SOCIAL INSECURITY: Reforming Social Security

Monday, September 14, 1998

What is wrong--if anything--with the Social Security system today? What plans exist to fix it? Michael Boskin, Hoover Institution Senior Fellow and T. M. Friedman Professor, Department of Economics, Stanford University, David R. Henderson, Hoover Institution Research Fellow and professor, Department of Economics, Naval Postgraduate School, Monterey, California, and Dean Baker, Senior Economist, Economic Policy Institute and Co-author of Social Security: The Phony Crisis discuss the future of social security.

Recorded on Monday, September 14, 1998

ROBINSON Welcome to Uncommon Knowledge. I'm Peter Robinson. Our show today: Social Security. Projections show that some time in the next century, the Social Security system is going to go belly up. Unless something is done to prevent this, older Americans won't be able to go out to their mail boxes to get their Social Security check because Social Security will have run out of checks to send out. With us today, three guests with three different plans for saving Social Security.

Michael Boskin and David Henderson are fellows at the Hoover Institution. Dean Baker is an economist at the Economic Institute in Washington, D.C. To illustrate their three different plans, let's pretend that the year is 2030.

Plan number one, Dean Baker's plan. Dean believes Social Security is fundamentally sound, and he'd make only minor adjustments. Under Dean Baker's plan, my Social Security check just the way I always receive it. Plan number two, Michael Boskin's plan. Michael believes Social Security is in terrible trouble, and he'd make a number of quite major reforms including raising the retirement age. Under Michael's plan, no Social Security check at all, because I won't qualify for benefits for awhile yet. Plan number three, David Henderson's plan. David proposes the most radical solution of all, abolishing Social Security altogether. David would permit Americans to save and invest that money on their own instead. Under David's plan, no Social Security check, just a copy of this morning's Wall Street Journal, so that I can check the stock quotations.


ROBINSON Dean, what's wrong with Social Security?

BAKER Well, the short answer is nothing. The program is sound if we do absolutely nothing. It can pay every cent of benefits for 34 years. It's a very efficient program. The costs are about eight tenths of benefits paid out. That compares to ten to fifteen percent in privatized systems, like Chile or Britain's. And it does exactly what we want it to do in providing a core income to retired workers, lifting them out of poverty.

ROBINSON So the system is sound for at least 34 years, if we do absolutely nothing. Mike, you buy that?

BOSKIN Well, under the traditional projections of Social Security, that's part one of the story. Part two is, in year 35, we can only pay three quarters of the benefits. And, if we keep going, we'll either have to have a radical reduction in benefits very abruptly if we do nothing, and wait until that time, or we will have to have massive tax increases in Social Security payroll tax rates, and a companion, a closely related program, for Medicare. Those kinds of tax rates would take us to European levels which would crush the economy. Social Security's done a lot. It has some problems. But the sooner we get to preparing for the demographic transition, the better.

ROBINSON Part one, nothing wrong for 34 years. Part two, year 35 we get into big trouble. David?

HENDERSON Here's what's wrong. Social Security is a Ponzi scheme; it's a chain letter. It is not true that you've got this big fund that's sitting there containing your contributions. They are not contributions; they're taxes. And what you get out of it is taxes future generations pay.

ROBINSON So you're making less a fiduciary point about the soundness of the system than a moral point, about the relationship between the American people and the government.

HENDERSON You're right. I'm making a moral point. And I also agree with a lot of Mike's fiduciary point.

BOSKIN Yeah, I think it's important to understand, by saying that because we temporarily have very benign demography, and we have the opportunity to collect a little more than we're paying out in Social Security, does not mean that the problem doesn't happen for 30 years. It's a problem now that we can anticipate unless one of two highly unlikely things happens. One is the economy grows much better than anybody currently is projecting. Let's hope it does. Let's hope we adopt policies, tax reform, education reform, etcetera, that will lead us to a stronger economy, or we have a horrible demographic event that [

ROBINSON Bubonic plague.] is unanticipateable at the moment, where gains in life expectancy stop and so on.

BAKER . . . . Let me carry on with the "horrible demographic event" because that characterizes the problem. The problem we're talking about is people are living longer, and to my mind that's not a bad thing, so what this means is if 30, 40, 50 years from now, people are living longer, as we hope and project currently that they will, and they choose to spend a longer portion of their life in retirement, there's arithmetic here. They're going to have to put more aside during their working year if they make that option. So what that means is that we'll have to see somewhat of an increase in tax rates. That's not something anyone ever likes to see or say, but, you know, if you want to support yourself in the same way through a longer retirement, arithmetic dictates that.

ROBINSON Just keep raising taxes. That's sure to be popular. Let's see what David Henderson would do with Social Security.


ROBINSON The Henderson solution. What would you do to fix what you see as the problem?

HENDERSON Okay, there are two fixes. One is to fix Social Security if you want Social Security to last. And that is you have to gradually raise the retirement age. It's already happening, but that's got to be speeded up to hit about age 70 by about the year 2015.

ROBINSON Raise the retirement age.

HENDERSON Raise the retirement age. Then you have to have a more reasonable adjustment of benefits for inflation. Mike Boskin's commission pointed out how to do that. You have a D indexing by about one percent a year—

ROBINSON So you raise the retirement age, and effectively reduce benefits.

HENDERSON No, you make benefits not grow as much as they otherwise would have grown.

ROBINSON You reduce the growth rate in benefits.

HENDERSON Right. Those things will give you actually maybe even the chance of a small tax cut, payroll tax cut now, and solve the long-term problem, but what are you stuck with in the long run? A lousy system. A system that gives a lousy rate of return. Black people are discriminated against. Smokers are discriminated against.

ROBINSON Why are black people discriminated against?

HENDERSON Because black men have a substantially lower life expectancy. Their life expectancy at age 40 is to live to 70. A white man's life expectancy is to live to 81.

ROBINSON Okay, so you've just told us how to fix the system, and then you've told us the system is lousy.


ROBINSON What do you do to get rid of a lousy system?

HENDERSON What you do is you abolish Social Security in slow motion. You say to a certain group of people under a certain age, let's just arbitrarily take age 30, "You're not going to get any benefits. Plan on that now. When you hit whatever age it is, you're getting nothing out of this system, so plan for it now. We can give you an additional payroll tax cut of about five percentage points out of the 10.6, and you can save that on an IRA if you want. We'll let you do that; we'll give you the tax advantage." But I don't think government is our parent. So I don't want the government to say, "You've got to save in an IRA." And that way, over time, we can roughly pay the benefits to the people who had these benefits promised to them, and people under 30, so 50 years from now, we don't have the system, essentially.

ROBINSON But 50 years from now, you have people retiring who have had the freedom to save nothing at all, and who can look to the government for nothing any longer.

HENDERSON That's right.

ROBINSON So you could end up with a lot of old folks in dire poverty.

HENDERSON Well, you could, but it's extremely unlikely. And first of all, we've never given that a chance. People say, "Well, look at the Great Depression." Well, the reason people were poor was because of the Great Depression, not because they didn't save for retirement. And in fact, the whole concept of retirement was kind of foreign in those days. People typically worked until mid-sixties, late sixties, and then died. There just wasn't a long time in which they were retired.

ROBINSON Dean, you buy this Henderson solution?

BAKER Well, one thing I have to say is he's the first person I've heard that's actually been honest enough to just say that we would just leave it up to everyone, because a lot of people will ostensibly say, "Let's get the government out." What they actually want to do is to have government-mandated saving. So they're still talking about requiring people to put their money aside; the idea is that they would just put it in some private account rather than putting it with Social Security, but the government's still forcing them to direct their money in a particular way.

BOSKIN And probably limiting their options by half.

BAKER That's right.

ROBINSON Let me get you to address this sort of this moral point. David says, it is a kind of laissez-faire.

BAKER Well yeah, no, I completely disagree with the moral point, I think, as a practical matter. I don't think the country will ever tolerate a massive impoverished elderly people dying without access to any income, health care—

ROBINSON And that's what you foresee?

BAKER If, in David's case, almost certainly, and we have some history on this, we could point to the Great Depression, but we don't have to go that far back. If you go back to 1960, there was a big increase in Social Security benefits over the decade of the sixties. And you saw a large decline in the poverty rate among the elderly from about 30% to its current levels of about 12%, roughly the same rate as the rest of the adult population. So it's not as though we have no record of what happens if you don't have this.

ROBINSON What do you do with that, by the way? I mean, that is sort of the standard item that gets taught in classes across the country, that you can say this or that about the welfare system in America, lots of failings, but it has succeeded in reducing poverty among old people. And it has succeeded through Social Security, right?

BOSKIN (?) First of all, it has. I will admit that. In other words, if you take a whole bunch of money from a whole bunch of people and suddenly give it as a windfall to a bunch of old people, they're going to be better off. No denying. That's just simple math. That doesn't mean that we would have a lot of poverty among old people, if we said now, when they're at age 30, "You have 40 years roughly to plan." . . . .

ROBINSON So David Henderson wants to abolish Social Security outright. What about Dean Baker? What would he do?


ROBINSON You said, fundamentally there's nothing wrong with the system, and you believe the country won't tolerate, the political climate won't tolerate the notion of old people dying in poverty.

BAKER That's right.

ROBINSON So what do you do?

BAKER Well, I think the main answer is, you do nothing, you know. There's not necessarily a rush to do anything right now. We're looking at demographic projections, economic projections 35 years out. If we're honest, we go back to 1960 and say, "What do we know about 1998 and 1960? The true answer is, next to nothing." I think it's very foolish to make major changes in the program that by any sort of objective measure is incredibly successful based on a future that might not even be there. And again, it's not that we're facing a disaster. If we get out, you know, let's say the projections are right to the letter, we got out to 2020, we still had done nothing, with relatively modest tax increases, less than what we had in the seventies, less than what we had in the eighties, we could easily keep the program solvent for another 30, 40, 50 years.

HENDERSON They were not modest tax increases from ‘77 to 1990. They were substantial—

BAKER The economy sustained them.

HENDERSON Well, yeah, right! But they were not modest.

BAKER They didn't bankrupt the country.

HENDERSON They didn't— okay, that's an interesting view of what's . . . .

ROBINSON Well, how much were they? How much were they, were the tax increases?

BAKER (?) Thirty percent.

HENDERSON But no, but then they were substantially higher because if the tax rate went up 30%, we know the tax base, the amount of income tax, went up substantially.

ROBINSON Okay, but look. But listen to the point that he's making. We're there in the richest country on earth during that same period . . . .

HENDERSON No, I agree with him, it will not bankrupt the country . . . .

ROBINSON Things are fine! Things are fine! What are you worried about?

HENDERSON Well, because that's an amazingly gross view of what constitutes a bad policy. A bad policy bankrupts the country, anything . . . .

ROBINSON Okay, but you say, "Abolish Social Security." He says, "Do nothing." What's wrong with "do nothing"?

HENDERSON Okay, first of all, "do nothing" could be better than some of the options the privatizers are presenting. This might surprise you, but look, look—

ROBINSON Abolish, and do nothing, and they'll—

HENDERSON He and I both agree that if you do nothing [

ROBINSON This is the lion and the lamb lying down together.], at some point you're going to need a big tax increase in the future if you do nothing now. Okay. My problem with privatizers, I don't know where you are in this, Mike, but my problem with people like Larry Kotlicof and other people who spout out the details is, they—

ROBINSON Details of what?

HENDERSON The details of privatization.


HENDERSON Is that they want to replace the possibility of a tax increase in the future with the certainty of one now, because if you look at their plan, what they do is they say, "Okay, we still got to pay off all these obligations, so we'll have taxes roughly the same, then we'll do a little shell game. We'll take a little piece of that tax, and we'll say, ‘You can save this for yourself in an IRA.' And then we'll say, ‘Wait a minute. We got a gap there.' So we'll impose another tax now." And so the libertarians and conservatives who ought to be my allies on this, are the ones leading the revolt to impose a tax increase now.

ROBINSON This is taking my breath away. You are as conservative on this issue as anybody I know. You say, "Abolish Social Security." He comes up with "do nothing." And you use his argument to smack around the people who ought to be on your side.


ROBINSON You're going to go with this? "Do nothing"?!

HENDERSON Do nothing if the alternative is a major tax increase such as the one Kotlicof and the one Carolyn Weaver of the Social Security commission have . . . .

ROBINSON "Do nothing" is better than a tax increase?

HENDERSON Yes. Yes. Draw a line in the sandbox . . . .

BOSKIN Some perspective on what people are calling . . .

ROBINSON The voice of reason.

BOSKIN . . . small and large and so on, okay? First of all, if we take the current system and the projections, Dean is certainly correct that 30, 40 years from now the world could be very different than our current projections. That's why they have scenarios. In the past, the Social Security projections have proved to have been too optimistic, that it was going to look too rosy for the projections, and so what was called the "intermediate projections" have been revised down every year until this last year. Point two, to put this in perspective, the unfunded obligations in Social Security, the amount of the analog of national debt that we have sitting in the system if we just did nothing, these projections came true, the benefits based on these projections were projected into the future, the current taxes were projected into the future, would be about ten trillion dollars.

ROBINSON We're coming up ten trillion short.

BOSKIN Yeah. That's double the national debt. Dean talks about modest tax increases. I think you've got to be very, very careful. They get much larger as you move through time, and we would be moving our payroll taxes to fund these benefits in these programs, largely reflecting demography as we've all said, to a level that is similar to what exists in Western European countries now.

ROBINSON (?) And those are very high.

BOSKIN I do not want our labor market to generate a 12% unemployment. I don't want to disenfranchise one eighth of our population because we have a crushing tax burden at that time.

BAKER If we talk about having higher payroll taxes, again we have to look at how wealthy people are going to be 30, 40, 50 years from now. If we take the trustees' projections, someone forty—

ROBINSON You say the "trustees," just clear up that . . . .

BAKER Social Security trustees, the intermediate projections that are generally used, I believe Michael and David and I are all accepting the same projections for purpose of discussion, that are generally used as the basis of the debate. If we take those projections, look out to the year 2040, a worker on average will be about 45% wealthier than they are today. If we accept the conclusions that were in Michael Boskin's report on the consumer price index overstating inflation—I believe David agrees with—it comes out that they'll be more than twice as well off as they are on average . . . .

ROBINSON Between abolishing Social Security outright and doing nothing, is there a middle road? What would Michael Boskin do?


ROBINSON How would you fix it, Mike? What would you do?

BOSKIN I think it is valuable to say that people are likely to be richer in the future, and we ought to put this in that context.


BOSKIN I think it is going to be harder for people to be richer in the future if we don't begin to deal with this now, because this will eat such a large part of our national saving, we may wind up with very large tax increases and make it harder for the economy to grow. None of that's factored into these mechanical projections.

ROBINSON By what time do we have to fix it? You're suggesting that we have a window of opportunity . . . .

BOSKIN I think we have a window in the next half dozen years.

ROBINSON Six years.

BOSKIN In the next few years, before the baby boom starts to retire in 2010, it will be a lot easier to have some sort of a change in the Social Security system that preserves the strengths, builds on its strengths, and takes out some insurance against these long-run problems.

ROBINSON Give me, say, the top three changes you'd make.

BOSKIN I think the top three things to do are: one would be to establish a modest individual defined contribution account in addition. I would be dealing—

ROBINSON So that people under a certain age, or for everyone suddenly?

BOSKIN I would like to do it for everybody, but you could focus on or have it phased in so it would be more relevant, but I would not totally replace the current system. I think that's— I don't go as far as David in that regard . . . .

ROBINSON So you'd give me to right to, say, take two percent, some small proportion of that payroll tax and shove it into an income bearing.

BOSKIN Yeah, that's right, and take advantage of the power of compound interest but knowing that, as Dean has emphasized, there's a certain risk to that. You'll probably invest it in a way that'll get you a much higher return than is likely to happen, as David has said, if it's left as trust fund investment and the current rate of return you're getting on your taxes. That's number one. Number two. I think we have to do something about the future growth of benefits relative to wages, and we have to both get, adopt a lot of policies we don't think of as Social Security policies to strengthen the economy, lower tax rates and reform tax system, market-based education and job training reform, litigation, regulatory reform. That's number one—

ROBINSON But you also want to cut benefits effectively.

BOSKIN I don't want to cut benefits. I want to gradually get them in line with whatever's likely to happen on the wage side. Now, that could be a partial COLA adjustment. I myself do not believe at all to be done legislatively. I would like to see the B.L.S. continue—the Bureau of Labor and Statistics, of the government—continue to make some improvements as they have been doing, with all due respect continuing to research the extent to which there should be a different index for the elderly and so on. The third thing, I think, that needs to be done, is we have to think if we want a program that maintains Bismarckian retirement ages that were appropriate for a program founded in the 1930s, when life expectancy is many years longer, where people today, more people are reaching 65 and collecting benefits with a life expectancy of 20 years than made it to 65 when we adopted Social Security. We need gradually to think about those sorts of things, but in an overall context of making sure that we maintain adequate benefits for people who can't take advantage of that. Not everybody is a professor. We have people in physically demanding and dangerous jobs, the miners, etcetera, so there is this heterogeneity in the population which both Dean and David have spoken about. And I think we have to have a system that's flexible . . . .

ROBINSON Michael Boskin wants to change the cost of living adjustments for Social Security recipients. Is that a cut in benefits, or not?


ROBINSON You mentioned this business of the CPI—the Consumer Price Index—inflation being over-measured and Social Security recipients receiving increases, annual increases that are actually too big in some sense. But, the counter- argument is that old people spend a disproportionate portion of their money on health care and housing, those two items, and those two items have been rising at quite a clip, at a faster clip than the rest of other items in the economy. How do you answer that one?

BOSKIN Well, number one, what you said is correct, but the implication is not. Medical care is a serious issue, and it probably leads to—other things being equal—would lead to the measured inflation for the elderly going up a little bit, a couple tenths of a percentage point higher than the general population's. That's why I said earlier that any change in indexing formulas, etcetera, ought to take due account of any differences. However, on housing, this is a technical point, you're not doing the arithmetic right. The elderly disproportionately own their homes, so they're getting the capital gains on their housing as well. Now that doesn't help the quarter of them that rent, so for that there's a separate issue, but so the indexing thing is a more complicated thing when applied to the future of a Social Security system. We're making a generic point about trying to get the basic price index we were using made more accurate through time.

ROBINSON Dean, briefly give us your thoughts on the Boskin solution here to Social Security.

BAKER Okay, well, a few different things. First off, again, I don't want to get into the politics of whether we want to call it a "cut" or not, but I believe Michael's talking about paying less benefits than are prescribed in current law. Whether you want to call that a cut, I don't really care, but you know . . . .

ROBINSON And any notion of cutting the benefits, or even cutting the growth in benefits, you find politically, morally repugnant.

BAKER You have a population that for the most part is not particularly well to do right now, so I don't think it makes sense to be looking to cut that right now, or anywhere in the near future. What I'm concerned about is that we start raising the retirement age next year or the year after, in the next five years, next ten years, when we're in a situation where there's a lot of people that cannot work until they're 68, 69, 70.

BOSKIN There is no single proposal that I'm aware of, of raising the retirement age, that doesn't do it very gradually after a grace period. Matter of fact—

BAKER The National Commission's proposal.

BOSKIN Matter of fact, several years from now, we will start to see, over the course of six years, a one-year increase in the age of retirement. That was planned in 1983, so it's going into effect a quarter century later, so the reason for doing this is people have had lots of time to do it.

ROBINSON Dean, let me ask you a question. You talked about the way in which the economy is going to grow, workers will become more and more wealthy. But isn't it true that, generally speaking, old folks are going to therefore become wealthier, too, as we talk into the future decades? And so, what I hear from you is: kind of old-fashioned, New Deal, compassionate liberalism; we don't want older Americans living out their final years in indigency, which strikes me as a compassionate, noble sentiment, but isn't it a little out of date?

BAKER First off, there is a plan that's getting an awful lot of attention. It's proposed by the C.S.I.S., the National Commission of Retirement and Security, that's gotten an awful lot by raising the retirement age to 68 by the year 2015, the normal retirement age. So to me, that's very rapid, and I hope Michael's right and it's not being taken seriously, but that's not what people in Washington are saying. The second point, are people getting wealthier through time? Certainly, I would hope that the elderly would be considerably wealthier 20, 30, 40 years from now than they are today. But we have to think about when are we making policy for? These plans, and again, I'll refer to that plan, which is being touted as this bi- partisan plan, people in the Clinton administration are supposedly very interested in it, a lot of Republicans have signed on to it. That calls for cutting benefits over the next 10 or 15 years. We are making policy for 2005, 2010, 2015.

ROBINSON And that's just not fair.

BAKER That's right.

ROBINSON That's just not fair. Okay, let me change gears . . . .

ROBINSON For years, talking about Social Security reform was taboo. But today, everybody's drawing up reform plans. How come?


ROBINSON When President Clinton was first elected, Social Security was still being compared to the New York City subway system. It was called the third rail, the electrified rail. For any politician to touch Social Security was to get fried. Now, here we are, and the climate now is moving toward reform of some kind. We even have liberal Democrats—Senator Moynihan has proposed a reform. What changed in the political climate? Dean?

BAKER Well, I think that there's been a concerted effort on it. It's come from three separate areas. One is there's been a lot of distrust in government. We've seen the height of distrust of government, part fueled by the Clinton administration, certainly promoted by Republicans, so, you know, government's held in less esteem today than probably ever before.

ROBINSON Therefore, the populace has lost confidence that Social Security works and will be there for them.

BAKER That's right. Secondly, there's a lot of people on Wall Street who certainly stand to make a lot of money by privatizing it, and they've been promoting this, and what's happened is you've gone a very long way towards undermining confidence in the system. At the same time, we've seen record run-ups in the stock market, so you have a lot of people who are 35 years old thinking that there's no way they're ever going to see Social Security. That's simply wrong, but they think that. And secondly, they think they're going to get 20 or 30% a year by putting money in the stock market; well, if you have 20 or 30% every year in the stock market versus a Social Security system that won't be there, it's an easy choice.

ROBINSON Okay, so the reason the country is finally willing to consider reform of Social Security is because they've been scared. Right?

HENDERSON Yeah, and they're scared for good reason. First of all, what they're seeing is a very lousy rate of return from Social Security. In fact, that's even hard to call it a rate of return. It's a reshuffling of taxes and subsidies, so we're using all this insurance language that doesn't really work. But the people your age can expect to get a return of maybe 0 to 2% from Social Security, and it's true that there have been these 20% returns on the stock market, and it's true, as Dean says, that's not the number to compare it with. But the number to compare it with is the real rate of return that people have gotten over the last 70 years in the stock market, which is over seven percent. And so people are seeing that, they're looking at their 401Ks, but even four years ago, they were looking at their 401Ks growing before the recent run-up and saying, "This is a better deal." So it's a lousy deal.

ROBINSON Okay now, we're running out of time. Let me close this out this way. I'm going to give each solution, and let the other two vote on it, as a matter of political practicality. The Henderson solution: abolish Social Security in slow motion. My question is not whether you want it or not, my question is whether the political system could possibly swallow that one. Mike?

BOSKIN Unlikely.

BAKER Almost inconceivable.

ROBINSON All right. Dean's solution: Do nothing now. Calm down, let's not panic. We've got years and years and years in which to address this problem. Politically viable at this point?


ROBINSON It is. Mike?

BOSKIN I think unfortunately so, especially given the recent problems in Washington. I think until the recent problems, there was a consensus building that we really ought to be forward-looking and do something to deal with these problems, but I think it's going to be difficult . . . .

ROBINSON The Boskin solution. I'll tell you what I take it to be. The Boskin Solution is: Do a little adjusting in the growth of benefits, do a little adjusting in the retirement age; and open up a door for people to put some money into private investment accounts. Now, is that politically viable now? David?


ROBINSON The country will go for that?

HENDERSON No, it's viable. I'm not saying it'll go for it. I mean, it's something that could XXXX have a reasonable shot.

ROBINSON Okay, Dean?

BAKER I would say it's possible, but I think there's a lot of details that pose real land mines which might prevent it from ever actually going through.

ROBINSON Dean, Mike, David, thank you very much.

ROBINSON David has his plan, Michael has his plan, and Dean has his plan. I only hope each one of those young fellows is willing to live with his plan once he gets to be my age. I'm Peter Robinson. Thanks for joining us.

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