Thursday, November 11, 2010

Social Security and Rev Cap

I mostly like the health care aspects of the Chairman's mark of the Fiscal Commission. I don't like the Social Security proposals so much, and understand people not liking the revenue target of 21% of GDP for revenue and could personally live with higher taxes, but think it is a move in the correct direction so can support this revenue cap.

  • The problems facing Social Security are relatively small compared to those facing Medicare. Social Security can pay out promised benefits until 2037 or so. If we do nothing, then Social Security will be constrained in 2038 or so to pay out only the total money flowing in. This would mean a substantial benefit cut of 20-22%. This is the default way to 'fix' Social Security; to impose a large benefit cut. The CBO put out a list of 30 policy options to address Social Security and extend the life of the program. They include different ways to increase taxes or decrease benefits....of course you could have a mixed strategy.
  • I think the Chairman's mark is correct in suggesting the the maximum taxable wage should return to the 90th percentile of wages. This was the essence of the Greenspan Commission in 1983. Bowles/Simpson want to do this slowly. I would prefer to do this faster and to add to this a reduction in benefits for higher income persons to extend the life of Soical Security instead of doing so by increasing the retirement age for Social Security. Extending the OASDI payroll tax to the 90th percentile of wages in 2012 would extend Social Security ability to pay full benefits to 2050, by itself. The Chairman's mark would eventually put the full retirement age to 69 by 2075 (68 by 2050). I respect the argument that the retirement age should rise due to increased life expectancy, but the reality is that these gains have not been equal across income levels. I think for blue collar workers this is likely to be a hardship, and I would prefer to deal with the problem in another way. I would rather apply the OASDI payroll tax more rapidly to the 90th percentile and to choose one of the ways to reduce benefits (or make more benefits taxable) for high income persons and leave the full retirement age at 67. In fact, I would rather unify the eligibility age for Medicare to 67 staring two months per year in 2014 (along with the planned Social Security increase) and maintain the Social Security retirement age at 67 in 2025 and beyond. Keep in mind that in 2014 the exchanges will be fully in operation and income based subsidy will be available for persons not eligible for Medicare. So, I don't think the Social Security suggestions in the Chairman's mark are the best ways to address the relatively small (as compared to Medicare) Social Security problem. But, I am willing to listen.
  • Revenue/Spending targets. The Chairman's mark aims to cap revenue at 21% of GDP, and spending at 22% of GDP by 2020 and then dropping to 21% in later years for a balanced budget. Several points on this. (1) I agree in general that I would prefer to not have hard targets/caps because flexibility and actual policy choice would be better. However, I think that given our longstanding difficulty in having a balanced budget I think a cap is a good idea, and will help bring some folks along for what are some large changes we will be undertaking if we do something anywhere near to the Chairman's mark. (2) A basic question if you accept the notion of a cap is what should the cap be.... (3) 21% Of GDP is being criticized by some progressives because it is too low (they would prefer to deal with deficits with more tax increases relative to benefit cuts), however, it is important to remember that if we have a tax code that raises 21% of GDP in revenue that will be the highest proportion of GDP raised in revenue in the past 40 years (we were close in 1999/2000). So, 21% of GDP is a substantial tax increase over what amount has been raised the past 40 years....that is why we have had a deficit 36 of the past 40 years!
  • The Chairman's mark stabilizes the debt and gets to long term balance by roughly cutting $2 for each $1 raised in taxes. This is a policy choice. It could be 50/50, which would mean the revenue target would be greater than 21% of GDP, or it could be $2/$1 the other direction, which would mean the revenue target would be even higher. Conservatives are correct in saying the proportion of the GDP to be redistributed by government is a profound choice. The trouble is that they only want to talk about reducing taxes and don't actually propose spending cuts....hence, large deficits. We progressives need to stick in and commit to a long term balanced budget. Conservatives have gotten away with massive hypocrisy on this issue, in part because progressives ceded the political territory of worrying about budget deficits. We can argue and make the case that the correct percent of GDP that should be raised by taxes should be above 21%, but we need to commit to long term balance, and we then have to live with less spending than we would prefer if we cannot make the case. Our country needs to have a discussion about what level of government spending we desire, and then develop a tax code that pays for it over the long run (you will always have deficits in emergencies; our problem is long term structural deficits under the default, do nothing). So, I can live with a 21% of GDP cap on revenue as a starting point, even though I would be willing to have taxes a bit higher. I don't see any way they can be lower if we are to have a hope of a long term balanced budget.

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