Social Security Reform is in the Pipeline

By John Ballard

First was Health Care Reform Then came Financial Regulatory Reform. Along the way Immigration Reform reared it's ugly head. Comes now Social Security Reform and butts are scrootching up all over the place.

It's Friday and for some reason the president's National Commission on Fiscal Responsibility and Reform is in the spotlight because the matter of Social Security is more urgent due to a surge in early benefits thanks to protracted unemployment brought on by the recession. 

Maybe this article from the Neiman Foundation (at the president's alma mater) is the source of the shivers.

President Obama and the leadership in Congress have delegated enormous, unaccountable authority to 18 unrepresentative, inordinately wealthy individuals. The 18 individuals are meeting regularly, in secret, behind closed doors, until safely beyond this year�s mid-term election. If they reach agreement, their proposal will be voted on in December by a lame duck Congress, without the benefit of open hearings and deliberations in the pertinent committees and without the opportunity for open debate and amendment on the floors of the House and Senate. Despite the speed and lack of accountability, the legislation will affect, in substantial ways, every man, woman, and child in this nation.

Who are these powerful people and what are their views?

They are the members of President Obama�s newly-formed National Commission on Fiscal Responsibility and Reform. They lack racial and gender diversity, and more importantly, they lack diversity of opinion. Their mantra is that �everything is on the table,� but their one member who has any expertise with respect to defense spending, for instance, is the CEO of a major defense contractor that devotes millions of dollars each year to lobby Congress for more defense spending.

�Everything is on the table,� they say, but the members appointed by the minority leaders in the House and Senate have made clear that they do not believe that the problems in this country stem from under-taxing, rather from overspending. The one area that they seem to be in agreement on -- and which they are in fact, focusing on like a laser -- involves programs that help the middle class and those Americans who are the most vulnerable. Even liberal Senator Richard Durbin has stated, �the bleeding-heart liberals� have to�make real sacrifices to strengthen our nation.�

As is the case for most of what happens in Washington, there is enough misinformation and ignorance to float an aircraft carrier and not enough informed opinion to launch a canoe. The vocabulary of politicians has been made colorful for years by ominous warnings and meaningless one-liners about entitlements, Social Security and Medicare being broke, losing benefits, death panels, leaving nothing for our children but debts  and cutting you off. What's a rational person supposed to believe?

An article in the Nation by William Greider ("...prominent political journalist and author, has been a reporter for more than 35 years") in January with the wonderfully balanced title "Looting Social Security" made a poisonous reference to the one plan about which I have read that not only makes sense but spells out the hard truths about where we have been and where we need to go.

...the assault on Society Security, we knew, would come back sooner or later because many of Obama's lieutenants are devoted to Peterson's fiscal logic. Budget director Peter Orszag once co-authored a "reform" plan that would raise the payroll tax on young workers and cut benefits for older people near retirement. Isn't that clever? Pinhead economists evidently think that workers won't notice. Now the billionaire is cranking up another fight. We should finger him again, big-time, and all those who willingly collaborate in his plot.

Mr. Greider's attack of Peter Peterson is a continuation of a feud started the previous year with Part One, to which the Peterson foundation replied in part...

The nation's bedrock social safety programs, Medicare and Social Security, are not in danger of being looted--they already have been looted. The federal government already has spent any related surplus and replaced it with non-marketable IOUs that aren't even considered liabilities by the federal government. In addition, Medicare is already drawing down on these IOUs and Social Security will start doing so within ten years. [This was some time ago. That day already came a few months ago.]

Mr. Greider is correct in saying that the government will have to repay what it borrows from Social Security--but how will it do so, and what level of tax burdens will be required to meet our growing Social Security, Medicare and Medicaid obligations without fundamental reforms?

That sums up the problem as well as anything I have read, and for most people it's nothing new.

Greider's misleading reference to the Diamond-Orszag Social Security Reform Plan, together with that clever reference to "pinhead economists" actually comes close to what will probably play out.

It is no accident that Obama's team picked Orszag for a position of prominence. I read the details of the plan two years ago and found it to be a model of balanced transformation of the nation's retirement system calculated to shift from company-paid plans to employee-paid plans with as little bloodshed as possible.

Explaining the details in a blog post would be an exercise in futility. But the big, unchanging realities of retirement are these.

• Social Security is not intended to furnish anything more than a safety net for those without income from work, due to retirement, disability or (in the case of a dependent) the death of a breadwinner. 


• Social Security funding is from payroll taxes, divided between the employer and the employee, to be used for current needs. It is not, as many imagine, a savings plan for the future. The working population pays for non-working beneficiaries (retired, disabled, surviving spouses, children, etc.).


• The financial needs of Social Security are measurable and predictable in accordance with actuarial projections. For this reason a "full retirement age" is a variable target which has been adjusted upward over the last several years. My parents' "full retirement" age was 65 and mine was age 66. For those born 1960 and afterward, the age is 67.


• The maximum earnings that will be taxed for Social Security in 2010 is $106,800. This cap on Social Security taxes may be the best-kept secret in America because most wage earners never get to experience what it is like to receive a paycheck without a FICA deduction. The maximum is adjusted upward, along with the amount of benefits, in accordance with a cost of living formula. (Because of no inflation in 2009 there was no COLA increase for 2010 for beneficiaries but also no increase in the maximum tax.)

Historically many companies have contributed to retirement plans for their employees in the form of what are called "defined benefits pension plans." The "definitions" varied from one plan to the next, but generally they were/are completely paid for by employers and understood by employees to be part of their anticipated retirement benefits, over and above whatever Social Security benefits might also be forthcoming.

In recent years a variety of employee-paid arrangements have come into existence, starting with "traditional IRAs" and later Roth Accounts, various 401 plans and others. The advantage of these plans is they they are owned and controlled by individual employees, whereas the (now old-fashioned) defined benefits pension plans were owned and managed by employers, typically through third-party investment-type companies charged with keeping up with the growing liabilities which companies, in turn, were expected to meet.

Retirement arrangements in addition to Social Security have these important realities.

• Employer-paid plans are now obsolete, having been replaced by employee-paid plans. However many companies still have them and will continue to offer them in addition to other employee-funded arrangements. My personal opinion is that pension plans will be few and far between for the next generation. They are too expensive for most companies to continue in the face of competition in the marketplace from newer companies which no longer offer them.


• The tax advantages once benefiting employers now benefit employees. Workers who fail to save and invest for their future retirement have no one but themselves to thank or blame when they arrive at that moment in their life.


• Unlike defined benefits pension plans, Employee-paid plans are personal assets which can be passed to heirs in the event of the owner's untimely death. (Most defined benefits plans included an option for a surviving spouse lower than the amount for the life of the retiree only, but the next generation is not entitled to any benefits.)


• One way a company can escape liability for its pension plan is bankruptcy, which is why many companies go bankrupt. 


• Another method is "Plan Termination" which may be voluntary (by the organization) or initiated by PBGC. when the company simply hasn't enough money to cover their liabilities.


• The Pension Benefits Guaranty Corporation (PBGC) is a government-run arrangement funded by private contributions which assumes responsibility for pension plans shed by companies which go bankrupt.


• Liabilities (or benefits -- same thing depending on whether you are the
  company or the beneficiary) for pension plans are a disappearing factor
  because the population receiving them becomes smaller with the passing
  of time.


• The term "legacy" is a polite way of referring to the fact that pensioners will eventually die. 

�

To review...
?The day of company-paid, tax-advantaged plans is coming to an end.

?Future retirement arrangements will be furnished by tax-advantaged individual arrangements. Employee-owned arrangements are predictable, flexible and portable. Within limits they can be supplemented, rolled over, combined, and reorganized however the owner/beneficiary wants.

?Social Security is not at risk. Payroll taxes will continue with modifications which may or may not include...

• Slightly higher percentages


• Increased maximums (raising of removing the annual cap)


• Means test (Do individuals with high additional retirement incomes also need Social Security?)




...people with higher earnings and more education are
increasingly tending to live longer than less-educated, lower-earning workers.
This hurts Social Security finances and reduces progressiveness on a lifetime
basis, since the highest earners receive payments over an increasingly longer
period compared to everyone else. To offset this trend, our plan would gradually
reduce the highest tier of the benefit formula, affecting the 15 percent of workers
with the highest lifetime earnings.

Legacy debt is best explained in the words of the Diamond-Orszag plan (9 pages pdf).

This is predictably the most contentious of all the adjustments that will have to be made but the facts are unassailable. (Compare today's sinking real estate market in which those of us who have paid for our homes watch helplessly as market values declines, while nearby houses are being purchased at prices well below what we paid for ours. Our only blessing is that we had no outstanding debt when the economy pulled the rug from under us with a protracted period of job losses.)

Confronting the Burden of the Legacy Debt

...our plan addresses the burden of the legacy debt.
Benefits paid to almost all current and past cohorts of beneficiaries exceeded what
could have been financed with the revenue they contributed. This difference is
what we call the legacy debt. Without this debt�that is, if earlier cohorts had
received only the benefits that could be financed by their contributions plus
interest, the trust fund�s assets today would be much greater. Those assets would
earn interest, which could be used to finance benefits.

We cannot take back the benefits that were given to Social Security�s early
beneficiaries, and most Americans seem unwilling to reduce benefits for those
now receiving them, or soon to receive them. Those two facts largely determine
the size of the legacy debt.

The key issue is how to finance this legacy debt across different
generations, and across different people within generations. We propose three
changes that contribute to restoring balance and represent an allocation of the
financing of the program�s legacy debt:

First, mandate Social Security coverage for newly hired state and local
government workers, so that eventually all workers will bear their fair share of the
cost of the nation�s earlier generosity.

Second, create a legacy tax on earnings above the maximum taxable
earnings base, so that very high earners contribute to financing the legacy debt in
proportion to their full earnings. This legacy tax would start at 3.0 percent and
increase along with the universal charge, described next.

Third, create a universal legacy charge. Roughly half will appear as a
benefit reduction for all beneficiaries becoming eligible in or after 2023. The rest
will appear as an increase in the payroll tax from 2023 onward. These charges,
together, will gradually increase, in order to help stabilize the ratio of the legacy
debt to taxable payroll.

These three approaches to the legacy debt issue would reduce the seventyfive-
year actuarial deficit by 0.19, 0.55, and 0.97 percent of taxable payroll
respectively.

Those are a few of the hard facts. I'm sure that anyone with a better arrangement would be more than welcome to submit them to the Fiscal Responsibility Commission.  Better yet, set up your own PAC, build a base and run for public office. I'm sure you will get lots of votes and sail into office with the sparkle and elan of Scott Brown or Rand Paul.

Later...

In the interest of balance I should point out that Jane Hamsher is on the case.

One important lesson I learned from the health care fight: the health care industry had been laying the groundwork for this for years, and that should have been an early focus. It wasn�t until the Gruber incident that I learned how the medical industrial complex had been working through foundations like Kaiser for over a decade to basically buy the academic underpinnings of their plan (and probably longer if you count the GOP/Heritage response to HillaryCare as its roots). They ran a nice back-and-forth between Congress, the White House, the CBO and Gruber to make it look he was supplying independent confirmation of the health care bill, when in fact it was all part of the same carefully orchestrated plan. It bought them a lot of credibility that they otherwise would not have had in the academic world.

Pete Peterson has been serving the same function on Social Security that Kaiser and others did on health care. From the Concord Commission to the Peterson Foundation, cutting Social Security benefits and diverting as much money as possible into Wall Street�s coffers has been Peterson�s holy grail. He himself was on the Danforth-Kerrey Commission, and was set to be the key note speaker at Obama�s first fiscal responsibility summit shortly after the inauguration. After we reported it, the White House canceled him then denied he had been scheduled to speak, but Robert Kuttner subsequently confirmed it in the Washington Post.

With customary thoroughness she digs deep into the very probable influence of special interests, political insiders, filthy rich oligarchs and other power brokers. In my heart I am in full agreement with her informed skepticism. I have the same sour taste in my mouth left by the health care fiasco, but in retrospect I have concluded that in the case of health care and insurance reform something is still better than nothing. The final result with all its bruises and flaws was almost defeated anyway. Had it not passed after all that went down, I doubt that another meaningful attempt would be launched in my lifetime.

So in the case of Social Security reform, I have no illusions that the end result will be far less agreeable to idealists like she and I, but will be light years ahead of the catastrophic alternatives that would certainly derive from a Republican Congress and/or administration. When I think how close the Bush years came to enacting their Social Security "privatization" proposals my blood runs cold.

Medicare Part D, Medicare Advantage and the much-vaunted HSAs and MSAs were bad enough. If the ACA does nothing else it starts collecting nails to build coffins for those dreadful approaches to financing health care. I share her misgivings, but dread more the alternatives if something affirmative is not done while the political fire is hot. The future of Social Security is far less secure if left to Republicans or Tea Party folks. 

The netroots and many others who put Barack Obama into office have since become his most vocal critics because he isn't the knight on a white horse he was advertised to be. (Sorry. Poor image. No double-entendre intended.) My friend Deborah White has been nipping at his heels in her blog, Deborah's US Liberal Politics Blog. Stuff like this...

Since his elevation to President, Obama has generally ditched the progressive principles that got him elected, and instead, governed from the mushy, deal-laden, Republican-support seeking middle. And with jaw-dropping swiftness, become the stuffy embodiment of the double-dealing D.C. establishment.

Yesterday's Congressional primary victories by the Democratic wing of the Democratic party had the unmistakably jubilant feel of the kick-off of the post-Obama era for frustrated liberals. Or at least the dawning of the post-expectations era for Progressives who no longer see Obama as one of them?

I'm sure she speaks for most Progressives and Liberals. And the DFHs stopped cheering waaay long ago.
I remain hopeful, though, and said so here.

�Will Obama Return to His Progressive Base?� That is the sixty-four dollar question.

Obama is a man driven by principle, not power. He�s fighting fire with fire. He hasn�t the multi-generational resources of a Roosevelt, Kennedy, Rockefeller or a Bush, but he knows what it takes to deal with powers behind the scene. He didn�t build the damn car but he sure figured out how to drive it.

The human family being made up of tribes, we tend to treat those who embrace an enemy tribe worst than bona fide, card-carrying, natural born members of an enemy tribe. (Which accounts for most anti-Obama sentiment before the election. Birthers, literally.) We only tolerate a turncoat and come to their defense when they face death all alone. (Think Lawrence of Arabia, A Man Called Horse, Dances With Wolves, and even the Avatar)

Walking into lions dens has been a way of life for him. It is a burden he already bears, so what�s one more bandwagon in a parade?

My guess is that after slogging around the swamp in a good faith attempt to engage political opponents, chipping away at what we all know is a cesspool in
Washington, he will at some point look back at the netroots, progressives and others responsible for his win and ask, �Who is still with me?�

The reply will determine whether he gets a second term. But he�s letting that be decided at the last minute. His strategy is like that of Joshua who allowed his forces to become irrationally small but whose assault on Jericho was successful despite the smallness of his army.

He knows the score better than anyone. There are battles yet to be fought. Last time the Dream Act came up it was defeated. And even Bush couldn�t manage immigration reform although it was one of the few policies he was correct about. If Obama figures out a way forward with immigration reform it will be more impressive than what happened with health care.

I've been wrong in the past. Embarrassingly wrong. But I am not embarrassed to be supporting the president for whom I voted at least until I see a more constructive alternative. Absent a realistic (i.e. politically feasible) alternative, I regard even well-informed, justified bitching as counterproductive.