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The Diamond-Orszag plan for "reforming" Social Security calls for reducing benefits on youngsters to make up for people living long—and the younger you are now, the more the benefit reduction. Their plan is to make up half of the shortfall (a shortfall which may not even exist, we’ll come back to that) by reducing benefits, and half of it by increasing FICA taxes. They do intend to increase the amount of money that richer people pay, modestly, and they also intend to reduce benefits for wealthier folks by more than they reduce benefits for those who have more average earnings.
Diamond and Orszag claim that since wages are increasing, in real inflation adjusted terms, this will still mean that young folks wind up earning more:
An average earner who is twenty-five years old in 2004, for example, would still receive an annual inflation-adjusted benefit at retirement that is more than 25 percent higher than the benefit of an average earner who is fifty-five years old. The reason is that Social Security benefits increase when career earnings rise, and today’s twenty-five-year-olds are expected to have higher career earnings than today’s fifty-five-year-olds because of ongoing productivity gains in the economy. . . .
This is simply not the case, as it assumes that productivity gains are passed onto median wage earners, which is not the case and has not been for some time (see the chart to the right). On an individual basis, hourly wage earners (the people who need SS the most) have only seen minor wage increases for 30 years (at best). Households have, but that is because more and more households are dual earner.
It is therefore unlikely that reducing the percentage of wages won’t lead to absolute benefit reductions, unless Diamond-Orszag are somehow convinced that the productivity-wage connection which hasn’t operated for thirty years is suddenly about to start up again. So the result of their reductions will be both an absolute and a relative decline in social security payments for most people.
Goods producing non-supervisory wages
Now the plan has some good parts, for example Diamond-Orszag want to increase benefits for people with low lifetime earnings and for widows and to shift disability payments so that workers who are disabled young get more money, which is appropriate, since they’ve lost more of their lifetime’s earnings (which tend to peak in late middle age, if your career goes well.)
I did find this little bit amusing:
Like our balanced approach, these modest reductions in benefits are in keeping with the tradition set in 1983. For example, the 1983 reform reduced benefits by about 10 percent for those who were twenty-five years old at the time of the reform, a slightly larger benefit reduction than under our plan for average earners age twenty-five in 2004.
Yes, well, just because workers got stiffed in 1982 by Greenspan et al doesn’t mean we should do it again.
All of this, though, is somewhat beside the point. Here are the bottom lines. According to the Social Security Trustees own projections (which are dubious, as are any multi-decade projections), Social Security will:
- Take in more money than it is spending until 2017
- Including interest on the SS trust fund, not be spending more money than its income till 2028
- Not run out of money till 2041
Now Diamond-Orszag recognize there’s no crisis. Instead they say "there’s a minor problem and we can fix it with some tweaking." But even that minor "problem" is based on a long term projection which is dubious at best. We’ll have more on this later, but if you, say, just assume as part of your model a 1% more productivity increase per year, average, there is no shortfall. And yes, any long term estimate of productivity growth (or almost anything else) is just a guess.
The Diamond-Orszag proposal for fixing SS is hardly the only way to do it. You could simply remove the FICA cap and that would fix it. You could, since productivity is no longer properly going to wages as it did in the early post-war period, simply start taxing corporate profits to make up the difference. You could, as Diamond and Orszag themselves note, take estate tax money and use that to fund the shortfall.
There are plenty of ways to "fix" SS, even assuming it needs a fix (which is not clear) which don’t require benefit reductions or increasing FICA taxes on people earning median incomes. And there are ways to deal with the issue that are much more liberal. Perhaps we should push those? Or perhaps, instead, we should go back to "there is no crisis", because a problem that might, and only might, occur in 32 years, is hardly a pressing issue.
FDL will follow up on this issue some more. We’ll talk about why people want to reform SS (hint: it’s a money grab, even if individual accounts aren’t included) and we’ll talk about the problems with projections and better ways to fix SS. Because SS is too important to leave to people who think liberalism means reducing the benefits from a program like SS.
Footnotes:
1) Note that the Diamond-Orszag plan does not (as previously reported by Jane) propose to increase the age at which people qualify for Social Security.
2) I have used goods-producing workers, not because they are atypical (they aren’t), but because data on them goes back to 1947, so you can see the post-war rise, and how small the changes are after the rise stopped. A chart of non-supervisory, non-goods workers from 1964 on looks like this:
Wages from 1964, Real 1982 Dollars
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ian, why is nobody talking about reclaiming the “loans” taken out against ss by reaga/bush/clinton/bush?
the liberal alternative to “entitlement reform” includes single payer healthcare.
I’m wondering if now’s the right time to try to tackle SS. I know what I’m about to say is heresy, but there’s a national emergency going on (called the impending Bush Depression). The priority needs to be (1) fiscal stimulus, (2) fixing the banking system, especially fixing mortgages/foreclosures and ensuring the contined availability of traditional business working capital, (3) improving the short-term safety net for increasingly unemployed people, including healthcare. Can’t we get around to fixing the trust fund problem in a couple of years? It’s not going to go away, and we can always raise taxes once we throw enough rethugs out of congress in the next by-election.
Since George W. Bush has long wanted to ‘fix’ Social Security, fixing it must be a bad idea.
Thanks Ian.
i’m shocked!
Ian,
Why should we, the middle earners, listen to any person talk about Social Security that doesn’t have 100% of his income subjected to SS with holdings? If a “fix” is actually required why do anything other than adjust the cap. Perhaps slide it down beginning at about $250K to say 1% at a million. End of issue no?
I believe talk of reform is to divert attention away from the 4.3 trillion owed to the fund that will not be paid back.
correct, they shouldn’t even be broaching the issue but you can “never let a catastrohpe go to waste’
the need to do nothing and they would be just fine
Has the Orszag plan not changed since 2003? I would think it has.
Please forgive me if I think
to myselfthat that was the plan all along.Of course if I owed somebody even half that amount, I’d want to ‘fix’ it too.
suggested correction.
agreed. that would take increasing taxes, especially on the high end and looking at other areas of spending like the military.
quick, look over there! a shiny object!
The reason they want to fix SS NOW NOW NOW is classic shock doctrine strategy.
Many more pressing concerns than looting Social Security right now. Are we sure we want to commit billions more dollars to the Military Industrial Complex and thousands more troops to Afghanistan?
Author Tom Ricks said that Gen. Petraeus implemented his idea to provide payola to insurgents without consultation or permission from Dubya or anyone else.
It seems that Petraeus has some of those pallets of cash to use at his own discretion. Cool. /s
borrowed against it by reagan in his asset redistribution program.
sick stuff for a democrat to talk about forgiving these debts
Mr. Obama, tear down this shock doctrine!
I think we should be clearly communicating that we don’t want attention focused on SS at all right now.. fix the urgent problems, leave thet trust funds for some other time. I don’t want a solution we’re going to have to live with for generations produced during a crisis that has nothing whatsoever to do with the crisis (except in some rethug pundit’s delusionary mind). This is a distraction.
Ian, thank you for tackling the economics of it. I like your idea of returning to workers via SS the monies which were taken from them over 40 years of wage and union busting. Of course, I want to put in a plug here for single payer universal health care services. We need a ‘win’ and this would begin to assure us that our government cares about us.
Another systemic deficit maker which could be brought under control are the salaries of public servants at the senior management level who are often paid wages which do not reflect the living wage of their communities. It is a privilege to serve one’s community or government and not an attribution of personal significance or indispensableness.
It is a failure of our current leadership to be silent about Social Security when everyone is terrified of what the mindless Blue Dogs might do. It is a failure of leadership to put out an Orzag report, let the media identify him as the point man, and state that the charge on the deficit big 3 has begun and then not to reassure those who depend upon the big 3 (Medicaid, Medicare and Social Security) for their well being. In addition, cutting the deficit created by military and defense spending and other programs were never mentioned by those describing the summit.
Thank you. This “grass roots ground swell” of desire to fix non-existent Social Security problems has all the earmarks of the Village Voices crying, “If you want to fix the problems I caused, you have to give me something I’ve been trying to gut for seventy years.”
It might be useful to point out that horse traders needn’t both being trying to trade horses. Cows, sheeps and offal work. Village deal makers are like Chicago commodities traders. They’ll trade anything. “If you want something, I’ve got something, and you won’t get yours until I get mine, and then more of mine.”
Democrats often remind me of mid-level managers who get an afternoon off at an Asian market. They keep looking for the advertised price and get their money out before the bargain’s struck. Republicans are bidnessmen, often bad bidnessmen. But they work to the rule that if you aren’t screaming about the price of needful things, it’s too low.
Do these projections take into consideration the massive number of jobs lost, which is definitely a big factor in predicting income to SS.
The job loss and huge unemployment figures also effect the benefit amount a SS applicant will receive. That amount is based on a required number of years of earnings to arrive at that person’s average earnings. Low or ‘Zero Years’ effect that benefit amount just as zeros effect a grade average. (I have seen interviews and read statements by persons who have been out of work for 4 and 5 years.)
FICA taxes are paid not only by wage earners, but also by self-employed small business owners (who pay double the wage earner’s percent). The flat economy and high gas prices of the last few years have hurt or closed down many small businesses. That also puts a dent in FICA tax income to SS, as well as to the benefit amount due that category of applicant when he/she files for SS benefits.
Considering the current economic crisis and there being no real projection as to the length of its duration, I can’t accept charts showing SS tax income. I’ve seen predictions from ‘ending late 2009′ to as far as 10 years into the future…. truth, as I see it, is that nobody knows.
Good point. What a great time to make older people more nervous! This compounds our economic woes. Those who can spend – won’t – if they are worried about losing any of their SS benefits. JHC!
Really horrible timing on Obama’s part on this SS fiasco. He’s scaring old people unnecessarily.
John Conyers and Dennis Kucinich have a bill HR676, The United States National Health Insurance Act (“Expanded & Improved Medicare for ALL”), and are looking for supporters. See HR676.org/ (if the link doesn’t work it’s http://www.hr676.org.)
Are you sure that zero periods are counted? My impression (from looking at my annual I’m worth more (financially) to my wife dead than alive) statement from the SS folks is that zero quarters (it’s quarters rather than years that are counted) don’t count. That is, if you don’t have FICA taxable earnings in a quarter, then nothing goes in either the numerator or denomimator.
Thanks for plugging HR 676.
My sign for tomorrow’s peace vigil says:
universal
HEALTHCARE
Not
worldwide
WARFARE
Unless shown otherwise, it seems to be another battle in the war on the poor.
Social Security is always “twenty years away from running out of money” and has been ever since the Cato Institute and Heritage Foundation folks started screaming about this twenty years ago. In other words, there’s always around about a twenty-year rolling cushion in the Social Security kitty.
Back in late 2007, I discussed and dissected the arguments that the privatization wing of the Kill-Social-Security crowd’s been using:
Yes, hackworth, we need more ‘fairness’. (Not to mention consideration of the psychological ‘impact’ of proposed … ‘fiascoes’ …)
For example, it has been suggested that the new ‘Mileage Tax’ will tax everybody at the same rate, per mile, whether they drive a economy car or a Hummer.
This is a perfect example of the current manifestation of American “Fairness”.
Don’t you think?
However the thinking behind the policy probably doesn’t address the issue of corporate jet ‘mileage’, as, ‘that’ wouldn’t be ‘fair’.
But then, the corporate or moneyed cla$$ IS, ‘rightly’, above the ‘fray’.
(Down to earth solutions are for the little people.)
I haven’t read the plan, but I have complete confidence in Diamond and Orzsag. These guys are on our side, not on the rethugs’s side. Not only that, they have spent a considerable part of their distinguished (very distinguished in the case of Peter Diamond) careers thinking about this problem. Don’t confuse them with Feldstein, who has been twisting evidence and logic since the 1970s to get the SS programme dismantled.
I think what we are seeing them trying to develop is a comprehensive package that targets the most vulnerable people in society, which is as it should be. I don’t think they are playing politics with this thing.
Perhaps we will see something introduced like the Canadian retired low income supplement in Canada — the one that gets clawed back to zero when your income hits $60,000. Ian, you surely know that the CPP benefits are nowhere near as generous as SS in the United States. I’m getting QPP, and I’ve contributed at the limit for 40 years. My pension is about $850 a month (taxable of course, but that’s only fair).
I think we need to be vigilant, but let’s not get too excited too soon about this.
Diamond Orszag isn’t a panacea. The release date suggests very strongly that it has provisions to get Republican support – it was offered as a counter to the private account system Bush hoped he’d get in 2005. As such it is a liberal proposal, and the provisions increasing benefits for low wage earners are progressive.
The assumptions used by the SSA’s actuaries are subject to revision, and that could easily make the long term insolvency issue moot. Lifting the cap is something I support… I don’t know about your assertion that ceterus paribus lifting the cap averts insolvency – it sounds plausible, I’d prefer to see something from SSA actuaries confirming that.
It’s really clear that health care is a much more pressing issue.
Re the lack of connectivity between wages and production, I thought at first that this was just a rookie, and totally inexcusable mistake. But I thought about it and think now it was a mistake but of a different kind.
Diamond-Orszag came out in 2003. At the time, as your graph of non-goods producing jobs shows, wages in this sector were increasing (although soon to plateau). I think Diamond-Orszag’s projections were based on a short trend in this area (that didn’t last) but which they projected as if it would.
This reflects something more profoundly wrong with the assumptions upon which Diamond-Orszag is based. They seem to have bought into the whole notion of the dominance of the paper economy, that non-good service sector jobs would replace goods producing ones, and that the real economy with its goods producing jobs would continue to wither away.
But the bursting of the housing bubble and the subsequent financial meltdown have led to the collapse of the paper economy upon which, I think, Diamond-Orszag is based. Indeed going into a depression, it seems positively goofy to accept any of Diamond-Orszag without re-examining all of its basic assumptions. The economic landscape has shifted and Diamond-Orszag belongs to a time before that shift occurred.
knut – here’s the thing, people like larry summers and bob rubin have convinced me that just because someone is not on the rethug’s sides, that does not mean they are on mine.
re: hr 676
conyers has been a trooper on the issue of single payer, introducing hr 676 in 2003 (38 cosponsors), 2005 (78 cosponsors) and 2007 (93 cosponsors). each time there have been a lot more cosponsors and groups like Physicians for a National Health Program (PNHP) have been continuing to work (PNHP since 1987) to build the case and organize for single payer.
conyers has again, for the new 111th congress submitted hr 676 (on jan 26 and it already has 42 cosponsors). we can help by calling our reps to ask them to sign too.
more info on PNHP’s single payer resources and fact sheets and blog (current post: Subsidizing COBRA is not enough. We need Single Payer.)
more info also from conyers (he has been sending out emails on the issue of health care that are useful).
both the need and the momentum are building…..
Absolutely. Examine the assumptions being made, revise them as necessary.
The expansion of low end benefits should be kept, if possible low end benefits should be increased more than was proposed.
Other policy issues are more pressing. Re-coupling productivity growth and wage growth – EFCA will help, but there may be other ways to do this as well. Corporate tax policy that disallows expensing any compensation over $500k per year? Much higher marginal tax rates at $500k and $1M?
Health care is indeed a more pressing issue. Social Security reform seems to be an intended distraction, another example of negotiating by giving in before the negotiations start. Mr. Obama would be wise to remember that he’s dealing with the successors of those who repossessed Oklahoma farms during the Great Depression and plowed homesteads under. Empathy is not in their tool box.
Perhaps my explanation was too brief. The result of zero years (it is total earnings for the year that are calculated) is that the required number of quarters for SS Retirement Benefit Insurance (based on year of birth) are based on the highest earnings posted for that number of years. If a wage earner or self-employed person, for example, has very low (or zero) postings for the years immediately prior to his/her attaining age 62, then his highest posted earnings years will reach back into years when the wage base was lower. The Primary Insurance Amount is determined on the earnings covered by FICA up to the wage base amount. (the cap).
I’ve been retired since 1988, so things change – - and I am somewhat rusty.
The formula for benefit calculation was a straightforward deal until Reagan. In his Omnibus Reconciliation Act was a complex, razza-ma-tazz formula (indexed earnings, benchmarks with rounding down at each step, and rounding down to even dollars in the checks.).
You are wise to get a benefit estimate amount from your local SS office and ask for a full explanation of how that amount was derived. The Retirement Benefit Claims Reps should be able to adequately explain that. If not, ask them to explain more fully. Remember, they work for you. (If you get a dud, ask to speak to the RIB supervisor).
Requirements for Soc Sec Disability Insurance Benefits are entirely different. Same advice applies; get a benefit estimate based on the year of onset of your disabling condition, and ask for a full explanation.
As for making changes to the Social Security Act, that must be legislated by Congress. Don’t let ‘em do it!! Raising the cap is the only changes that I could agree with.
I can see SS eventually making the liquid wetter and flexing the pipeline by delaying benefits by one day each monthly benefit period, and adding a day’s benefit value (including an interest formula’s added amount) each time – giving the benefactor a hold on the capital for an additional day. It’s the other side of what AT&T’s Bellsouth did last summer when it altered its invoicing during a one-time shift from billing only per arrearage and use, to billing in advance (recurring services and fees). That shift ‘cost’ me nothing except for the proverbial use of my money, which was transferred to AT&T for their short-term-only benefit. (I wonder if they did that across the board, or here and there according to their needs at the time.)
I would really like to understand all of the reasons behind the sharp break between productivity and wages that occurred in the mid ’70’s and has never seemed to been restored. I suspect that there are multiple explanations including the upswing in outsourcing of manufacturing to Asia, the assault on unionization among others.
This needs to be explored much more completely and lessons learned need to be applied as we begin repairing the damage done to this country by conservatives.
How ’bout it Ian?
I’m no particular fan of the Diamond-Orszag plan, though for reasons that probably won’t appeal to most readers here. But Ian’s analysis above is basically wrong: Orszag’s claim that future retirees will receive higher real benefits than current retirees already takes into account that GDP will grow faster than wages (by around 1.7% vs. 1.1%). The only way that real benefit levels could decline is if real wages declined, which simply won’t happen over the long term.
More broadly, the GDP growth vs. wage growth argument is pretty dodgy. The key statistic here is labor’s share of GDP, which has remained roughly constant over the past 30 years. The reason it seems incomes have fallen so far behind GDP are first, that wages have become a smaller share of total compensation, while health care and other non-wage forms of compensation have risen; and second, that a different measure of inflation is used in calculating real GDP versus real wages (the GDP deflator versus the CPI). Once you account for those things, total compensation has risen more or less in line with GDP.
Finally, while as someone from the right it’s ok by me if you guys attack each other, the claims that the Diamond-Orszag plan would make huge cuts to benefits are pretty much false. If you look at the SSA actuaries’ analysis of the plan you can figure out that it fixes Social Security using around 85% tax increases and 15% benefit cuts, almost all of which are focused on high earners. If I were a liberal and someone offered me this deal I’d take it in a second; even with Democratic control of Congress you simply won’t get a better deal than this.
Oh, wow, Ian. I finally get to post a comment after so many “Comments closed” messages at the bottom.
First, I respect you, Ian. You’re not an an economist, and you know more about what’s going on. I WISH you were on Obama’s advisory team or Cabinet.
But I gotta say, Social Security is a Ponzi scheme. My actuarial table shows I likely won’t get anything for all that I’ve put in. Most people put in FAR LESS than they will ever take out, and our population is not a growing pyramid.
Lastly, Ian. I’m disappointed. I’m a huge fan of yours, but then you wrote “I hope everyone who voted for the recall, and for tax cuts, and for Republicans is happy: they’ve succeeded in turning CA into a third-world country.”
I’m sorry, Ian, but we’ve got to rein in our excesses. Our state budget DOUBLED in the past 10 years while our population only grew by 10%. Why should we try to meet a $40 billion budget shortfall ($10 billion of which is a scheduled increase in spending, not actually comparable to last year) with huge increases in state income tax and state sales tax and state gasoline tax – when we:
1. Have hundreds of thousands out of jobs and facing foreclosure and facing cutbacks in income.
2. Have teachers paid more than in most other states, yet deliver bottom-ranking student performance. (Look at Utah, where teachers aren’t paid nearly much but they deliver performance amongst the Top 5 states.)
3. Have prison guards making $90,000 per year, thus costing our state $40,000 per year per inmate incarceration when Florida does it for $20,000 per year per inmate and even the Federal government does it for only $26,000 per year per inmate.
I certainly think we need to trim back our BLOATED state budget and state government and renegotiate with the unions. It’s time to trim back when income and job losses and this general economy dictate that we do.
We can still be a great and golden state. We just got to stop killing the golden goose of suffering taxpayers to sacrifice it at the feet of a GINORMOUS state budget that has no business spending two times what it spent 10 years ago when state population has only grown 10% in the meantime. There are many other states that could do what we do, with less money, and none of them are 3rd world. They’re right here in America.
California needs prison reform. The Correctional Officers Union has way too much political influence – Republicans like them because it plays on “tough on crime” lawn order rhetoric. Dems like them because they’re Union! and they can also play lawn order BS. Both parties like them because they donate profligately to campaigns.
There may be other places to cut spending as well.
Actually, median wages for individuals are down in absolute terms over the last 8 years. So I’m not thinking I agree with the 1.7% vs 1% projection, that’s quite unlikely given the last 8 years were good compared to what’s coming down the line.
Of course, if you add in non wage compensation the picture changes, but then adding in insurance which is growing far faster than whatever type of inflation you chose to use is something that I’d rather not do — instead I’d like to cut those costs by a third by going to some sort of decent universal health care. Americans lives have not notably been improved by increased health care costs, so there’s very little utility to that inflation.
I note also that you are discussing total compensation rather than median, two rather different things.
It’s not about the population growth (mainly) it’s about whether you have a richer more productive economy than you do now. If that SS money is spent correctly (ie. not on wars in Iraq), then you will.
As for California, tell me how much you’d have to cut wages to make up the gap? The fact is that the governor before the Governator was on track to close the deficit, instead you got Schwarznegger, who decided debt was the way to finance the state budget.
The last cut proposal I saw had huge cuts to things like health care for poor people.
But if Californians want to cut their way out of this mess, be my guest. I’m betting you aren’t going to find that many painless cuts in the budget. The answer, I’ll suggest, is both targetted cuts and tax increases. And a repeal of the entire proposition system, as far as that goes.