB. Culturally, we need to begin asking the following questions in Medicare (and the rest of the system). Does it improve quality of life? Does it extend life? If no to both questions, we need to ask, why again are we doing it? And regardless of the answer to these questions, how much does it cost? There is obviously uncertainty in answering these questions, and mistakes will be made, but we must start asking them, and move to use the answers to make policy. The IPAB is a first step to all of this. I am not sure of the calculus of how we eventually use the answers to these questions to make policy both in Medicare and private insurance; we will have to work that out and it will take time. This is a cultural issue as much as a health policy one: will we grow up and learn to talking thoughtfully about limits? I am point is that ee won't crack these profound health policy questions this year (or even this decade), but we could shore up Social Security this year.
  • Any changes/alterations to PPACA that address cost inflation should be seriously considered and supported. The big enchilada is changing the tax treatment of employer paid insurance. Interestingly, I believe every single Republican member of the Deficit Commission has at one point or another favored eliminating the tax exclusion of employer paid insurance. This is what made their (Republicans, generally) opposition to the tax on high cost health insurance so preposterous, which of course in a roundabout way accomplishes the same thing. And of course the President pushed for this, obviously over the wishes of organized labor a key Democratic Party constituency. The tax was delayed until 2018 and the trigger level made to apply only to policies over $27,000 in value I believe (for families). The fact that this tax on high cost insurance remained in the final legislation is in my opinion, the least reported 'big deal' of PPACA. The delay and increase in trigger point was in the reconciliation bill, which of course expires in 10 years. Inside the Senate bill is a tax with a lower threshold level that is being updated at 1 point above CPI that will come into force in a decade, and will apply to a good number of policies since health care cost inflation is going up lots faster than 1 point above CPI. The pay-for to get rid of it (repeal it in 10 years) will be very large. So, the tax treatment of employer paid insurance is likely going to change in a decade or so one way or another. That is one of the best aspects of long range PPACA in terms of cost control. I would rather cap the tax exclusion in a straightforward manner and at a lower level, much sooner.
  • Austin's comment about lack of momentum after PPACA casting doubt about my notion that a Social Security fix could add momentum for general policy movement is a fair point....I am an optimistic person. And I keep thinking that at some point the seriousness of the issue facing our nation will mean that the grown ups will rise up and work things out.....
Question 2: Why not apply the payroll tax to the 90th percentile (~$156,000 in 2012) and use the extra revenueX (X = OASDI rate applied to first $156,000 - OASDI rate applied to first #113,660) to exempt the first dollars of wages from the OASDI tax? Note, I don't know how high up the wage level that the revenue X above would allow. Lets say for argument sake, it would exempt the first $7,500 of wages from Social Security; your rate on the first $7,500 of wages would be 0 if you did this (I will try and back of the envelope it later).

  • I think this is a bad idea, because it undermines Social Security as a Social Insurance program. A payroll tax is regressive, which means that for 83% of the US population, 100% of their wages are subject to the OASDI tax; for someone with $1 Million in wages, only 11% of their wages are subjected to the tax. It is the opposite of our income tax structure that is progressive. However, having a payroll tax be a first-dollar tax also means that each person with wages chips in something to Social Security (and also Medicare). And while it is true that Social Security has a redistributionist aspect (floor below which no one can fall; non retirement protection such as survivor benefits); it is also true that your wage history (what you paid in) is important in setting your retirement benefit level. I don't think that it is romantic to be poor, but it is the case that even someone with very low wages today has contributed something to Social Security, and I think that provides them with a measure of dignity, and helps explain the high level of support for the program: everyone contributes, everyone benefits.

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