Monday, May 02, 2005

Bush bets "all-in" on PRA 

I never did get to my thoughts on Bush's Social Security press conference Thursday night during the NARN show last Saturday. So let's get a few thoughts here.

First, it's interesting that the president has in essence doubled down on personal retirement accounts. He gave way on "progressive indexing", which I think is politically a dangerous strategy but economically the right one, and he didn't say "never" to the idea of raising the cap on SS contributions (meaning you would pay the tax on higher levels of income rather than the current cap around $94,000.) This admits that PRAs will not solve the funding problem for Social Security, but makes them part of Bush's broader vision of an ownership society. (Even then, they are imperfect, but more on this later.)

Second, the Democrats have found ingenious (or is that disingenuous?) ways of bluntng the thrust of Bush's plan. Relying on a strategy paper written by Jason Furman, who was John Kerry's economic advisor during last year's run (he's burnished the paper here and here, but he's playing the same theme), the Democrats are arguing two main points:

  1. The old "a cut in the rate of increase is still a cut" canard. Anyone making more than $20,000 a year currently and is born after 1950 loses a benefit. But this ignores the value of the PRA. Only if you count the payments made by the government guarantee alone would you get the results Furman has presented. Donald Luskin notes this as well. You can observe the numbers with the Social Security Calculator provided by Patrick Ruffini. I suggest you go there and play with the calculator for awhile and see how PRAs allow younger workers to build their retirement savings.
  2. The second point is the attack that, by advocating progressive indexation, Bush is turning Social Security into a welfare plan. Reliable toady Paul Krugman is in shrill form today over this.'s a good bet that benefits for the poor would eventually be cut, too.

    It's an adage that programs for the poor always turn into poor programs. That is, once a program is defined as welfare, it becomes a target for budget cuts.

    Michelle Malkin notes the Left's new-found concern for the benefits of the rich. But this too is missing something. Hasn't it always been the argument that Social Security is a bad deal for the poor? But if we do something to fix that, then we are doing something worse? There isn't much good evidence one way or the other on the progressivity of Social Security; a paper in 2000 by Coronado, Fullerton and Glass (non-technical summary here) suggests that over a lifetime the current system is probably neutral; another paper of theirs looks at several plans, including those here, using some micro-level data and suggests there would be little change.
The reason I think progressive indexation makes sense economically is that wage indexation may be a dangerous thing to have in the long run. Social Security premiums are invested in short- and medium-term government securities, while benefits indexed to wages will behave like returns to capital, as Arnold Kling noted a while ago. In essence you are running an asset-liability mismatch in your portfolio, so that an expanding economy (or any situation where the stock market return exceeds those on short-term bonds) makes the Trust Fund worse off. This would be cured, by the way, if we allowed the Trust Fund to invest in long-run securities, or completely privatized the system.

The WSJ is correct that Bush has stood the debate on its head, and makes one other key point regarding the administration's continued focus on "fixing" Social Security:
The overriding problem, however, is that solvency pushes the entire reform debate into what Americans will lose rather than what they can gain. The great appeal of private accounts is the chance for workers to own their retirement savings rather than depend on the promises of politicians. Especially for lower-wage workers who find it hard to save, it is the chance to build wealth that they can control and pass along to their heirs. If they now die at age 64, they lose all of the taxes they've paid over a lifetime of work. That's the "fairness" argument we wish Mr. Bush and Republicans were stressing.
I continue to express my frustration that the "ownership society" president I voted for continues to miss opportunities to put that vision at the front and center of his domestic economic policy.

UPDATE: Reader jw sends along this report from the chief actuary at Social Security to Robert Pozen on the effects of progressive indexing with and without PRAs. Much of the information being used by the administration in its talking points seems to come from this, especially the last page. They are assuming a real (above-inflation) return on the PRAs of 3%. SSA thinks that assumption is warranted.