Kerry Talks Social Security

Yesterday, Democratic presidential candidate John Kerry was questioned on Social Security reform by Tim Russert of Meet the Press (transcript).

Unfortunately, Kerry’s main idea to sustain the program -- faster economic growth -- and his fall-back idea, means-testing, fall well short of what should be expected. And Sen. Kerry's sidebar on Medicare solvency would be laughable if that program's cost problems weren't so serious.

Russert: “There are now 40 million Americans on [Social Security and Medicare]. There's soon to be 80 million. The trustees of Social Security told us this, that if the programs remain in their current form, we're going to have to either cut benefits by a third or double the payroll tax from 7.5 percent to 15 percent for the average wage earner. Back in 1995, you said we have to be bold. And it might be unpopular, but we should consider raising the retirement age and means testing. Do you stand by those statements?

Kerry: No, I rejected that. We looked at that and we found that we don't have to do it. But you know what's interesting, Tim--I wish I had the power to press this button and put up on the screen what you said, because back in 1997, on November 9, you sat with Bill Clinton, and what you said to Bill Clinton is--you said, "Mr. President, by the year 2001 Medicare is going to be bankrupt and you're going to have to raise the retirement age. You're going to have to raise the premiums and you're going to have to cut the benefits." That's what you said. Guess what, Tim? He didn't do it. We didn't do it. And we made Medicare whole until the year 2029. We made Social Security whole until 2037.

Along comes George Bush. We have a downturn in the economy, an increase in expenditures for the military, and a big, big, big tax cut we can't afford. And all of a sudden, you look worse for Social Security and Medicare. I'm going to put us back on the track that we were in the 1990s. We said we were going to save Social Security first, and we had the ability to do it, without doing all these terrible things that you're saying. I'm not going to do those. I'm not going to cut Social Security benefits. I'm not going to extend the retirement age. And we're not going to have to raise the premiums. We can fix Social Security beginning with a stronger economy.

Russert: Double the number of people on it with current spending?

Kerry: Tim, we're going to have a bigger economy. We have more Americans who are working. We have the ability to grow out of it. Now, if we don't do that--let me give you an idea. You and I earn a lot of money. We're very lucky. If you live to be 85, Tim, do you think it's right that somebody who earns $30,000 a year after you've gotten all your money out of Social Security, after you've gotten everything and more than you paid is paying you money? I think there are plenty of ways to look at things. We don't have to tell Americans it won't be there, because it will be there. And we certainly don't have to cut benefits to pay for George Bush's unaffordable tax cut.

Sen. Kerry hit on two main points in his discussion, economic growth and means-testing.

Kerry is right that economic growth is important. After all, retirees in the future will consume goods and services produced by workers in the future. The more workers there are, and the more productive each worker can become, the larger the economic pie will be.

But Kerry is mistaken when it comes to the effect of economic growth on Social Security’s finances, both in the short run and the long run. Kerry first argued that the slow economy of the past several years has hurt Social Security, placing the blame on President’s Bush’s policies. But whatever the impact of Bush administration policies on current economic growth, their effects on Social Security’s long-term finances has been minor.

In 2001, when the Bush administration entered office, the official Trustees Report projected that Social Security would run cash surpluses until 2016, face trust fund exhaustion in 2038, and run a combined 75-year deficit equal to 1.86 percent of taxable payroll (i.e., a payroll tax increase of 1.86 percentage points would keep the program technically solvent for 75 years).

The 2004 Social Security Trustees Report shows the program running cash surpluses until 2018, facing trust fund exhaustion in 2042 and running a 75-year deficit of 1.89 percent of payroll.

In other words, despite a recession and slow recovery, Social Security’s long-term finances have been virtually unchanged. As the date of cash flow deficits is the more important, one might even argue that Social Security’s finances have improved marginally.

Kerry’s claim that “We have the ability to grow out of it,” is, well, wrong. Just as slower economic growth the past several years hasn’t done much to hurt Social Security’s finances, faster economic growth won’t do all that much to help them.

The reason is simple: both Social Security taxes and benefits are based upon average wages, so while higher growth may raise tax receipts, it would also increase the benefits Social Security would have to pay. Envision a dog chasing its tail and you have a rough idea what’s going on; fast as he may spin, he’s not going to catch it.

The Social Security Trustees’ sensitivity analysis for wage growth shows that increasing real wage growth from 1.1 to 1.4 percent annually – a 27 percent increase – would delay the Social Security trust fund’s insolvency date by only 6 years.

Even if wage growth doubled over the long term, which is very unlikely, Social Security would still become insolvent before the traditional 75-year measurement period was ended. The Center for Retirement Research at Boston College recently published an issue brief by former Congressional Budget Office head Rudy Penner taking a closer look at this issue.

Which leads us to Sen. Kerry’s fallback: means-testing. He said to Russert “Let me give you an idea. You and I earn a lot of money. We're very lucky. If you live to be 85, Tim, do you think it's right that somebody who earns $30,000 a year after you've gotten all your money out of Social Security, after you've gotten everything and more than you paid is paying you money?” Implicit in this would be reductions in Social Security benefits for retirees with non-Social Security incomes of $30,000 or more.

Whether we call this means-testing or something else, it has several significant shortcomings. First and foremost, it wouldn’t go nearly far enough to fix Social Security’s finances, for the simple reason that there aren’t that many retirees with outside incomes of $30,000 or more. Americans are remarkably dependent upon Social Security in retirement, with roughly a third of retirees getting virtually all their income from Social Security benefits.

Second, cutting Social Security benefits based on other income would hurt the incentive to save before retirement or work after retirement, and would spawn a rush by individuals to transform their incomes to a form not subject to the means test. (For example, defined benefit pensions might shift to defined contribution, transforming an income into an asset.)

Third, means-testing would alter the “everyone pays, everyone receives” ethic that has separated Social Security from so-called “welfare programs” in the past. Granted, Social Security may already be turning into “generational welfare,” since future retirees are promised well more than the current program can afford to pay them, but many people nevertheless hold this contributory aspect of Social Security to be important.

Sen. Kerry -- and President Bush, for that matter, who has been no more specific on how to fix Social Security -- needs to look at proposals that really address the system’s problems, without the benefit of wishful thinking. One such plan is that of Sen. Lindsey Graham, who spoke with Rep. Harold Ford at a recent event co-sponsored by Centrists.Org. Another plan sponsored by Reps. Jim Kolbe and Charlie Stenholm would also permanently solve the problem.

Links:
Rudolph G. Penner Can Faster Growth Save Social Security? Center for Retirement Research, Boston College (December 2003)
Centrists.Org A Preliminary Analysis of Sen. Graham's Social Security Proposal (revised December 14, 2003)
Centrists.Org The Kolbe-Stenholm Social Security Reform Plan (revised February 14, 2004)
Centrists.Org Transcript Addressing Greenspan's Challenge on Social Security and Savings with Senator Lindsey Graham and Rep. Harold Ford (March 25, 2003)

Centrists.Org Issue Summary Social Security Reform

Posted by Jeff Lemieux at April 19, 2004 05:40 PM