Class Discussion of Social Security Reform

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Class Discussion of Social Security Reform

• October 18, 2006

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Outline

• Finish discussion of economic effects of Social
  Security
• Effect on national savings
• Role of the Trust Funds
• Class discussion of reform
• Some reform options
• Ten myths

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National Savings

• National saving
• individual saving govt saving
• We care about national savings because it
  provides the fuel for investment, and thus
  long-term economic growth
• Understanding effect of government policy is
  often difficult
• Ex Do 401(k) plans increase national savings?
• Individual saving rate clearly rises
• But government revenues decline
• Which is larger? (For 401(k)s, most believe
  there is net increase)

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SS and National Saving

• Individuals have 12.4 of their income go to pay
  Social Security payroll taxes
• In return, they receive retirement benefits in
  the future
• Individuals save less because they know they will
  have some SS income in retirement
• But there is no corresponding increase in
  government saving because of pay-as-you-go
  nature of the program

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How Big is the Crowd-Out?

• There is a substantial body of economic research
  examining this question using
• Changes in savings over time
• Differences across individuals
• Differences across countries
• Each 1 of Social Security Wealth (i.e., the
  present value of future Social Security benefits)
  crowds out private saving by 30-40 cents.
• Keep in mind that this is a huge program!
• U.S. capital stock may be trillions smaller than
  it would otherwise be

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What difference does it make?

• Lower national saving rate ? less capital
  available for investment
• Less investment ? lower rate of economic growth
• Lower economic growth ? the size of the economic
  pie is smaller in the future
• One key issue to consider when discussing
  potential Social Security reforms is what effect
  it will have on national (public private) saving

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What about the Trust Fund?

• Any surpluses from Social Security are credited
  to OASDI trust funds
• Trust fund creates a legal liability for the U.S.
  Treasury
• When SSA redeems the bonds, Treasury must find
  the money to pay for them
• The bonds are an asset to SSA, but a liability
  for the U.S. Treasury

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The Trust Fund and Savings

• At end of 2004, the trust fund held nearly 1.86
  trillion in government bonds
• Does this mean that the government saved 1.86
  trillion over the past two decades?
• If we hold constant all non-SS spending and
  taxes, then running a 1 surplus in Social
  Security increases national saving by 1
• But should we hold other spending constant?

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TF and Budget Accounting

• Social Security is Off Budget
• But the unified budget includes Social Security
• One view is that the presence of large SS
  surpluses made it easier for Congress to spend
  more money in rest of the budget
• Use the SS surpluses to hide deficits elsewhere
• Raiding the trust fund
• Did not happen from accounting perspective
• Might have happened from economic perspective

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The Lock Box

• Featured prominently in 2000 election (and on
  Saturday Night Live!)
• Idea was to lock the surpluses away so that
  they would be saved, not spent
• But the lock box was soon broken
• Large deficit spending
• Is there a better lock box?

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Four Groups

• White House
• Senator Harry Reid
• AARP
• Americans for Tax Reform

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In your groups

• What is your position on the severity of the
  problem facing Social Security?
• If you believe there is a problem, what specific
  proposals do you support to fix it?
• Benefit cuts?
• Tax increases?
• What is your view about personal accounts?
• Carve-out vs. Add-on
• Part of Social Security vs. outside of Social
  Security

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Prepare to Report to Class

• Choose one person as a spokesperson
• Be prepared to provide 2-3 minute summary of your
  groups position to the class
• Entire group should be prepared to answer
  questions from class

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Now Form Teams Across Groups

• Make sure each team has at least one member from
  each of the four groups
• WH, Reid, AARP, ATR
• Each individual should continue to hold their
  group position can you agree on any steps
  toward reform?
• What policies might satisfy all parties?
• What are the major stumbling blocks?

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The 2005 SS Debate

• State of the Union (minutes 12-22)
• http//www.pbs.org/newshour/bb/white_house/sotu2
  005/
• Democratic Response (minutes 5-720)
  http//www.pbs.org/newshour/bb/white_house/sotu200
  5/dems_text_2005.html
• AARP response
• http//aarp.typepad.com/socialsecurity/2005/03/aa
  rps_social_se.html
• How debate evolved over summer 2005

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Top Ten Myths of Social Security Reform

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Ten Myths of Social Security Reform

• Social Security is financially sound for decades
  to come
• Economic growth will eliminate the existing
  problem
• Social Security is in crisis and will not be
  there when todays younger workers retire

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Ten Myths of Social Security Reform

• Personal accounts can save Social Security
  without benefit cuts or tax increases
• Allowing individuals to redirect their
  contributions from the trust fund to personal
  accounts will provided a higher rate of return
• Personal accounts will worsen Social Securitys
  financial problem

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Ten Myths of Social Security Reform

• Personal accounts will cause benefit cuts
• Personal accounts are risky and the current
  system is safe
• Transitioning to personal accounts is too costly
• Social Security reform is bad for the poor /
  women / minorities

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Methods to Reduce Shortfall

• See SSAB Handout
• Changes to benefit formula
• AIME calculation - years, indexing, etc.
• PIA calculation change bend point factors
• Increase retirement age
• Changes to tax base
• Raise taxable maximum
• Changes in coverage
• State and local workers
• Many others

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Pros of Personal Accounts

• Perhaps a better way to save SS surpluses than
  the trust funds (and thus increase national
  savings)
• Possibly improve labor supply incentives because
  contributions no longer viewed as a pure tax
• Potential to extend asset ownership to 50 of
  households that lack it
• Offers opportunity to pursue higher expected
  returns

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Cons of Personal Accounts

• Exposes individuals to increased financial market
  risk
• Voluntary
• But might government bail-out losers?
• Need to finance the transition from pay-as-you-go
  system to funded system
• Possibly erode long-term support for social
  insurance aspects of the system