Redstate

Matthew Yglesias is blogging from the conference as well.  Check out his site for a different perspective.

There is a continual debate about blogging.  Is it news or not?  I don't hold the answer.  But seeing a major think tank invite bloggers alongside news reporters to this conference seems to be an interesting step toward legitimizing blogs as a news media.  They don't have wifi, but the were prepared with ethernet cards and cords.  It wouldn't surprise me to see them replicate this effort in the future.

Heritage's VP for Domestic Policy is giving a brief overview of Social Security.  He describes SS as "social insurance."  And asks "is that system sustainable?"

How do we balance the obligations of one generation to the next?  Do our government obligations to seniors trump all other obligations of government?  The numbers game is just an "implicit element" of the bigger debate.

SS is a combination of insurance and an annuity income.  In the current view, there is no "nest egg."  Is it time to redefine or modify SS to help create a nest egg as part of its purpose.  This impacts poorer retirees more as they are less likely to have the nest egg part of retirement security.

Should we change the social contract to make it more income-sensitive.  This would move SS from a social insurance program to a blended social insurance base and a second part based on need (instead of income).  This would move SS toward a more welfare-like program.

The means-testing idea of reform is cutting in an unusual direction.  Having a major Heritage figure suggest a more welfare-based system probably seems odd to some.  I can think of two explanation.  First, it could be sweetener to liberals to acquire personal retirement accounts.  Second, and more nefariously, conservatives could believe moving away from the "fair" system we now have and toward a welfare system will lower support for SS in the future.

A good question from Jay Anderson about why SS was originally setup as a universal program.  Most people (including myself) think SS is universal because it creates political support for the program.  Mr. Butler points out that there is both a political support reason and a belief in social insurance based on mutual obligation where everyone puts into the bucket and it is doled out to everyone.

FWIW, WaPo reports that the President is campaigning for personal accounts.  Nothing too new, but they do misreport one fact:

The Bush plan, which would be phased in over time, would eventually allow workers to put nearly two-thirds of the 6.2 percent Social Security tax they pay into private accounts.

 The tax is 12.4% with half of it hidden because it comes from the employer.  Thus, only 1/3rd of the tax would go toward the PRAs.

Mr. Beach is a Heritage Data guy and Mr. Greenstein is a balancing liberal policy expert.

Beach: (focus on aging)

"Demographic momentum" driven by the retirement of baby boomers and raising life expectancy is the major driving factor of many public policy problems.  Along with higher standard of living expectations.  "70% of all human beings who have ever lived are alive today."  Increasing average age of population creates many problems.  The world population of over 55 will probably outnumber those under 55 by the mid-century.  We might have to choose between child-focused funds and grey-haired funds.  Strongly recommends Coming Generational Storm.

Bigger demogrpahic trends show population declining in Russia and Japan.  That trend is spreading to Europe and would hit America if it wasn't for immigration.

1900. Median age of 22.9 with life expectancy of 47.  4% were over 65 years old.
      
      
2000. Life expectancy of 76.  12% were over 65 years old.

Revenue shortfall geneally leads to raising taxes first, then cutting benefits.  Or a combination of the two.  And then a tweaking of the retirement age.  These changes have kept SS financially sound.  However, now it is apparent that demographics are working against the current setup.

When there were 15 workers supporting one retiree, payroll taxes were lower.  Now there are less than 4 workers per retiree which means each worker pays more.  That ratio is continuing downward.

Because baby boomers are rather healthy (dieting and exercising), they will live longer than past generations.

Demographic momentum is shaping this debate.  It is also shaping the Medicare debate and touching on other public policy issues.

Greenstein: (CBPP policy guru)

SS financing gap isn't too bad.  Medicare is worse.  However, there is no free lunch in fixing the SS financing gap.  Most people in the debate acknowledge two long-term numerical analyses of the SS financing gap.  Trustees project insolvency in 2041, CBO project insolvency in 2052.    2017/2020 is when SS tax revenue no longer covers benefit outlays.  2027/2033 the tax revenue and interest from the Trust Fund can't cover the benefit outlays.  2041/2051 the bonds run out and only tax revenue is left.  Thus the shortfall.

Trustees: $4 trillion over 75 years

CBO: $2 trillion over 75 years

Trustees: $11 trillion over infinite horizon (1.2% GDP)

There is enough SS tax revenue to cover current workers.  It cannot cover the existing retirees.  Historically, the first generation of retirees received funds without paying in many years (or any in some cases).  That unfunded liability is still hanging over Social Security or a "legacy debt."

There is no way to make that legacy debt disappear.

Harvard Economist Robert Barro wrote "Advocates of personal accounts cite the low rates of return in the current system, but this is misleading. Prospective returns to young people are low mostly because we gave benefits to older generations of retirees who did not contribute their share of taxes to pay for them. One way or another, the burden of this generosity has to be borne by the young.  From the perspective of the trust fund, returns look low because the fund's government bonds have paid less than stocks.  But the premium on stocks is compensation for risk, as gauged by financial markets. Although the ability to hold stocks is a plus, there is no free lunch of assured higher returns."

The problem isn't that big.  But health care costs going up at the same time makes the issue much larger.  SS alone is not an unmanagable problem.

There is no free lunch

What can we do?  SS is designed so that benefits should replace the same percentage of prior wages earned.  The average wage earner gets a payment for about 36% of their average wage before retirement.  But the actual check they get is lower because of the Medicare premium and the new Drug Benefit premium.  Those premiums increase at the rate of health care costs while the SS payment increases at the rate of wages.

There are no magical new options.  Taxes go up or benefits go down.

Greenstein:

Question on how to fix solvency without PRAs:

74%/78% of promised benefits can be paid after 2041.  66% by 2080.

Increase payroll taxes 1.92% immediately to 14.32% (from 12.4%).  Increase payroll taxes more if you change later.

Eliminate payroll tax altogether.  Not pushed by many people.

Indexing retirement to life expectancy is an option.

Calculators:

Harry Reid

Heritage Foundation

CATO

Non-partisan FactCheck article debunking Reid's calculator

Opinion Journal has an article by HUD Secretary Alphonso Jackson on the benefit of PRAs to minorities:

Black Americans have the most to gain from the proposals. As it stands today, black seniors are disproportionately more dependent on Social Security, but they receive less benefit from the system. While approximately 20% of white Americans depend entirely on Social Security for their retirement income, the figure doubles for blacks.

But blacks receive far less in return for their Social Security contributions. One in three will get no benefit at all because he will die before he is eligible to collect benefits. After a lifetime of paying into Social Security, nearly 30% of black seniors are left in poverty, compared to 7% of white seniors. And while the average black male lives to age 67.8--after collecting less than one year of Social Security--the average white male will collect seven years of benefits. In effect, black workers are subsidizing the retirement of whites. The inevitable results of not reforming Social Security--raising payroll taxes or reducing benefits--would only worsen the situation for blacks.

Today, about half of the nation has money invested in stocks. The other half doesn't earn enough to afford the freedom to invest. Despite their inability to save for their future, these low- and middle-income workers are forced to pay 12.4% of their income into Social Security--a system that generates no wealth. An individual can work for 20, 30 or 40 years, but if he dies without children under 18 or a spouse over 65, none of that Social Security money is passed on.

Rea Hederman, Heritage data guy:

Heritage assumptions:

SS Bonds (IOUs) are not included since they are not economic assets.  Assuming they will not be repaid.  

Assuming 4.9% real growth which is based on SS assumption.  That is adjusted to 4.6% to pay for the 30 basis points of administrative costs.

Use a Thrift Savings Plan annuity calculator to turn a PRA into an annual annuity payment.

I had tried to get these assumptions from one of the policy analysts at Heritage before.  They are slanted.  Not as bad as Reid's, but they make assumptions that create desired results.  A non-partisan calculator would be a much needed addition to the debate.  Mainly, one that assumes the Trust Fund will be paid back but has reasonable rate of return expectations (4.9%-7.0%).

One of the other bloggers here challenged Mr. Hederman to open the source code of the calculator on the Heritage website.  You invite the bloggers and you get a different view on things.  Open source  is popular for bloggers as it is the basis of blog-linking.  The push for transparency will be stronger from bloggers.

Third-term Congressman Pence who heads the conservative Republican Study Committee is a blogger.  He is also spearheading the opposition to "add-on" PRAs in favor of real PRAs.  The RSC's opposition to "add-ons" should doom that proposal.

Congressman Pence:

A 1994 Republican revolutionary type who got elected in 2000.  Feels like he missed the boat.  After NCLB and Medicare Drug Benefit, Congressman Pence worries that another conservative idea will morph into a massive new entitlement.

Medicare costs 7 times what it was promised to cost.  The history of entitlements is that they always cost many times what is projected.

Ryan-Sununu has a lot of support among House conservatives.  It is a big personal account (up to 6 percentage points of the 12.4% payroll tax).  No long phase-in.  No raising taxes.  No payroll cap rise.  No payroll tax increase.  No new mechanism of taxation.

On taxation, House conservatives feel bullish.  They are unified and strong in opposing tax increases.

On "add-on" accounts: liberals are main pushers for this reform.  George McGovern, Robert Rubin, and President Clinton all put forward "add-on" accounts.  Conservatives see it as a gimmick that result in a net increase in SS entitlement spending.

There are only 3 choices for "dealing with the enourmous obligation we have"...: "break promises to seniors..., raise taxes through the roof..., or take the same amount of money and make it work harder through compound interest."

Endorses voluntary personal retirement accounts.  Quotes Einstein on power of compound interest.  City of New York allows choice between social security or a personal account.  Anecdote of $36,000/year janitor in NY who has almost $300,000 in the bank at 38 years old.  "This is the vision for America that we want as opposed to depending on people like me."  References Flemming vs. Nestor to point out that the Supreme Court has ruled that you have no right to your social security.

Congressman Pence believes that the President could win any proposal by taking it to the American people.  He alludes to President Reagan lowering taxes in the early 1980s with a Democratic Congress.

We're in Phase I: There is a problem.  Many House conservatives want to get to Phase II: Actual Proposals.

We may move indexing from wages to inflation.

Congressman Pence: "They could pass the House."  He then qualified it a bit.  He is optimistic about the House.

The Senate is another story.  As with most major iniatives, the Senate is where the battle will take place.

Congressman Pence also mentions Galveston, TX and its decision to opt out of Social Security for city employees.  They are a success story of PRAs.

He also talks about the "immorality" of a system that takes payroll taxes from half of African-Americans who never see more than a year of Social Security to pay Florida retirees who probably had an easier life.  Congressman Pence says that "if he were President, he would be in an African-American church each week" making that argument.

Mr. Jackson is presenting on international demographics and the policy issues that are driven by them.  Here is their work on aging policy issues.

Many of the issues he is discussing are outlined in this policy paper (.pdf).

His overall result is that countries' vulnerability to problems rank from the least problems (Australia) to the most problems (Spain):

Low vulnerability:

1. Australia (-1)
   
   
2. United Kingdom (7)
   
   
3. United States (18)
   

Medium vulnerability:

4. Canada (42)
   
   
5. Sweden (48)
   
   
6. Japan (50)
   
   
7. Germany (52)
   
   
8. Netherlands (62)
   
   
9. Belgium (63)
   

High vulnerability:

10. France (81)
    
    
11. Italy (84)
    
    
12. Spain (93)

Mr. Jackson holds up Australia as a good case.  They have forced savings personal accounts and means-tested programs.  They are in the best situation of all countries.  The UK and US have real problems that need to be dealt with.  The US' main issue is with health care.

The list is unsurprising.  The best positioned countries are the most free market and decently high birth rates (closer to 2 children per woman).  The worst positioned are highly dependent on government for benefits and have low birth rates.  Spain and Italy being very high on benefits and very low on birth rates.

Alison Fraser, with Heritage, and Heidi Hartman from the Institute for Women's Policy Research are sparing over whether SS is a "good deal" for women and minorities.

Fraser:

There are 3 things wrong with SS: First, there are no property rights.  If someone dies before retirement without any dependents, all of their money is lost.  Second, there is no investment aspect to social security.  No opportunity to let money work for families.

Payroll tax rose from 2% to 12.4% over the past few decades.  

When individuals and families start saving and investing, their behavior changes.  There is a positive cycle in terms of behavior

If you die early, you lose every cent you put into the system.  "That's wrong, and that's unfair."

On women specifically.  Three things: First, couples that have the same income get different returns if the woman works or not.  Second, divorcees don't receive benefits if they weren't married for at least 10 years (which is longer than the average marriage).  Third, SS benefits are raised for high-income earner than a low-income worker, which are disproportionately women.  That impacts 2/3rds of women.

Scenario 1: Husband dies and 3 children are all over 18.  Wife gets nothing and children get nothing until wife retirees.  And only if wife does not re-marry before age 60.  Under a PRA, the property rights to the payments allow widows to have increased financial security.

Scenario 2: Husband works, wife doesn't.  Total income of $36,000/year.  Husband receives $1300/month and wife receives $650/month.  Total benefit of $1950/month.  Second family.  Husband2 makes $24,000 and wife2 makes $12,000.  Total family income is $36,000/year.  Husband2 makes $1,000 and wife2 makes $650.  Total family benefit is $1,650/year which is $300 less than the one-income family.  The survivor benefit is also different ($1,300 vs. $1,000/month).

Personal accounts allow working women a chance to save their money.  It eliminates the work penalty that exists right now.

Widows and poverty.  1 in 5 of all widows are still in poverty despite SS.  

Yes, she said 3 things and only listed 2.  That's not a typo.

Hartman: (President and CEO of Insitute for Women's Policy Research

SS pays out a better return for women and minorities and is thus a good deal for most of them.

References CEPR SS Calculator.

Black beneficiaries receive SS disability at twice the rate of white beneficiaries.

Low earner who is long-lived may not accumulate enough to cover their full retirement since the guaranteed benefit would be smaller.

Michael Tanner has been working on SS reform for longer than most people in Washington.  Unfortunately, his counterpart (Maya Rockeymoore of the Congressional Black Caucus) is a no show.

Tanner:

Most Americans don't realize that they have no guaranteed benefits.  There is no legal obligation to pay back your social security.  They're not guaranteed financially or legally (see Fleming vs. Nestor, 1960).  Media reports that call them guaranteed are incorrect.  Congress can change the rules in the middle of the game.

Thus funds are not inheritable.  And millions of Americans pay into the system but die before they retire but after their children are over 18; they lose every dime they put into SS.

Rich children end up rich.  Poor families don't have much legacy to leave to children.  Their children are thus poor and more likely to stay poor.  PRAs would allow families to pass on money and decrease the number of poor children and thus less poverty in the future.

The rate of return for young people is terrible.  Most young workers will receive 1.4-1.6% annual rate of return.  And raising taxes or cutting benefits will make that worse.

The essence of choice is denied by the current system.  American workers deserve more choices.  American's decide where they want to live, what they want to do, and what car they choose to drive.  Why don't they have choice over their retirement funds.

CATO is launching a major PR drive in the near future (60-120 days) to drive home these issues.

CATO's proposal (the 6.2% solution) has been introduced by Tim Johnson and Jeff Flake and several co-sponsors.

TSP hasn't been politicized as CalPers has because it is a defined contribution unlike CalPers' defined benefit setup.  In TSP, personal ownership creates a less politicized environment.  CalPers has encountered a lot of political problems about where they invest their money.

This national debate has to come to some sincere conclusions quickly and then the political means to enact that decision have to be agreed upon and acted upon.  There is no other time than now.  This is not a question that can be put off for political reasons for another year.  My guess is that if meaningful reform in Social Security doesn't happen by the end of this summer, it never will.  

But I can tell you that the opinions I heard from a lot of liberals just after the election, once the shockwaves passed, amounted to the commitment to make sure that even if the President's foreign policy had been prescient (which they weren't going to admit), they ALSO weren't about to allow the Republicans to change Social Security.  More than that -- they were newly committed to making sure that this Administration got NOTHING done domestically.  And they are doing that very effectively.  We won the majority, we'd better start acting like it, and stop squabbling, and soon.  

Michael Tanner added during the Q and A session that he has talked with several Democrats' offices who are quite interested in personal accounts.  His take is that the leadership is really clamping down on this issue with threats of lost committee assignments, funding, etc.  He says that if the dam breaks, there will be quite a few Dems supporting PRAs.

That is definitely good news, especially put along side the fact that House Dems are open to negotiation.

I have two things to say about Mr. Tanner.  First, he is the most knowledgable person I've heard from on the social security issue.  And second, his inside information about Democrats was the most interesting new tidbit of information I learned today.

Doverspa -

High marks and many thanks from me for your excellent commentary on this.  It's an issue of great importance, and I personally appreciate your timely and non-partisan coverage.

Many very interesting points and issues here.  Is there anyplace we can go to follow up on the conference -- transcripts of addresses, etc.?

Thanks again -