In making Social Security reform a top priority of his second term, President George W. Bush has emphasized two points: first, that, without changes, our Social Security system will be bankrupt by 2042 and, second, that a key element of reform must be creating private accounts to allow workers to invest a portion of their payroll taxes in stocks and bonds. Is the president right on both counts? Peter Robinson speaks with John Cogan and Alan Auerbach.
Peter Robinson: Today on Uncommon Knowledge: Social Security--taking it personally.
Announcer: Funding for this program is provided by the John M. Olin Foundation.
Peter Robinson: Welcome to Uncommon Knowledge, I'm Peter Robinson. Our show today: is Social Security really in a crisis? And if it is, what should we do about it? In advocating his Social Security reforms, President Bush has over and over again made two points. The first that unless we do something about it, Social Security will be bankrupt by the middle of the century. And the second, one key element of any reform must be the creation of private accounts that would allow workers to invest a portion of their payroll taxes in stocks and bonds. Is the president right about both of those?
Joining us today two guests. Alan Auerbach is a professor of economics and law at the University of California at Berkeley. John Cogan is a senior fellow at the Hoover Institution who served on President Bush's Commission to Strengthen Social Security.
Title: The Future is Now?
Peter Robinson: President George W. Bush on Social Security, "The crisis is now." Republican Congressman Rob Simmons of Connecticut on Social Security, "Why stir up a political hornet's nest when there is no urgency? When does the program go belly up--2042. I'll be dead by then." President Bush, the crisis is now. Congressman Simmons, ahhhh, who's right. John?
John Cogan: President Bush is more right. The system is heading for a train wreck. Got to fix it now.
Peter Robinson: But you have a little nuance--little nuance there. All right. Alan?
Alan Auerbach: It depends on what you mean by crisis. The problem gets worse every year. And if we don't deal with it now, some people may be dead when we deal with it but those who aren't dead will have a much heavier price to pay.
Peter Robinson: Okay. Give this layman some feel for the scope of the problem. Social Security created in 1935 to provide retirement and other benefits, financed by taxes on the first ninety some thousand dollars that each worker earns. The worker himself pays 6.2%, not an inconsequential figure and the employer pays a matching 6.2%. Any program that takes more than twelve percent out of everybody's pay is a big deal in this country. For many years now, the Social Security system has collected more in revenues than it has paid out in benefits. The system is in surplus. So tell me what the problem is.
Alan Auerbach: The problem is that the old age dependency ratio is going up very rapidly.
Peter Robinson: By which you mean?
Alan Auerbach: By which I mean the share of the population collecting benefits relative to the share of the population paying payroll taxes--that means that in a system which is basically a pay as you go system as we have, the money coming in has to cover benefits for a lot more people. That's just going to continue happening. It's partially due to the large baby boom generation. But it's also due to increasing life expectancy. So it's really a permanent problem because the number of years in people's lives after 65 or after 62 or whenever people retire is much greater than it was in previous generations.
Peter Robinson: By the way, can I just pause for a moment and try to induce either one of you to spit upon the system as it now--as it was originally instituted in the sense that the notion is abroad and has been encouraged for some decades now that when that money goes out of your paycheck, in some way or other you're contributing to your own retirement and that has been a lie from the first day. Is that not the case?
John Cogan: Well, it's certainly not the case. As Alan said and as you said, the system is a pay-as-you-go system. That means the taxes that are collected from today's workers are going to finance the benefits paid to today's retirees. There's no savings in this program. There's no investment in this program. You asked about how soon the problem is down the road. Let me put it in simple terms. As Alan said, demographics are a very big part of the problem. Right now we have three workers for every retiree. In twenty years, we'll have two workers for every retiree. The first of the baby boomers…
Peter Robinson: Do I get to choose which two?
John Cogan: The first of the baby boomers retires in three years. So the problem is upon us and that's why the president's right--address it now.
Peter Robinson: John Cogan says the problem is upon us but not everybody agrees with that opinion.
Title: Don't Bring Me Down
Peter Robinson: Economist Paul Krugman, "Social Security is a much smaller factor in projected deficits than either tax cuts--George W. Bush's tax cuts--or rising Medicare spending. Viewed on its own terms, Social Security has been run responsibly. That is to say the system has been in surplus for years now and is a sustainable system. The problem isn't with Social Security. It's with the rest of the budget." There's something to that isn't there John?
John Cogan: Well, it hasn't been run responsibly. In fact, the surpluses that you have mentioned have been used year in and year out for the last twenty years to finance other governmental activities--used to finance the Cowgirl Hall of Fame, Amtrak subsidies, farm subsidies, foreign aid. Whenever congress needs…
Peter Robinson: I'm not so sure about foreign aid but we need that Cowgirl Hall of Fame, John.
John Cogan: Whenever Congress feels it needs money for something, the Social Security surpluses are a convenient pool of money to take from. And they have. What do they do? Each year they put in IOU's.
Peter Robinson: Understand all of that but isn't it nevertheless the case--I mean, I'm still want to push on this Krugman point that the Social Security system is in surplus. The government may have been raiding it over and over again but why are we talking about fixing that system instead of the government's propensity to spend money it ought not to spend.
Alan Auerbach: There are a few points here. First of all, John may be right about the government as a whole but if you look at the Social Security system, you could say well the government's been irresponsible but the Social Security system on its own terms has been running surpluses. Of course, those surpluses are, in some sense, a fiction because we aren't taking into account the very heavy implicit liabilities that we've been incurring. The reason why we say Social Security has a problem even though it appears to have a current surplus is because we know we have an obligation to pay under the current system. We have an obligation to pay very, very substantial benefits in the future. So we do have a problem even taking account of the current surpluses--even just looking at Social Security and not paying attention to what the rest of the government is doing. As for the other point about how Social Security--how big the Social Security problem looks relative to the rest of the government, it is correct that Social Security is a smaller problem than Medicare and Medicaid taken together. Those are huge problems. And I guess it's a political question what you should deal with first. Saying that those are bigger problems is not saying that you should not deal with Social Security.
Peter Robinson: George Will has made the point a couple of times that although we are tying ourselves in knots trying to figure out how to solve the Social Security problem, Social Security is actually easy by comparison with Medicare. And therefore Social Security is indeed the right place to start. That the Bush Administration--you agree with that?
John Cogan: Absolutely. I think we're farther…
Alan Auerbach: I would agree with that too.
Peter Robinson: Okay.
John Cogan: …much farther along in terms of policy development and a consensus about what will work and what won't work in retirement than we are in healthcare.
Peter Robinson: Next, would personal accounts solve the Social Security crisis?
Title: Now It's Personal
Peter Robinson: Here's what George W. Bush wants to do. I quote the president himself, "What I think you ought to do," this is a slightly rambling quotation because he is speaking off the cuff--this is not from a speech. I'm defending his speechwriters here. "What I think you ought to do is to be able to take some of the money you're paying in and set up what's called a personal retirement account. Think about private property in an account that you can pass on to who you want, that earns a better return than the current system and you'll end up with more money." So you put money into personal retirement accounts. These accounts earn a much better return than anybody would get from Social Security. And the notion there is what? That you've solved the fiscal crisis?
Alan Auerbach: No, and even the president himself has said that this doesn't in itself address the fiscal crisis. Social Security reform involves two pieces which although they politically may be tied together, are logically distinct.
Peter Robinson: All right.
Alan Auerbach: One is either raising taxes or cutting benefits in some manner to close the long unfunded gap. The other is…
Peter Robinson: You concur with that?
John Cogan: Yeah.
Peter Robinson: There's no…
Alan Auerbach: The other is how one structures benefits. Shall it be a private system? Shall it be the current system now? Shall people make investment decisions themselves? Will the investment decisions be left to the government? Those are all the issues that are involved in thinking about privatization which are logically distinct and the--I think the more painful issues having to do with…
Peter Robinson: Then let us turn to John Cogan, one of the nation's leading proponents of private accounts. You just nodded as Alan said that the private accounts don't actually fix the fiscal problem. What good do they do? Why are you so ardent?
John Cogan: They help fix the fiscal problem.
Peter Robinson: They do? All right go ahead.
John Cogan: Absolutely. But first I think the most important feature about personal accounts is what they do for workers. They give--they would give every worker a chance to build a little financial nest egg. And that nest egg would provide them with a better financial deal than the current Social Security system would provide them. It would give them in addition, more control over their retirement decisions. And so they're very, very good for workers. If you were establishing a Social Security system today, not in 1935 but today, personal accounts would be part of that system as they are for federal workers now. How are personal accounts good for Social Security? Well the way I see it is in order to have a viable retirement program, either private or public, you've got to have a program that saves and it invests. The problem with the current Social Security system is it neither saves nor does it invest.
Peter Robinson: It spends every penny of surplus.
John Cogan: Right.
Peter Robinson: Just spends it.
John Cogan: Spends it. Personal accounts are a way of utilizing these surpluses that we have today and we will have for another dozen years for Social Security. And thereby it'll help reduce the overall problem that Social Security has down the road. It gives Social Security a saving component and it gives Social Security an investment component. It's not big enough--the personal accounts that come out of these surpluses--are not big enough to fix the whole Social Security problem but there will be more money that's being used for retirement purposes in the new Social Security program than are being used now.
Alan Auerbach: But John, logically let's look at the Bush plan. President proposes to essentially lend people money at a fair government interest rate. The loans will be paid back out of reduced public benefits.
Peter Robinson: Hold on. Lending people money. Now I'm confused. I thought the whole point of private accounts was that it would be their own--he used the word private property.
Alan Auerbach: What President Bush is proposing to do is to allow people to divert a portion of their payroll taxes into private accounts. In exchange, they have to give up a certain fraction of their future benefits from the existing public program. The way that reduction is calculated it would be as if the government were loaning people money…
Peter Robinson: As if?
Alan Auerbach: …at a reasonable rate of interest to make investments in their personal accounts. Think of it as a government sponsored margin account.
Peter Robinson: All right.
Alan Auerbach: Okay. So if the government then funds these loans that it's making to people, it has to come up with the money somewhere by borrowing. The government…
Peter Robinson: This is the transition costs, right?
Alan Auerbach: But it's really pretty simple. The government is borrowing the money that it is giving people to put into these accounts. As a result--and of course, the people will pay it back in the future--and the government will be able to pay…
Peter Robinson: Let's get to the bottom of this issue of whether or not private accounts would cost taxpayers more in the long run.
Title: Pay It Forward
Peter Robinson: Under the current system without making a single change, the government faces massive liabilities off in the future.
Alan Auerbach: Exactly.
Peter Robinson: Is it accurate to say that by shifting a portion of this to private accounts the government is doing no more than recognizing now the liabilities that it faces in the future? It's simply moving them forward in time. Or is it actually incurring more costs than it would under the present system?
Alan Auerbach: No, you're absolutely right. If the present system were to continue unabated then simply recognizing the liabilities of that system by, you know, borrowing against the future benefits, reducing the future benefits, giving people money for their private accounts--you're right. It's just recognizing the debt we already have. And therefore, it's that…
Peter Robinson: So you can shoot down one piece of can't right now and the piece of can't is that Bush is proposing hundreds of billions of dollars in new or additional costs. That's just not the case. He's proposing, in effect, that the government stand up to its obligations now rather than later. Is that correct? You'll go with that?
Alan Auerbach: I will go with that except the response is really--a criticism of that would be a political one, not one of economic logic which is that if you thought that those benefits were going to be eroded anyway through some sort of changes in the future, then by recognizing the liabilities today, you're basically putting them into law. You're saying we don't just have this unclear, unfunded liability that we might have to pay benefits in the future. We're making that a clear liability today.
John Cogan: The bottom line of the Bush plan is as Alan said and as you just said. Look, you're recognizing some future liability--some future liability on the books today. My belief is just as with a private corporation that if you have a future liability, you should put it on the books today. Personal accounts are a way of doing that. Now let me come back to this question of…
Peter Robinson: You're making a moral argument. The government ought to tell the truth about what's…
John Cogan: There is a very strong moral argument in favor of personal accounts. Government should not be promising…
Peter Robinson: This is what I'm going to ask you to comment on. Go ahead.
John Cogan: Government should not be promising benefits to future generations of retirees that require higher taxes on future generations of workers. It's, in effect, proposing or legislating higher benefits for future retirees than it's willing to pay to today's retirees. And then imposing--desiring to impose taxes on future workers that it's unwilling to impose on today's workers. That is something that it should not be doing.
Peter Robinson: Private accounts are simply healthier because in this country we believe private property is healthy in and of itself. Furthermore, they're more honest. It's the government fessing up to responsibilities now. Do you buy that?
Alan Auerbach: There's an argument for that but that has nothing to do with fixing the Social Security system.
Peter Robinson: Okay.
Alan Auerbach: I think these are two separate issues. You can talk about property rights, the advantages of private ownership, of invest--of people being familiar with the stock market. Those are all arguments for privatization but they don't do--fix…
Peter Robinson: Next: one simple solution to Social Security's problems.
Title: The Wage Index of Sin
Peter Robinson: Journalist Susan Lee in the Wall Street Journal, "You will be able to fix Social Security yourself in the time it takes to recite this sentence--drop the wage indexing formula." Would you care to explain that?
Alan Auerbach: Yes. Currently Social Security benefits grow at the same rate that wages grow. Some people have--some people call that wage indexing. It's a little bit more complicated than that but it's useful to think of it that way.
Peter Robinson: For the purposes of television, that's a close approximation.
Alan Auerbach: Right. Wages over the long term grow faster than prices because of productivity growth. We can pay higher real wages over time because productivity's growing. Benefits that are growing with wages grow faster than benefits that are growing at the rate that prices increase. So if we switch the system to one where each successive generation's benefits grew only with prices--protecting people from inflation but not giving them the benefits of productivity growth and we kept the system that way forever--then the public system would be more than fixed. That is the funding gap that we currently have would be replaced with a small funding surplus.
Peter Robinson: Susan Lee goes on to say, I quote her, "As Economist John Cogan points out," who the hell is he, "the purchasing power of benefits paid to today's teenager are scheduled to be sixty percent higher than benefits paid to a typical worker who retired in 2001." Okay fellas, why don't we just do this, change the indexing formula?
John Cogan: It makes so much sense doesn't it. Alan mentioned something that's very important. That is if you simply went to a price index system in which all future generations of retirees would receive the same real benefits--benefits after you've accounted for inflation--same real benefits as today's retirees get, you would not only fix Social Security's financial problem but you'd have some surplus left over.
Peter Robinson: You could cut that payroll tax.
John Cogan: You could either cut that payroll tax or…
Peter Robinson: Most regressive tax in the nation.
John Cogan: …or you could shore up the safety net part of Social Security by increasing benefits to widows, increasing benefits to low wage workers.
Peter Robinson: Oh come on. Come on.
John Cogan: And still within…
Peter Robinson: Don't talk about--you're going to expand the welfare state instead of cutting taxes?
John Cogan: I'm just saying that's an option.
Alan Auerbach: But before you get too excited about this prospect, let's look--instead of looking ahead, let's look back. Suppose somebody said we've got a good offer for you retirees. We're going to give you the same standard of living as civil war veterans enjoyed. How would you like that? Is that fair? Would you say well that's okay because I have the same purchasing power as people who retired in the 1860's or the 1880's had? Of course not. We have a moving target if you like, of what we think is appropriate, what we think the poverty line is. And benefits that are constant, real terms, over short periods of time, well our perceptions don't change that much. But if we're talking about keeping real benefits the same, that is, adjusting for--only for inflation, we're saying that retirees, at least to the extent that they rely on Social Security benefits, are going to have the same absolute standard of living fifty years from now that they do today even as everybody else in the economy is enjoying a much, much higher standard of living.
Peter Robinson: John?
John Cogan: Alan, that's a very good point and I guess the way I would respond is two--first as an economist, we know that the CPI overstates inflation so even if you went to…
Peter Robinson: The CPI is the Consumer Price Index?
John Cogan: Used to measure the cost of living increase. We know that it overstates the real cost of living increase. And so if you went to this new price index system, you would have still growth in the standard of living but a more important response is that--is to ask yourself first who should make the decision about those future benefit levels? Should it be today's congress deciding what retirees fifty years from now should get or should it be a congress fifty years from now saying look, we got other needs. We've got poor individuals that are below the age of 65 or 67. We've got young people that need additional education, whatever it is. Shouldn't that congress decide how much in the way of benefits retirees should get at that point in time? Don't you think that's a better governmental system?
Alan Auerbach: John, you're arguing that we should have a slower growth of benefits than the benefit--or putting it another way, that benefit cuts is a way of solving the funding problem. I don't necessarily disagree with that. I would probably throw in some tax increases as well as benefit cuts but I'm not sure I would design the benefit cuts this way to just be bigger and bigger and bigger and bigger and bigger over time. I might do it more quickly. Having price indexing, for example, only means that benefits are eroded slowly.
Peter Robinson: This has to be quick because we're running out of time. Has anybody anywhere in this debate suggested means testing or is that really politically beyond the pale? That we ought to reserve Social Security payments to people who need it instead of people who just use it to pay their greens fees?
Alan Auerbach: It's been proposed indirectly by Robert Posen, for example, who suggested doing the price indexing instead of wage indexing but only for higher income people, which is effectively a cut.
Peter Robinson: You've been in and out of Washington. You're advising the White House--in even the blue sky discussions about what they ought to do, does anybody mention that, means testing?
John Cogan: Well, all of the benefit proposals that you've heard coming from the hill and coming from think tanks, all flatten out the benefit profile from low wage to high wage workers. It's not quite a means test but…
Peter Robinson: But it's a movement in a reasonable direction.
John Cogan: And the argument is a very, very sensible one. It's as Alan said, high income people have other means for achieving their retirement income.
Peter Robinson: Okay.
John Cogan: This is a very important point about personal accounts. If you ask me who the main beneficiaries of personal accounts are, it's low-wage workers that don't now have an opportunity to save and invest. This would give them an opportunity to use their own money, not some governmental borrowed money, but their own money for personal accounts.
Peter Robinson: Finally, predictions on the future of personal accounts and Social Security reform.
Title: Owning the Problem
Peter Robinson: Three predictions. Try to keep your answers short--not analysis but just predictions. I'd like to see how you guys think the country's moving and the economy's moving. President George W. Bush, "I like the idea of promoting an ownership society," there's that phrase again, "I think it makes sense to have people feel a stake in the future by owning something. I like the concept of people getting a quarterly statement about how their stocks and bonds are doing in their own personal account." Before he leaves office, will this president be able to sign personal retirement accounts into law? Alan?
Alan Auerbach: Possibly but not the proposal that he's made.
Peter Robinson: John?
John Cogan: I believe so. In the end, I believe so. Yes.
Peter Robinson: In his first term, George W. Bush added one trillion to the national debt and in the form of his prescription drug benefit, enacted the biggest new entitlement since Lyndon Johnson. Will he indeed be known as a president who took the country in the direction of an ownership society or simply as a--or primarily as a president who expanded the federal government and indeed massively increased federal debt. John?
John Cogan: If he gets a Social Security reform, I think he will be known for his Social Security reform. I think…
Peter Robinson: That's such a critical reform…
John Cogan: …such a critical…
Peter Robinson: …that that will be historic.
John Cogan: That's right. It will be historic, not only for Social Security but it'll serve as a model for I think Medicare and our healthcare system. I think that he will be criticized for his expansions of government and for the deficits, much as President Reagan was criticized for his. But I don't think that criticism is going to end up being all that important in influencing the public's view of his presidency if he gets personal accounts and the situation in Iraq turns out as it has been going--quite well.
Peter Robinson: What's it going to be--on the domestic fiscal side.
Alan Auerbach: I think he'll be remembered as the president who finally severed the link between the Republican Party and fiscal responsibility.
Peter Robinson: Oooh. Go ahead now. Them's fightin' words. Go ahead and back yourself up. I may have to flip it back to Cogan. I may have to defend the president here.
John Cogan: You know, he's often been compared to Reagan, starving the beast and so forth. The beast is doing quite well under President Bush. We have…
Peter Robinson: Was that a political mist--is he having trouble on Social Security in part because nobody can listen to him with--not nobody--but the political class in Washington has trouble listening to him with a straight face when he--he, himself has created fiscal problems that dwarf the fiscal problem of Social Security.
John Cogan: No, I don't think so. I think his solution to Social Security is designed to address a debt problem. And so no, I don't think so.
Peter Robinson: Alan?
Alan Auerbach: Well he created very large deficits through tax cuts, through spending increases and through the Medicare prescription drug benefit.
Peter Robinson: A quarter of a century from now, will Bush be known as--will Bush be remembered for beginning the transformation of the welfare state into the ownership society?
Alan Auerbach: No.
Peter Robinson: No.
John Cogan: Yes.
Peter Robinson: You think that's…
John Cogan: I think he'll be an important part of it.
Peter Robinson: Alan, John, thank you very much.
Peter Robinson: I'm Peter Robinson for Uncommon Knowledge. Thanks for joining us.