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The Administration's Point Man on Social
Security
Brad DeLong's Semi-Daily Blog, 3/28/05 http://delong.typepad.com/sdj/social_security/index.html
....But [Charles] Blahous doesn't
understand the Bush Social Security Plan. He can't hash out
specifics inside the West Wing.
Here are some selections from a briefing he gave the morning
of the State of the Union address. He says a great many things
that are simply wrong. For example:
(1) BLAHOUS: The problem that we now face is not one that
we can tax our way out of, for a very simple reason: The costs
and the current program are growing faster than the underlying
tax base. So if we were to raise taxes today to deal with it,
and the costs of the program continued to grow faster than
the tax base, then in the future, future generations would
simply have to come back and raise taxes again.
Here Blahous is simply wrong: The 2005 Trustees Report says
that a 1.8 percentage point increase in Social Security taxes
would be expected to balance the system out to 2075, and that
a 3.5 percentage point increase would be expected to balance
the system out to infinity. I think these numbers are high:
I think it's more like 1.2 and 2.0, respectively.
Let's move on:
(2) BLAHOUS: It's also not a problem that, under the current
system, we can grow our way out of. The current system is designed
so that benefits grow as fast as wages and the economy grow.
And what this means is that if the economy does grow faster
than projected, then wages will grow faster than projected;
we will collect higher revenues, to be sure, and we might be
able to push off that 2018 date, or 2042 date by a few years,
but we would also owe more benefits as a consequence of the
higher growth.
Here also Blahous is simply wrong: faster productivity growth
improves Social Security's finances by an amount equal to roughly
half of life expectancy at retirement times the change in the
productivity growth rate. 1% per year faster productivity growth
reduces the deficit by about 1 percentage point. The point
is that faster productivity growth raises the current Social
Security tax base relative to its current obligations: pay-as-you-go
systems like Social Security make sense only if productivity
growth is relatively high, and the faster is productivity growth
the more sense they make.
(3) BLAHOUS: With respect to the fiscal effects of the personal
accounts, in a long-term sense -- and I know those of you who
have talked to me have heard me say this before -- but in the
long-term sense, obviously, the personal accounts, as we would
structure them, would not create a net new cost for the system.
To the extent that people put money in these accounts and invest
in these accounts, there would be a corresponding reduction
in the government's liabilities from the Social Security system
that is equal in present value to the money placed in the personal
accounts up front. So in a long-term sense, the personal accounts
would have a net neutral effect on the fiscal situation of
the Social Security and on the federal government.
Here, once again, Blahous is simply wrong: given divorces,
remarriages, the progressivity of the benefit formula, and
so forth, in a large number of cases the government does not
have a large enough Social Security liability to be able to
reduce it enough to balance the cost of the money diverted
to the private account. A ballpark estimate is that the Bush
private accounts proposal has a net fiscal cost to the U.S.
government of some $1.1 trillion in present value--half a percentage
point or so of taxable payroll.
Most of this net fiscal cost comes because the private accounts
proposal is biased toward the rich. The working and middle
classes essentially borrow from their traditional Social Security
benefit at 3% per year plus inflation to fund their private
accounts (this is what makes private accounts a relatively
lousy deal for them). Because of the limited reach of the clawback,
the upper middle class and the rich get to borrow to fund their
private accounts at less than 2% per year.
(4) Q: In saying that there is no net added cost to the program,
are you implying -- is it implicit that there is a benefit
offset of one-third current guaranteed benefit because you're
diverting one-third of revenues away from this program? If
that's not correct, what would the benefit offset be to traditional
benefits, and how would it be calculated?
BLAHOUS: The way that the election is put before the individual
in a personal account structure of this type is that in return
for the opportunity to get the benefits from the personal account,
the person foregoes a certain amount of benefits from the traditional
system. Now, the way that election is structured, the person
comes out ahead if their personal account exceeds a 3 percent
real rate of return, which is the rate of return that the trust
fund bonds receive. So, basically, the net effect on an individual's
benefits would be zero if his personal account earned a 3 percent
real rate of return. To the extent that his personal account
gets a higher rate of return, his net benefit would increase
as a consequence of making that decision.
Q: So he would only get a benefit to the extent that his
portfolio performed in excess of 3 percent?
BLAHOUS: Right. You can think of it as saying -- if you were
making a decision on where to put your money going forward
over the next 10 years, and you're saying, should I put it
in this account or that account, if you're choosing to put
your money over here instead of over here, then the net effect
on you, as an individual, is to compare what would be the rate
of return you get from this system, as opposed to putting it
over here. And that would be the difference between the two.
Blahous is simply wrong yet again. It's 3% only if you're
in the working or middle class--for the upper middle class,
it is less. There is a net fiscal cost to the private accounts
proposal, and it is a transfer from taxpayers in general to
those whose earnings are near or above the Social Security
maximum.
Last, let's go to Blahous simply being evasive:
(5) BLAHOUS: In the near-term, however, of course, there
will be transition financing required. Our estimate of the
total amount of transition financing for the accounts, according
to the schedule that I've outlined before, is about $664 billion
through the end of the budget window of 2015. If you assume
that -- debt service effects on top of that, that would be
another $90 billion.
Q: You talked about the $664 billion for the near-term costs.
There's been a lot of speculation in advance that it would
be something like $2 trillion. Talk a little bit more about
that. How do you square that?
BLAHOUS: I don't want to say too
much about it. Obviously, the $2 trillion number is not a
number that was ever generated
by us or by the Social Security actuaries, or any of the
other nonpartisan scoring agencies. There were different assumptions
that went into that number, and they reflected, I think,
the
thinking of other people beyond the scoring agencies.
Q: If I could follow up on a couple of questions that have
already been asked -- can you give us a second 10-year estimate
on the revenue effect? Can you tell us how you would pay for
that, in the first 10 years' revenue loss? And am I right in
assuming that in the way you describe this, because it's a
wash in terms of the net effect on Social Security from the
accounts by themselves, that it would be fair to describe this
as having -- the personal accounts by themselves as having
no effect whatsoever on the solvency issue?
BLAHOUS: On the second point, that's a fair inference. On
the first point, the long-term picture, of course, as you know,
is very -- it's a very comprehensive picture. You're looking
forward 75 years over all time, depending on how you gauge
things. And that can only be done accurately in the context
of a comprehensive plan to fix the system. For example, if
we were to do projections out beyond 2015, we would have to
model what were the hypothetical changes made to fix the system's
finances, which are at this time yet undetermined.
Q: Putting
those aside, what is the revenue implication of a fully phased-in
4 percent account of the type that you've
laid out?
BLAHOUS: It would be very different depending overall on
whether or not it was done alone or in the context of a comprehensive
plan.
Q: Assuming it's done alone, since that's all you're putting
out here --
BLAHOUS: And the problem with assuming it's done alone is
that we aren't advocating that it be done alone. We're advocating
that it be done in the context of a comprehensive plan.
Q: But you're not saying what else is in there. You're not
saying what else is in the comprehensive plan, so --
BLAHOUS:
Well, when we have -- at the point where we can attach numbers
to a comprehensive plan and model the effects
of the accounts in that context, of course we'll put those
numbers forward. But until that -- those specifications exist,
we don't have the ability to project that.
The answer to the question he's being asked is: "Over
the next twenty years, transition costs are about $2 trillion.
To the extent that we do other reforms that cut--excuse me,
slow the growth--of benefits, we recapture some of those."
With (5), it's clear that Blahous knows the answer to the
question he's being asked, but has been told not to give it
out under any circumstances. (4), (3), 2), and (1) are somewhat
harder to evaluate.
I've been told by people who worked with Bush Social Security
Commission staff that (1) and (2) reflect Blahous's general
low level of knowledge about how the Social Security system
actually works. Within the Social Security community, claims
that prefunding tax increases cannot balance the system or
that productivity growth does not improve the system's financing
are ludicrous. Yet Blahous makes them with a straight face.
I have heard from people who have talked to Social Security
Administration staff that (3) and (4) result from the fact
that Blahous simply did not do the staffwork to properly understand
the impact of his own private-accounts proposal. That the proposal
widened the fiscal deficit because in many cases the reach
of the clawback was insufficient appears to have come as a
great surprise to Blahous: he had only evaluated the impact
of his plan on the median worker. That the proposal winds up
transfering $1.1 trillion of wealth from the average taxpayer
to the upper middle and upper classes also, I am told, came
as a surprise to Blahous. I don't know how reliable the sources
of my sources are.
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