19 August 2010 
I have a post on The Daily Beast today about the prospects for Social Security reform.
You can read it at The Daily Beast or here.
Thanks to The Daily Beast staff, who were efficient and friendly.
A Democratic split is coming on Social Security.
On one side is the president, who said Tuesday in Ohio, “I have been adamant in saying that Social Security should not be privatized and it will not be privatized as long as I am president. The population is getting older, which means we’ve got more retirees per worker than we used to. We’re going to have to make some modest adjustments in order to strengthen it. And what we’ve done is we’ve created a fiscal commission of Democrats and Republicans to come up with what would be the best combination to stabilize Social Security not just for this generation, but the next generation. I’m absolutely convinced it can be done.”
On the other side we have Paul Krugman, who wrote in The New York Times earlier this week, “The program is under attack, with some Democrats as well as nearly all Republicans joining the assault. Rumor has it that President Obama’s deficit commission may call for deep benefit cuts, in particular a sharp rise in the retirement age.”
Krugman continues, “Social Security’s attackers claim that they’re concerned about the program’s financial future. Instead, it’s all about ideology and posturing. To a large extent they rely on bad-faith accounting. But [conservatives] receive crucial support from Washington insiders, for whom a declared willingness to cut Social Security has long served as a badge of fiscal seriousness, never mind the arithmetic.”
While Krugman names Obama fiscal commission co-chairman Alan Simpson, he also is targeting Democrats such as fiscal commission chairman Erskine Bowles and House Majority Leader Steny Hoyer.
Let’s look at how a Social Security deal might come together, first in the president’s commission and then on Capitol Hill.
A few conservatives who say that personal accounts alone can fix Social Security will oppose any deal that includes changes to benefit spending promises or tax increases, so they’re on the outside no matter what. That group is small but could cause a little trouble by (incorrectly) promising gullible and nervous conservative members of Congress that a free lunch solution is theoretically possible.
For most Republicans, three things are important: permanently solving Social Security’s cash flow problem, not raising taxes, and allowing younger workers to voluntarily redirect some of their current payroll taxes into personal accounts. Republicans know these “carve-out” accounts are anathema to most Democrats and impossible with a Democratic president. To pick up enough Republican support to be viable, a deal must therefore significantly, if not permanently, address Social Security’s long-term cash flow problem and must not raise taxes. If a proposed deal includes tax increases, I think all but a few Republicans will walk away. To get a deal, Republicans might split evenly on carve-out accounts, but they won’t split on tax increases. The president gets a win by blocking “privatization” (carve-out personal accounts), while Republicans get a win by not raising taxes. The reduction in, if not elimination of, Social Security’s long-term financing problem would be a bipartisan win for which both sides would claim credit.
If I’m right about Republicans on personal accounts and taxes, Democrats will split. Many Democrats would naturally oppose a deal that only slows spending growth and does not raise taxes, even if that deal excludes the carve-out personal accounts they oppose.
The president’s comments Tuesday suggest he is trying to lower the temperature during election season and nudge Democrats toward a deal that some Republicans could support. He could fairly easily convince his fellow Democrats to support a deal that uses trust fund accounting, solves only a fraction of the cash flow problem, and relies heavily on tax increases. But he, or his proxy Bowles, chairman of the fiscal commission, can’t get Republicans to agree to tax increases, and probably cannot get more than a handful of Democrats to fix Social Security’s cash flow problem permanently without tax increases. I expect Democrats in Washington will split on whether a commission deal “cuts benefits” too much, especially if the deal doesn’t raise taxes. They will want to support the president if he leads, but they won’t like the substance of the deal needed to get Republican support.
If a bipartisan deal is at all possible, I expect, therefore, that it will be only a partial solution to the permanent cash flow problem, and it will exclude both carve-out personal accounts and tax increases.
All the while, Krugman and others on the left will argue that the problem is overblown and maybe even nonexistent, the benefit changes are draconian, and the solution is a Trojan horse for privatization or at least dismantling of Social Security. I expect this reaction to be independent of the substance of any deal. Like the fairly small free-lunch personal accounts-only crowd on the right, I expect this much larger group on the left will attack a deal and those who support it. Despite an overwhelming expert consensus that Social Security’s cash flow problems are real, enormous, immediate, and harder to solve the longer we wait, this group will argue that little is wrong and a solution can wait.
The president therefore has two challenges: How does he convince enough congressional Democrats to support a deal they won’t like because it doesn’t raise taxes, and how does he mitigate the attacks from those on the left who deny a serious and immediate problem even exists?
This would be easier for the president if a center-left coalition were feasible, but the substance of Social Security reform has always lent itself to a center-right coalition that excludes a small conservative fringe and cleaves the left in two. This is not a natural coalition for President Obama, who has so far been willing to nudge his party toward but not lead them to a difficult caucus-splitting choice (see: public option, dropping of). If Republicans take the majority, the president could support and execute a center-right deal despite vigorous opposition from the left. If Democrats retain either the House or Senate majority, he would have to push Speaker Pelosi or a Democratic Senate majority leader to agree to a deal that splits congressional Democrats.
In modern American politics, presidential leadership sometimes means angering many in your own party to accomplish a national goal. If doing so is the only feasible legislative path to addressing this critical policy problem, will the president be willing to lead?
(photo credit: Nick Wheeler)
comprimise ? are you sure that is even in the Obama dictionary ?
what are the chances that a change in eligibility age would impact those who currently are eligible to take Social Security but have not?
Keith, do you think Steve Goss is a crazy conservative lunatic free luncher? He (the Chief Actuary of SS and the gold standard of scoring) scored Ryan-Sununu at achieving full solvency back in 2005.
Ryan-Sununu was large personal accounts (10 percentage points), no tax increases, and no benefit cuts. I believe there was even a government guarantee on the accounts (plussing them up to the old benefit level in the unlikely event the account underperformed). There was a couple of trillion in debt floated in the early years, but that was fully-paid off by the end of the 75-year scoring window. This permanently-fixed Social Security, was voluntary, and eliminated all the unfunded liabilities.
I'm not arguing that it's politically-viable, but you have to admit that it's a real plan with real scoring to back it up. Just because the small accounts/benefit cut strategy of Chuck Blahous didn't work doesn't mean that large accounts also don't work.
The problem with personal accounts is that it forces the young to pay for themselves and for those who went before them. The young will obviously have to pay for themselves to some extent, but the personal accounts proposals accelerate that payment and focuses it all on the young. Let's make the choice stark:
behind door number one is benefit cuts for existing and future retirees. This can result in a solvent Social Security system. It implicitly results in the young saving more for themselves, but they are also paying less for those that have gone before them.
Behind door number two is no benefit cuts for the existing retirees nor curent workers, just young workers who will have increased personal accounts and still have to pay for everyone who went before them. This can make the trust fund sound in the long run, but it accelerates the unfunded liability onto the young that you choose to pay for their own retirement.
I think you need to have a healthy combination of pain for everyone. That means benefit cuts for the existing elderly and all current and future workers, with perhaps a modest tax increase to shield some of the benefit cuts for existing low income elderly. That is the only fair thing to do.
It amazes me that Krugman even has the ability to be part of the conversation. At what point does someone need to be always WRONG to become irrelevant to the discussion? He can't even out debate his blog readers on economics for goodness sake.
How likely is it that the President will provide any leadership beyond an admonition to plug the damn hole?
He is already demagoguing the issue for all it is worth.