ECONOMY AUGUST 22, 2011
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This article is a contribution to 'Is There Anything That Can Be Done? A TNR Symposium On The Economy'. Click here to read other contributions to the series.
With millions of Americans out of work, a mounting federal debt, and the national economy at risk of a renewed recession, no one seems to be thinking about the Social Security system at the moment. But they should be. Fixing Social Security—that is to say, restoring the program’s actuarial balance—would serve our economic needs in a number of ways. It would help with our long-term fiscal problems without damaging our short-run outcomes; moreover, it would be a lasting commitment, not a seeming fix that might be undone. Most importantly, it’s something that our existing political system might actually accomplish.
In contrast to fixing Social Security, addressing now the budgetary elephant in the room, healthcare costs, has little to recommend it. We don't sufficiently understand how to make health care work better. We do understand how to shift costs from the federal government, but that does not address the root of the problem. We have a healthcare cost problem not only for the federal budget, but also for state and local budgets, for businesses and for individuals. In short, we have a system that doesn't work well. While there are some changes we should make now, learning how to fix it thoroughly is going to take experimentation, evaluation, and repeated corrections. Not to mention the fact that we have a history of some of the cost-lowering legislation in the health care sector getting canceled later. Tax reform has a similar history of some backtracking; a number of the important 1986 tax reforms have already been rolled back.
Social Security, by contrast, is both easy to understand, and already has a history of significant, positive, lasting reforms. The program’s design is simple: it’s essentially money in and money out. Everybody who looks at it understands how it works. We also can estimate, with fairly good accuracy, what sort of behavioral changes—and cost savings—would be produced by changes in the program’s parameters.
Moreover, restoring Social Security’s actuarial balance makes eminent macroeconomic sense. It would have a significant effect on the debt held by the public in the long run, without harming the economy in the short run.For example, the reform that Peter Orszag and I proposed in our book Saving Social Security would have reduced debt held by the public by 25 percent of GDP within 45 years of its enactment.
It’s encouraging, as well, that there’s a pretty good track record for Social Security reform. The last major reform of Social Security came in 1983, and it looks likely to have given us 50 years of ability to pay scheduled benefits. None of its major provisions have been rolled-back, not even the controversial increase in the age for full benefits from 65 to 67. In fact, Social Security has a long history of addressing future concerns with sustainable policies: Future payroll tax rate increases were incorporated into the program from the very beginning. While these increases were sometimes delayed and sometimes accelerated, they were never canceled. Even now there’s largely a consensus on how to approach fixing Social Security: Everyone agrees that we should phase changes in slowly, thereby having no negative short-run effects. In short, if we fix Social Security, we are very unlikely to undo it.
And with the system’s trust fund reserves projected to run out in 2036, pretty much everyone agrees that we do have a Social Security problem, and would have one even if we didn't have a debt or overall deficit problem. Starting in 2036, the payroll tax revenue will continue to flow in but will be enough to pay only three-quarters of scheduled benefits. With no legislated change, benefits would need to be cut by a quarter.
In some ways the current political climate makes this an especially good time to try fixing Social Security. Fixing Social Security involves some combination of raising taxes and lowering benefits, both of which are very hard to legislate until the public feels it’s facing an imminent crisis. Heightened concerns among many Americans about the long-run debt held by the public should help cultivate acceptance for changes in Social Security.
One issue that has held up reform is the dispute between Republicans and Democrats over whether to use existing payroll tax revenues for individual savings accounts. I suspect that idea is no longer much in play—not least because diverting payroll tax revenues from Social Security’s existing trust fund to individual accounts with diversified portfolios would add to public debt. The reason for that is simple: Instead of the trust fund using payroll tax revenues for the purchase of government debt, some revenue would instead go to individual purchases of stocks and corporate bonds, resulting in more debt that gets sold to the public and so more risk of a negative bond market reaction and a greater cost if one does happen. For example, the proposal from the Bush administration would have added 19 percent to the debt to GDP ratio by 2050. And some proposals would have had massive increases—the proposal by Congressman Paul Ryan and then-Senator John Sununu would have added more than 90 percent to the debt to GDP ratio by 2050.
The hard issue is what mix to have between additional revenues and decreased benefits. To get the 1983 Social Security reform, President Reagan and Speaker of the House Tip O'Neill agreed that the mix would be 50/50, and they set up a committee to work out the details. Congress stayed fairly close to that balance, if not exactly on it. Finding an acceptable mix remains a serious problem and policymakers will need to find a mechanism for addressing it.
The base-closing commissions remain a prime example of Congress partially tying its own hands in order to get an improved result, an example that lot of analysts now want to use. Following that example, a Social Security commission’s report (with a sufficient majority) would receive special congressional rules requiring an up-or-down vote and disallowing the use of a filibuster. To make this work Congress should legislate instructions to the commission requiring a particular balance between direct revenue increases and benefit cuts. (Any increase in the maximum earnings subject to tax or coverage of state and local workers would increase both revenues and benefits and should be treated as a separate category). Unlike much of the legislation discussed in Washington, the public should be able to relatively easily follow the Social Security debate, and what it would mean to refuse all revenue increases or to refuse all benefit cuts for the program. Neither position is politically viable for a plan to rescue Social Security and polls have repeatedly shown that the public wants a balanced Social Security reform.
Social Security reform--with its large contribution to the long-run debt problem—should not be seen as exclusive, but combined with the sort of large infrastructure program that could stimulate the economy. As with Social Security, there is wide agreement that we have major infrastructure needs throughout the country, and fixing now what we would otherwise need to fix later would not really add to the long-run debt level. In fact, current infrastructure spending would have a lower real cost by drawing in part on otherwise idle labor and capital as well as having a multiplier effect on unemployment.
But while reforms to Social Security would ideally be combined with this kind of fiscal stimulus, at a time of rising polarization, policymakers should at least address those problems that we know we can fix. Social Security is the place to start.
Peter Diamond is a Professor Emeritus at MIT and a co-recipient of the 2010 Nobel Prize in Economics. He first consulted to U. S. Congress about Social Security reform in 1974 and has remained active in Social Security analysis here and abroad ever since.
25 comments
Um, okay, but how does reducing federal debt by 25% over the next 45 years address 16% real unemployment NOW? This essay is analogous to recommending a fresh coat of paint for the living room while in the kitchen a grease fire rages unchecked.
- AaronW
August 22, 2011 at 12:18am
To a hammer, every problem is a nail.
- AaronW
August 22, 2011 at 12:20am
"We don't sufficiently understand how to make health care work better." How about we try what the other industrialized countries do: have a single, publicly accountable system to pay for health care. They spend a little over half what we do and have better outcomes. Then tax 90% of income with the payroll tax, like the system was set up to do and now we've mostly taken care of Social Security. The fundamental question is do we want to use the debt as the excuse to continue the gutting of the middle class/feeding the wealthy and corporate interests as we have the past 30 years, or do we want a country that works for us all.
- bsemple
August 22, 2011 at 12:54am
Prof. Diamond, I have a perfect solution to all debt problems. KILL THE BASELINE. Or, mathematically, equate it to zero. But that requires honesty and loss of political power. The infrustructure part of the essay implies that the Highway Bill is not passed every year, and now Social Security somehow is connected to an unknown future infrastructure, which we don't have. Watching Ed Rendell rants about the stimulus "for the infrastructure" on the History Channel for 2 years would make one think they have thrown $2T into the infrastructure projects already. Now the infra thing is attached to Social Security. Are you talking about another "stimulus" or is it stimucurity or socistructure? Or, how about this: The Union Job Security Act Equals Endless Road Construction. Also, SocialSecurity is (according to the professor) Road Construction. What else? Unions keep Democrats in power. United Health Care push the Medicare costs up. It's a union, they want job security. Hmm, Socrates is a mammal. Dobin is a horse, but also a mammal. All mammals eat food. Do I have enough for two syllogisms? No, but enough for checking the associative and cumulative properties of political propaganda. Social Security + Endless Road Construction=Union Job Security + Democrats in Power Forever. Road Construction+Unions= ResurfacingDeclared as Construction and the real money put in the Union Pensions. Total Unionization + Infrathing=Social Security Wow!!! 99% of the vote of the workers went to the Party of the Bright Future, it'll give you Social Security for about a decade. It's called MoneyForEducationMoneyForInfrastructureMoneyForFamiliesPinkJobs. That's what the essay sounds like to me. I don't see any connection between Social Security and the 3 years of infra noise other then thurst for power.
- SayNo2TAM
August 22, 2011 at 1:15am
"We don't sufficiently understand how to make health care work better." Let's adopt the Canadian system: Canada Per Capita Health Expenditure: $3,173 Life expectancy (2005): 80.3 years Insurance method: Single payer in each province. United States Per Capita Health Expenditure: $6,096 Life expectancy (2005): 77.8 years Insurance method: Single payer over 65 years, otherwise confused. So Canada spend about half what the U.S. does per capita, and Canadians live longer. It's not their good weather.
- jonrysh
August 22, 2011 at 2:53am
Canada Population 34 million, barely managaeable single payer Live within 100 miles from the US border Per Capita number of brutal trial lawyers - 30% of the US Number of Medical Device Companies - 1000, buy what you want from less than 100 miles away US Population 308 million for Obama-the-manager to manage, peanunts compared to Canada Per Capita number of brutal trial lawyers - More than anywhere in the world Number of Medical Device Companies - 56000 Insurance Sales Locked within States Boarders Trial Lawyers' Life examplified by John Edwards' $8mil home, nothing like it found in Canada
- SayNo2TAM
August 22, 2011 at 4:12am
Peter is an extraordinary economist, and I really admire his work. But, I do question how much enhanced longevity for Social Security would benefit the economy right now. Bill Gross has gotten some big picture things right ("the new normal") and other contentions of his have been more dubious (e.g. http://krugman.blogs.nytimes.com/2011/06/10/the-decline-of-pimco-macro/) Here is his contention on that topic: " Politicians feel that fiscal conservatism equates to job growth. It's difficult to believe, however, that an American-based corporation, with profits as its primary focus, can somehow be wooed back to American soil with a feeble and historically unjustified assurance that Social Security will be now secure or that medical care inflation will disinflate. Admittedly, those are long-term requirements for a stable and healthy economy, but fiscal balance alone will not likely produce 20 million jobs over the next decade." Maybe if it was paired with a short-term full payroll tax holiday, or something. Keep the bond holders happy and get a nice boost now.
- darklayers
August 22, 2011 at 4:36am
Is this essay intended as parody? Does fixing a problem that won't arise for another 25 years give a boost to the confidence fairies and thereby fix the low output, high unemployment crisis we have today? I don't know about those confidence fairies, but if the 1983 social security "reform" is Diamond's idea of a model for another round of social security reforms today, then the middle class might as well bend over and get ready for another prod up the rectum. Of course, the reason Diamond and those like him are running around with their hair on fire screaming that we must "fix" social security now is because the 1983 "reform" was an illusion, an illusion that will become evident in the next couple of years when it comes time to start spending the social security "trust fund" created by the 1983 "reform" that doesn't exist. The 1983 "reform" accomplished two things: first, it created the largest lower to middle income tax increase in history, and second, it enabled the adoption of the largest upper income tax cut in history. Now, that may be Diamond's idea of good tax policy, but it isn't mine.
- rayward
August 22, 2011 at 7:25am
I can only second the comments above (with the exclusion of SayNo, of course). When I first read this late last night, my instant reaction was more or less that of Aaron's first comment, although less colorful. Given the author, however, I thought I had better at least give this another slow read before saying anything against the possibility that I had missed something important. But Aaron makes the only point that needs to be made. We simply do not need any more of this deficit hawkery, no matter what the guise, no matter what the source. Future social security deficits are a minor problem at best and they have nothing at all to do with the current recession. Want to "fix" social security? Tie benefit levels to median household income (so that social security recipients benefit from productivity gains but not more) and tax all income to pay for it, on a unified income tax basis -- or even with a flat base tax if we must. Tying benefits to median household income assures that we can always afford them and prevents unfair inter-generational transfers. Making all income the tax base for social security as part of a unified progressive system assures that there is never a financing problem. With that, we could simply liquidate the "trust fund" by declaring it vanished as it would be completely superfluous. There would no longer be any need to issue debt, new or previously purchased, to fund social security. We would not need accounting devices to distract from the reality that present benefits always represent a share of current output, not some transfer from the past of, lordy, from the future (shades of The Terminator). That didn't take long, and has nothing whatsoever to do with our current economic emergency. Thank you, Aaron, et alia for the plain and obvious truth. I cannot imagine what Diamond is thinking other than per Aaron's second comment.
- roidubouloi
August 22, 2011 at 8:25am
"transfer from the past or, lordy, from the future"
- roidubouloi
August 22, 2011 at 8:27am
yeah, I expected better from Diamond. No one should even be making SocSec the primary target, especially for deficit reduction! I thought there were a lot of examples in the US of how to bring health care costs down, e.g., Kaiser Permanente. Or, how about Mr. Diamond explains why New York MedicAID spends almost twice per capita for longterm care than Connecticut or New Jersey?
- K2K
August 22, 2011 at 10:24am
yeah, I expected better from Diamond. No one should even be making SocSec the primary target, especially for deficit reduction! I thought there were a lot of examples in the US of how to bring health care costs down, e.g., Kaiser Permanente. Or, how about Mr. Diamond explains why New York MedicAID spends almost twice per capita for longterm care than Connecticut or New Jersey?
- K2K
August 22, 2011 at 10:25am
Social Security is a minor, easily fixable problem. This post is the equivalent of how the deck chairs should have been arranged on nthe Titanic to slow its sinking.
- drofnats1
August 22, 2011 at 1:09pm
Wrong! Health care can be fix. Every economist knows that any item that passes more hands before reaching the customer rises in price with each hand it passed through. Simple then! Instead of enriching the insurance companies that do zero for the health of people, cut them off of the gravy train. Universal health insurance will lower the cost of health insurance to European levels where universal insurance is the norm. Then control fraud and relax.
- Poupic
August 22, 2011 at 1:42pm
This won't make a dent on anyone's thinking, but with these sorts of theorizing/projecting what the future holds for the economy, are useless mainly because the muck up what should be a much simpler analysis. I use intuition instead of analysis and logic. I haven't the tools to analyse or think logically, but my intuition has answered at once every question, as if the answer awaited the question. In 2003 I was alarmed when talk first began about invading Iraq. I knew if we did, we would be caught in the Middle East, and never escape. As soon as home prices began rising, on intuition I believed we were headed for nothing but trouble. The day the investment banks began to collapse, I "knew" that it would take a decade to recover from the disaster. Now I sense we won't fully recover possibly for longer than a decade, approaching 2020, or later. I also believe the worst is yet to come, a depression like the Great Depression, though with less suffering. So we'll see, obviously. I think healthcare costs can and will get lower, how much I don't know. They would get a lot lower with simple changes to the way we use medical care. Specifically, psychiatric care for depression would cost less if people replace name brand generics, and use previously used meds. Side effects wouldn't be much less, in many cases they will improve. Also, cutting the use of annual physicals, and most of all antibiotics. If a person's cold doesn't worsen after ten days to two weeks, no medication other than an analgesic and/or other the simplest, cheapest over the counter meds. Realistic thinking about, for example, tests and treatments for prostate cancer, even breast cancer though it is a far more serious condition. One has to die of something, and doing nothing works as well or better for problems than doing much of anything. Eat a balanced diet, don't smoke at all and drink no alcoholic beverages. Cut out sugar or drastically reduce it. Eat foods the way they are, only salted and/or peppered. You will adjust in 30 days or fewer.
- Tgossard
August 22, 2011 at 3:06pm
Oh, yeah, leave Social Security/Medicare alone. We may be forced to change it, but when we do is soon enough.
- Tgossard
August 22, 2011 at 3:27pm
Excellent article. The those that love to talk about the life spans as a figure of merit for the effectiveness of health care.... Take a look at the life span of a Swede in the 1950's living in Sweden (prior to their 60 years of generous health care), and the life span of a Swede today. In the 50's, a Swede lived 2.6 years longer than an American. Today, they live 2.7 years longer than an American. All that taxing and socialism gave them 0.1 year advantage. But, the survival rates for most cancer patients is significantly better for Americans than Swedes. Or other EU countries for that matter. And the survival rate of those that live to 80 is significantly higher for America than it is for Sweden, France, England and Japan. An article from Duke University recently concluded "In the United States, life expectancy at the age of 80 and survival from the ages of 80 to 100 significantly exceeded life expectancy in Sweden, France, England, and Japan....For people 80 years old or older, life expectancy is greater in the United States than it is in Sweden, France, England, and Japan. This finding suggests that elderly Americans are receiving better health care than the elderly citizens of other developed countries. That's because we don't have Death Panels that decide it is time to pull the plug I guess. Crap, Palin was right again. www.ncbi.nlm.nih.gov/pubmed/7565998
- seattleeng
August 22, 2011 at 3:39pm
I'm wary of going off in this direction, since its pretty far off topic, but I think seattleeng deserves a response since, for once, he's onto something, though as usual he spins a kernel of truth into fluff and nonsense. "And the survival rate of those that live to 80 is significantly higher for America than it is for Sweden, France, England and Japan." True. Here's the abstract: http://www.nejm.org/doi/full/10.1056/NEJM199511023331824#t=abstract But in your next sentence you show that either you're unaware of or you choose to ignore the difference between statistical significance and practical or clinical significance. Those authors meant that the difference in life-expectancy post age 80 between the countries studied was statistically significant. Whether or not it's practically significant is another matter. So what was the actual difference in survival between countries. Well, in the cohorts examined, starting at age 80, in America the five-year survival was 57%, while in the other countries studied it was 47% or a bit higher. That means the absolute risk-reduction in death at five years is 10% and the number needed to treat with medicine American-style to save one 80-something life is ten. And this tells us nothing about the quality of life of those additional survivors. Many (most?) of them would be nursing-home residents suffering through recurrent hospital admissions. But you are correct, seattle, here exactly is what our expensive American health care buys us, a few extra not-very-pleasant years of life at the extreme end. I suggest you reread this article by Sherwin Nuland and Daniel Callahan, two men who should know what they're talking about being both doctors and octogenarians. http://www.tnr.com/article/economy/magazine/88631/american-medicine-health-care-costs
- AaronW
August 22, 2011 at 4:39pm
- kpidcoc
August 22, 2011 at 6:08pm
Yes. Another compliant, handpicked commission, because a democratically elected Congress is just so unreliable. Talk about fiddling while the country goes down in flames. Jobs? Anyone?
- chuckvw
August 22, 2011 at 6:41pm
@AaronW: Good points. Also, keep in mind the article doesn't say we have better health care for octogenarians. It only says we have better survival rates, and suggests a number of *possible* explanations. One of those explanations is this: "High mortality at younger ages may leave a select group of robust survivors at advanced ages." In other words, it may be that our health care system is so crappy that only the toughest, grittiest, most un-killable people can survive 80 years of it! I don't really think that's the explanation, but it's an example of how statistics can be taken to mean more than they do.
- Dausuul
August 22, 2011 at 7:31pm
This is not the time to make the actuarial and structural adjustments necessary to social security. The political culture of the United States is convulsive. The US currently suffers from intense factional struggles. One of the two major parties finds the 'art of compromise' unpalatable. The country has moved from the 'end of ideology' consensus of the 1950s to a transparent manifestation of "class war" during the Great Recession. We are heading into the national elections. Do we wish to thrash-out social security's technical adjustments and other problems of the system, during a polarized national election campaign, in the heat of ideological and partisan conflict? I have no doubt the Libertarians and the 'constitutional conservatives', inside and outside the Republican Party, will call for a significant privatization of social security or its effective abolition as a government program. They will provide the ideological cover for the Republican wrecking crews in the House. Social Security issues must not become hostages of the of the ' social security reactionaries,' nested in the House. Infrastructure financing receives a boost with the introduction in the Senate of a Kerry(D-MA) and Hutchison (R-TX) sponsored "National Infrastructure Development Bank Act ." The bipartisan proposal wants to use public seed money of $25 Billion to attract more private investment for bridges, roads, and other projects. The White House has its own version of the Bank, with initial funding of $35 Billion. The United States has no alternative than to address the chronic depreciation of our ports, public transportation systems, bridges, highway systems, passenger rail and commercial freight, water and sewer systems, post, and rural repaving or in some cases, de-paving roads. The Infrastructure Bank is likely to be the first of a number of new federal and state entities to be created, in the decades to come, designed to address this pressing issues of national development and national security. I do not favor coupling infra-structure and social security, although theoretically possible, I believe it is risky, in today's political climate. Infrastructure development enjoys bi-partisan support, while social security is always the "third rail" of American politics. A majority of the American people registered their disapproval of Pres. Bush's privatization proposals for Social Security? Must we continue to endure ("OMG") the Republican's distaste for social security, year in and year out. Social Security, the "Immediate Demand" of the old Socialist Party's Campaign Platform has found great resonance with the American people.
- LawrenceGulotta
August 22, 2011 at 11:10pm
Actually, Dausuul, it is quite likely that poor medical care prior to age 80 in the US does play a role. If overall life expectancy is worse in the USA, as it is, it means that a larger proportion of the population in the USA dies before reaching 80 presumably with poorly managed chronic disease. It is likely that a Swedish diabetic has a better chance of seeing her 80th birthday than an American diabetic. It follows that those Americans who do reach 80 are less likely than their Swedish comparators to suffer from conditions like diabetes, which in turn means they're less likely to die.
- AaronW
August 23, 2011 at 2:48am
"with the system’s trust fund reserves projected to run out in 2036, pretty much everyone agrees that we do have a Social Security problem" And the author is a trained economist? Why "start" with Social Security when the most pressing problem is our National Debt and Budget Shortfalls? I feel like I should be preaching to the choir, but Social Security has not contributed to the national debt, and as the author makes clear, it is not likely to do so until after 2036. The only way Social Security is currently involved in the issue of the national debt is because, like China, it purchases Treasury instruments with the proceeds of the Social Security Trust Fund. It must do so, by law. Therefore, S.S. contribution to the national debt is funding it. Isn't that better than China holding more of our debt? Certainly long term plans must be made for Social Security, and it would be best to start now. But it is not the most pressing fiscal issue of the day. Just because the author is an economist, does not make everything he says true. He must be a Republican shill.
- rpvmeyer
August 23, 2011 at 11:25pm
The first thing to do to fix anything is abolish the Bush tax cut. The rich should pay their fair share before anything else. Every economist knows that anything sold increases in cost if passing through many hands since every hand gets a cut. Thus it follows that health care without the many insurance companies getting their cut while providing nothing beside being a pain to physicians and patients. It follows that universal health cost would drive the health cost in the USA down just as it is a much lower cost than the US health care cost. The health care cost in the room could transform from the elephant in the room mentioned in the article into a poodle in the room. Then there would be no need to slash social security as it is no doubt what is proposed here.
- Poupic
August 26, 2011 at 7:16pm