Many of us suspect that Social Security faces eventual bankruptcy. But the government projects its future finances using long outdated methods. Employing a more up-to-date approach, Jagadeesh Gokhale here argues that the program faces insolvency far sooner than previously thought.
To assess Social Security’s fate more accurately under current and alternative policies, Gokhale constructs a detailed simulation of the forces shaping American demographics and the economy to project their future evolution. He then uses this simulation to analyze six prominent Social Security reform packages—two liberal, two centrist, and two conservative—to demonstrate how far they would restore the program’s financial health and which population groups would be helped or hurt in the process.
Arguments over Social Security have raged for decades, but they have taken place in a relative informational vacuum; Social Security provides the necessary bedrock of analysis that will prove vital for anyone with a stake in this important debate.
Many of us suspect that Social Security faces eventual bankruptcy. But the government projects its future finances using long outdated methods. Employing a more up-to-date approach, Jagadeesh Gokhale here argues that the program faces insolvency far sooner than previously thought.
To assess Social Security’s fate more accurately under current and alternative policies, Gokhale constructs a detailed simulation of the forces shaping American demographics and the economy to project their future evolution. He then uses this simulation to analyze six prominent Social Security reform packages—two liberal, two centrist, and two conservative—to demonstrate how far they would restore the program’s financial health and which population groups would be helped or hurt in the process.
Arguments over Social Security have raged for decades, but they have taken place in a relative informational vacuum; Social Security provides the necessary bedrock of analysis that will prove vital for anyone with a stake in this important debate.
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Overview
Many of us suspect that Social Security faces eventual bankruptcy. But the government projects its future finances using long outdated methods. Employing a more up-to-date approach, Jagadeesh Gokhale here argues that the program faces insolvency far sooner than previously thought.
To assess Social Security’s fate more accurately under current and alternative policies, Gokhale constructs a detailed simulation of the forces shaping American demographics and the economy to project their future evolution. He then uses this simulation to analyze six prominent Social Security reform packages—two liberal, two centrist, and two conservative—to demonstrate how far they would restore the program’s financial health and which population groups would be helped or hurt in the process.
Arguments over Social Security have raged for decades, but they have taken place in a relative informational vacuum; Social Security provides the necessary bedrock of analysis that will prove vital for anyone with a stake in this important debate.
Product Details
| ISBN-13: | 9780226300368 |
|---|---|
| Publisher: | University of Chicago Press |
| Publication date: | 05/15/2010 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 374 |
| File size: | 3 MB |
About the Author
Read an Excerpt
Social Security
A Fresh Look at Policy AlternativesBy JAGADEESH GOKHALE
THE UNIVERSITY OF CHICAGO PRESS
Copyright © 2010 The University of ChicagoAll right reserved.
ISBN: 978-0-226-30033-7
Chapter One
The Simmering Social Security Reform Debate
A Pause and an Opportunity
The Social Security reform debate remains in limbo as of this writing during early 2009. President George W. Bush stopped promoting his preferred approach of introducing Social Security personal accounts after losing Republican majorities in both houses of Congress in the 2006 midterm elections. Although when he assumed office as U.S. treasury secretary, the prime objective of Henry Paulson was to explore broad-based entitlement reforms during the last two years of the Bush administration, a decline in the international value of the dollar compelled greater focus on China-related international trade and finance issues. And when a financial crisis emerged during late 2007, financial, auto, and housing sector bailouts took center stage during the remainder of the G. W. Bush presidency.
The ongoing economic recession is projected to boost annual federal deficits in 2009 and beyond to extraordinary levels. Political pressure to adopt strong countercyclical government spending has prompted Congress and the new Obama administration to propose massive new fiscal stimulus programs financed by government borrowing. In light of already massive entitlement shortfalls, the imperative of reforming Social Security and Medicare with an eye to reducing the federal government's long-term fiscal obligations will only grow more intense.
The 200 debate on Social Security reform revealed deep ideological and political disagreements on entitlement—especially Social Security— reforms between the two major political parties. However, President Obama has proclaimed the need for "unprecedented" initiatives to meet the nation's long-term economic challenges, and another attempt at reforming Social Security may soon rekindle the debate on policy alternatives. There have also been occasional news reports about behindthescenes negotiations on Social Security reform between Republicans and Democrats in Congress. Initiatives by small groups of lawmakers may be useful for refining positions, exploring new options, and maintaining communication channels. However, given the wide ideological rift on approaches to Social Security reform, and because economic interests of large and powerful voter groups are involved, a secretly negotiated "grand bargain" on Social Security appears unlikely to succeed. At the time of this writing, however, one can only guess about how the process of building sufficient political support for implementing a far-reaching Social Security reform will unfold.
The most likely first step would be the appointment of yet another commission to make reform proposals. Past Social Security reform commissions— those appointed by Presidents Bill Clinton and George W. Bush—failed to trigger significant changes to Social Security because no single approach from among the several that were proposed garnered adequate support. However, those two commissions have studied Social Security reform options in considerable detail. In addition, many lawmakers, academicians, and fiscal policy experts from across the political spectrum have proposed a wide variety of alternative approaches for restructuring Social Security.
Collectively, existing Social Security reform proposals seem to exhaust possible approaches for modifying the program, and a new Obama commission on entitlement reforms is likely to simply revisit earlier options and approaches—at least in the case of Social Security. Regardless of how the next Social Security reform effort evolves, one should question whether government scoring agencies employ reasonable methods and measures and whether information obtained from them on the program's finances are reasonably accurate.
Although talk of entitlement reforms may soon be reawakened by the prospective recession-induced buildup of U.S. national debt, the period of relative calm in the Social Security reform debate since 200 presented an opportunity for assessing Social Security reform options using a fresh perspective. This book reports the results from a microsimulation— DEMSIM—that was developed after the 200 Social Security reform debate. It provides a new analytical tool and a new perspective on Social Security's future finances under current laws. The results also provide additional insights into the effects of particular Social Security reform measures from among six selected reform packages.
Another Book on Social Security Reform?
Many analysts and academics find the topic of Social Security reform to be quite riveting. To date, scores of lawmakers, federal budget analysts, university professors, and businessmen have proposed a variety of Social Security reform packages. Social Security's Office of the Chief Actuary (SSOCACT) scores such proposals chiefly, but not exclusively, in response to lawmakers' requests. About thirty Social Security reform packages have been scored by SSOCACT for their effects on the program's overall finances and on various population groups.
Unfortunately, SSOCACT's memoranda are rather terse, and the metrics used for evaluating the proposals' effects have some shortcomings: the evaluation is exclusively in terms of the proposals' impact over a 75-year projection horizon—which means any comparison of alternative proposals based on SSOCACT scoring would not necessarily provide an apples-to-apples comparison. The reason is simply that some proposals may restore 75-year solvency only by pushing the program's costs beyond the 75th year whereas others may not. As a result any conclusions regarding their quality and desirability might be overturned simply because of the passage of a few years as out-year financial shortfalls enter the 75-year projection window. It's not that reporting over finite, even shorter-than-75-year, time horizons is undesirable, but extending the time horizon beyond 75 years to obtain a more comprehensive long-term picture of the program's finances and alternative reforms would be informative and would facilitate proper comparisons across reform alternatives. Indeed, as some analysts have pointed out, focusing on a limited time horizon leads to a bias in policymaking: Lawmakers then have an incentive to favor proposals that minimize short-term imbalances and reject policy alternatives that could place the program's finances on a sounder long-term footing.
Second, SSOCACT and the Social Security Trustees use an actuarial projection methodology that does not allow consideration of important mutual interactions between projected demographic and economic variables. The importance of adopting a rich modeling framework to allow such interactions when projecting future trends will become clearer in later chapters. This book's analysis, which is based on a detailed micro-simulation of future U.S. demographic and economic forces, suggests that such interactions hold significant implications for Social Security's future finances. The 2007 Social Security Technical Panel on Assumptions and Methods makes similar comments about the modeling methodology adopted by SSOCACT and the program's trustees. For example, the report states that "by explicitly accounting for interactions across variables, micro-simulation models increase transparency around key assumptions underlying the cell-based projections.... Micro-simulation can improve forecast quality when changes in the cross-section over time affect macroeconomic outcomes and thereby system finances" (Social Security Advisory Board 2007, p. 3).
The phrase "interactions across variables" refers to demographic and economic variables that influence one another. On the one hand, demographic attributes such as mortality, fertility, marriage, divorce, family split-offs (when children become independent adults, for example), racial composition, and so on, govern patterns of family formation and dissolution and influence economic variables such as rates of skill acquisition, working, saving, retirement, labor productivity, earnings, and so on. Consider the hypothetical example of two equally educated adults of the same age: a single female parent with five dependent children and a married male family head with just two dependent children. As microdata surveys confirm, the former is less likely to consistently participate in the workforce and, contingent on participation, earn as much as the latter.
On the other hand, economic variables such as education, labor force participation, and earnings, also affect demographic outcomes. For example, people tend to sort according to age, race, and education when deciding on marriage partners. Similarly, entry into the work force, acquiring education, making fertility and divorce decisions, and so on, trigger differences in family structures, racial composition, migration, and mortality experiences. Without capturing such interactions at the micro level—which is only possible under a microsimulation approach—it is difficult, if not impossible, to properly project the future evolution of labor market outcomes, in particular, to account for the evolution of total "effective labor inputs," which are crucial for determining future earnings distributions and the Social Security payroll tax base.
To provide a relatively simple example, a cell-based approach may project earnings based only on the population's projected age and gender distribution. That is, earnings may not be distinguished by race, education, marital status, family structure, the number of children, and so on, and earnings projections may not be based on the population's evolving cross-sectional distributions of these variables. Such an approach would misestimate future earnings if, conditional on age, "earnings-challenged" demographic groups become dominant in the population over time as inbuilt demographic and economic forces mutually interact and evolve. Following the earlier hypothetical example, total earnings growth projections based only on the population's projected age and gender distributions may contain large errors if changes in fertility and family formation patterns cause large increases in the share of single adults with many dependent children compared to married household heads with very few children. Indeed, this may occur even if the population's average education level increases over time—a seemingly paradoxical result. This is the reason why the Technical Panel—as quoted above—strongly emphasizes the need to track how changes in the population's cross-section over time affect macroeconomic outcomes and thereby Social Security's finances.
Finally, some of the measures used by the Social Security Trustees to describe the impact of reforms are arguably obsolete. In most cases, income replacement rates are reported to asses a reform proposal's effect on specific population groups. However, Social Security is a lifetime program; participants pay taxes and receive benefits for many decades. And longevity increases since Social Security was first introduced in 19 have made retirement life spans longer, making it especially important to consider lifetime net benefit (or net tax) measures when assessing Social Security's fiscal treatment of various types of individuals. But a cell-based projection methodology permits such calculations only for stylized individuals or household rather than for representative samples of each population subgroup incorporating, for each, its associated demographic and economic attributes. Finally, there appears to be nothing in the literature on Social Security reform or on SSOCACT's Web site that provides a side-by-side and apples-to-apples comparison of different Social Security reform options.
Public Expectations and Government Obligations
Social Security continues to operate because the vast majority of Americans support the current program. In particular, workers acquiesce to payroll tax deductions from their paychecks. They do so because they expect to receive future Social Security benefits upon meeting the program's benefit eligibility terms—which they may be expecting to remain not too dissimilar to current ones. Without such future benefit expectations, it is difficult to imagine why working age voters would continue to support a program that taxes more than a tenth of their hard-won earnings.
Workers' expectations of future benefits commensurate with their payroll taxes are so strongly entrenched that they are generally described as "entitlements"—created by participation in the program by paying payroll taxes during working years. This sense of entitlement to retirement and other benefits is strengthened by the special linkage that has been established under Social Security between worker earnings in occupations covered under Social Security, payroll taxes, benefit eligibility, and the amount of benefits.
Participants' expectations of stability in the program's rules are anchored in the program's objective of enabling participants to maintain a reasonable living standard during retirement. This is the program's so-called social adequacy objective. Moreover, ensuring a fair fiscal treatment across different participants, including across different generations— known as the "individual equity" objective—requires that the program's rules remain stable over time. Any changes to the rules must be introduced very gradually and with sufficient lead time to allow participants to adjust their private economic choices—on working, saving, investing, and choosing when to retire—so that their expectations of reasonable living standards during retirement could be realized.
The expectations linking the quid of Social Security payroll taxes to the quo of future Social Security benefits is unique and appreciably stronger than expectations of other public goods and services in return for income taxes and other non-payroll taxes. The stronger linkage of current Social Security payroll taxes with future expected Social Security benefits is created and reinforced by two aspects of the program. First, the Social Security benefit formula incorporates each worker's earnings history in calculating benefits to be awarded. That indirectly but formally links each worker's payroll taxes to future benefits. Second, the Social Security Administration sends annual benefit statements to all non-retired participants (workers) indicating the estimated amounts of various types of benefits that they would receive under current Social Security laws. Although the statements caution recipients that actual future benefits may be different if Congress changes Social Security's rules before they become due and payable, the statements nevertheless strengthen political support for the program by maintaining public confidence in receiving some future benefits. Hence, the statements provide additional political weight against dramatic changes to Social Security's current tax and benefit rules.
These features of Social Security mean that although participation in Social Security via payroll tax payments does not by itself accrue for workers any contractual rights to collect specific future benefits—that is, benefits of given and fixed amounts at particular future dates—such participation creates valid perceptions and expectations of future benefits and promotes the program's continued operation under relatively stable rules. By implication, there exists a corresponding, future payment "obligation" or "commitment" on the part of the federal government to pay benefits as participants become eligible to receive them. This politically supported future payment commitment appears to be quite firm notwithstanding the fact that no formal, contractual, and legally binding agreement for the government to pay benefits exists between the government and any individual participant. And political support for maintaining Social Security benefits close to their current levels is likely to become stronger as members of the baby boom generation enter the ranks of retirees during the next two decades. Yet another reason to believe that the government's future commitment to pay Social Security benefits is quite rigid is that those benefits are indexed to the general price level and, unlike most government bonds, their real value cannot be eroded away via faster inflation.
(Continues...)
Excerpted from Social Security by JAGADEESH GOKHALE Copyright © 2010 by The University of Chicago. Excerpted by permission of THE UNIVERSITY OF CHICAGO PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
List of Tables
List of Figures
I. Issues in Evaluating Social Security’s Finances
Chapter 1. The Simmering Social Security Reform Debate
Chapter 2. Simulating U.S. Demographics and Economics: Beginning in 1970
chapter 3. Forward Motion: Demographic Transition, 1971–2006
Appendix 3.1. Mortality Rate Calculations
Appendix 3.2. Estimating Fertility Rates by Female Race, Age, and Education
Appendix 3.3. Marriage and Divorce
Appendix 3.4. Labor Force Status Transitions
Appendix 3.5. Calibration of Immigrants’ Characteristics
Chapter 4. Peering into the Future
Chapter 5. A Framework for Simulating Annual Nominal Earnings
Appendix 5.1. Method for Simulating "Effective Labor Inputs"
Appendix 5.2. Simulating Workers’ "Effective Labor Inputs" in 1970
Appendix 5.3. Regression for Simulating Life-Cycle "Core Labor Input" Trajectories
Chapter 6. Simulating Social Security’s Finances
Appendix 6.1. The Social Security Tax and Benefit Calculator
Chapter 7. Micromeasures of Social Security’s Financial Condition
II. Issues in Evaluating Social Security Reform Proposals
Chapter 8. Liberal Proposal 1 by Robert M. Ball: "A Golden Opportunity for the New Congress"
Appendix 8.1. Estate Tax Revenue Projections for the Robert M. Ball Reform Proposal
Chapter 9. Liberal Proposal 2 by Peter A. Diamond and Peter R. Orszag: "A Balanced Approach"
Appendix 9.1. Incorporating Diamond-Orszag Reform Elements into DEMSIM
Chapter 10. Centrist Proposal 1 by Representatives Jim Kolbe, Charles Stenholm, and Allen Boyd: "Bipartisan Retirement Security Act"
Chapter 11. Centrist Proposal 2 by Jeffrey Liebman, Maya MacGuineas, and Andrew Samwick: "A Nonpartisan
Approach to Reforming Social Security"
Chapter 12. Conservative Proposal 1 by the President G. W. Bush Commission to Strengthen Social Security: Model 2
Appendix 12.1. Benefit Offset Calculation under G. W. Bush Commission Model 2
Chapter 13. Conservative Proposal 2 by Representative Paul Ryan: "Social Security Personal Savings Guarantee and Prosperity Act"
Appendix 13.1. Progressive CPI Indexing Social Security Benefits under the Ryan Reform Proposal
Chapter 14. Key Conclusions about Social Security’s Financial
Condition and Reform Alternatives
Acknowledgments
Notes
References
Index