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The Gang of Six Framework: A Step Backward for Social Security Reform

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The Gang of Six Framework: A Step Backward for Social Security Reform

July 21, 2011

This week, the Senate’s “Gang of Six” unveiled a deficit reduction framework that has been publicly described as generally building off of the Simpson-Bowles fiscal commission recommendations, and as specifically pursuant to Social Security reform, among other objectives. A careful examination of the framework, however, reveals that it is a step back from bipartisan Social Security reform rather than a step toward it.

This piece explains specific elements of the Gang of Six’s Social Security framework. I want to be clear from the outset that I strongly support the conceptual objectives of the Gang of Six to promote deficit reduction, general bipartisan cooperation, and to build off of the specific Simpson-Bowles recommendations. My repeated support for and defenses of the Simpson-Bowles Social Security proposals are on the public record. The goal of this piece is to explain the substantive implications of the Gang of Six document, leading to the conclusion that it moves away from meaningful Social Security reform. I would look forward to applauding future efforts from the Gang of Six to advance such bipartisan reforms.

The following are the principal attributes of the Gang of Six Social Security framework:

  1. Lack of support for the substantive reforms in Simpson-Bowles. The Simpson-Bowles Social Security plan would correct program finances by, among other things, gradually increasing eligibility ages, constraining the growth of benefits above inflation for higher earners and increasing the cap on taxable wages. None of these reforms are endorsed in the Gang of Six recommendations. The only financial correction specified that would affect Social Security is general reform of the Consumer Price Index (CPI), a technical refinement in the measure of price inflation with effects spread throughout many government programs. The Gang of Six rhetorically separates this general CPI reform from Social Security reform and even espouses other changes to SSI and Social Security to counteract some of its effects. In sum, the Gang of Six declined to embrace any of the Simpson-Bowles financial corrections that are specific to Social Security itself.
  2. Specificity only with respect to a Social Security benefit increase. The framework embraces a new Social Security “minimum benefit” at 125% of the poverty line. Like the Simpson-Bowles commission I support an enhanced minimum benefit within Social Security, but only in a certain context. That context is one of simultaneous comprehensive corrections to Social Security’s finances. Outside interest groups have instead called for benefit increases before financial corrections are enacted. The Gang of Six’s framework implicitly sides with those who endorse further benefit increases before devising needed financial repairs, and against those who would offer them as a sweetener to help pass comprehensive reform. Offering such benefit increases in advance of comprehensive financial corrections would make those eventual financial repairs still harder to enact.
  3. Erecting procedural and rhetorical barriers to Social Security reform. The text of the Gang of Six document offers obeisance to a talking point that has become common on the political left: that Social Security is not really a part of our broader deficit problem, so there should be no discussion of Social Security reform in a deficit reduction context. Specifically, the document states that Social Security reform should be “isolated from deficit reduction” and proposes a procedure by which Social Security reform would be considered “if and only if” a comprehensive deficit reduction bill has “already received 60 votes” in the Senate. It further requires that the Social Security reforms themselves must receive 60 votes. This approach contains several problems. First, Social Security is a significant contributor to the current federal deficit, and current policies are intermingling Social Security finances and the general government accounts in an especially direct way. This year, for example, incoming program taxes will fall short of benefit payments by more than $150 billion. This is in part because Congress recently cut the payroll tax and transferred general government revenues to the Trust Fund to make up the difference (though Social Security would still have added to the deficit even without this action). If bipartisan reformers do not confront these realities, they will not be able to counter existing factual confusion and explain the reality of Social Security’s current cash shortfall, its relationship to the larger budget, and the ramifications of further subsidization of Social Security from the general fund (not only occurring this year, but being proposed by some for extension into next year). Second, while reformers should perhaps favor “separating” Social Security if this expedites action, this framework does not so expedite. It instead indicates that Social Security reform should only proceed if broader deficit reduction is voted through first. This is highly problematic for a program with its own shortfall to resolve irrespective of problems elsewhere in the budget.
  4. Embrace of an incomplete scorekeeping metric that tilts toward accounting gimmicks, tax increases and intergenerational inequity. Perhaps the most problematic aspect of the Gang of Six framework is that it would adopt the standard of “75-year solvency” and “decennial reviews” for Social Security finances. It is important to understand that these standards would tilt the playing field strongly in the direction of tax increases and accounting gimmicks. Most recent bipartisan efforts have adopted a standard judging reform plans not only by whether they attain technical 75-year solvency for the Trust Funds but whether they attain annual balance between incoming taxes and outgoing payments over the long run. The Simpson-Bowles plan, for example, complies with this common standard. This is important because the specific metric of 75-year solvency is biased in favor of policy responses that allow Social Security cost burdens to swell substantially. The reasons for this are rooted in Trust Fund accounting. If tax revenue is credited to the Trust fund today, that deposit of principal will be compounded with interest credits that grow enormously over decades, creating a large improvement – at least on paper -- in actuarial balance. Even if that additional tax revenue merely served to obligate an equal amount (in present value) of additional benefits – that is, even if it created no actual net improvement in total program finances -- the act of raising taxes would be given disproportionate positive credit by the 75-year solvency metric. This is complicated to explain in words, and is perhaps easier to understand visually. See the following graph, which presents the effects of completely eliminating the current-law cap on taxable wages:
    oasdi cost rates and income rates

    This graph, copied directly from the SSA website, shows that if the tax cap were eliminated, tax collections would increase greatly (from the thick dashed blue line to the thick solid black line roughly parallel above it). Meanwhile, cost growth would also increase due to additional benefit obligations (see the movement from the thin dashed blue curve to the thin solid black curve above it). By the 75-year actuarial balance measure, this exchange is scored as eliminating 99% of the shortfall -- even though it leaves about 60% of the operative problem in place over the long term. Were such a proposal enacted today under the Gang’s proposed scoring rules, the Social Security shortfall would be declared essentially solved. But upon the first “decennial review” policy makers would face the majority of the problem all over again, except that then millions of additional Baby Boomers would be already in retirement and it would be too late to adjust the rising cost of their benefits in any meaningful way.

    Not only does the metric create an incentive for repeated stopgap tax increases, it places no limits on accounting gimmicks like one operative this year, enacted last December with the payroll tax cut. $105 billion in additional debt is being issued to the Trust Funds this year to make up for revenue foregone when payroll taxes were reduced. This accounting maneuver shifts Social Security cost burdens from current workers to future income taxpayers. The 75-year solvency metric offers no protections against “balancing” Social Security’s books merely by swapping debt between government accounts, even if that debt is unsupported by an external financing source. Elected officials could theoretically clear the Gang’s financial test with government bookkeeping changes alone.

    In sum, for those concerned about the growth of tax burdens and about hidden costs being passed to younger generations, the Gang of Six’s Social Security reform metric is the wrong choice.

  5. Continued absence of bipartisan support for specific reforms. History strongly suggests that successful Social Security reform must be bipartisan. The last major reforms in 1983 were bipartisan, whereas subsequent single-party efforts have failed (e.g., in 2005 when Republicans controlled the White House as well as both branches of Congress). It is important that lawmakers from both parties back specific reforms. One decade ago bipartisan Congressional Social Security tag-teams were common, including Simpson-Kerrey, Gregg-Breaux and Kolbe-Stenholm. Democratic Senators such as Daniel P. Moynihan also stepped forward with specific plans for sustainable solvency. In the current Congress, however, the only plans put forward meeting this standard have been Republican-only plans. One has been offered by Senators Graham, Paul and Lee, another more recently by Gang of Six member Senator Tom Coburn. (Two other plans, one by Republican Senator Hutchison and one by Democratic Congressman DeFazio, would attain 75-year balance but not sustainable solvency.) The willingness of Democratic Senators Conrad and Durbin to support such a plan while serving on the Simpson-Bowles commission is praiseworthy. But with the Gang of Six walking away from those provisions, the perception is fueled of an insurmountable partisan divide within the Congress over specific changes to Social Security. To create momentum for bipartisan reforms, at some point lawmakers from both sides need to step forward; the Gang of Six’s failure to do so sends a worrisome signal in that regard.

We should hope that the Gang of Six continues its efforts and in the future develops specific reforms to place Social Security’s annual operations on a sustainable forward path. But the current Gang of Six framework is a considerable step backward from bipartisan Social Security reform.

Charles Blahous is a research fellow with the Hoover Institution and the author of Social Security: The Unfinished Work.

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