On Fixing Social Security, and the Budget

Karl Smith raises concerns about proposed changes to social security:

Based on any estimates I have seen, it's clearly possible to raise taxes on workers high enough to fund benefits to retirees for the foreseeable future. Even if such taxes had nasty effects on long term growth -- which is a major source of debate -- they are nonetheless possible. 

 What we have to determine is whether or not potential tax increases are desirable. A good first step would be to ask people. Fortunately Gallup has done just that. To some extent all age groups, but especially the young workers we claim to be concerned about, believe that raising taxes is a superior solution to cutting benefits. 

 Perhaps, they don't understand the full trade-offs. This is a possibility and we should make clear the scope of the possible tax increases and reasonable estimate of the effect on economic growth. However, at a core level, if people would prefer to pay more in order to get more then there is nothing wrong with that. It doesn't make sense to protect future generations from the possible burden of higher Social Security taxes when future generations are saying that they would prefer to shoulder that burden. 

That is, unless, your position is that young workers don't know what's good for them and it is up to us to safeguard them from themselves. We must, such arguments say, impose the tough choices and hard sacrifices that will leave tomorrow's generation with a world they consistently tell us that they do not want. 

 I fear that calls to make tough sacrifices aren't about protecting future generations. They are about proving to the current generation how hard-nosed and responsible we are. I worry that it is a gratuitous display of seriousness that risks leaving the world a worse place than it was before we started trying to improve it.

I'd suggest the data might be explained by recourse to the employment-to-population ratio for 18-24 year olds, which is under 50%.  I don't find it surprising that people who are not self-supporting would disproportionately break in favor of higher taxes to support a paternalistic program.  But the proportion in the general population which supports tax increases is well under 50%, and unsurprisingly, is lowest among the age groups that are going to pay most of the taxes.

Moreover, I think this is the wrong way of looking at it.  On several blogs this morning, I've seen the argument that social security shouldn't be part of the deficit commission proposal because it's a "separate program".  This is absolutely puzzling to me.  It's of course totally true that we could raise taxes to support Social Security at current benefit levels.  This is, in fact, true of almost any government program you can name.  And if we only had one government program, that would be helpful.  But we have a whole group of government programs, and only so much money to spend.  Taxes raised to pay for Social Security cannot be spent to, say, provide national defense or shore up Medicare.

Have you ever known anyone who got into trouble with credit cards?  I don't mean someone who had something go wrong and ended up deep in credit card debt because they had to pay the rent somehow; I mean someone who wakes up one day with $21,000 in debt, a closet full of shoes, and no idea where the money went?

The way they get into that trouble is often that they don't budget.  They consider each purchase in isolation:  "can I afford these shoes?  Can I make the payments on that television?"  And in fact, they can afford each of their purchases.  They just can't afford all of them.

A lot of what I see among the commentariat makes this mistake at the federal level.  They offer a menu of tax and spending solutions for a given program--but they don't consider what that does to all the other programs.  As I said in my previous post, I'm afraid that's what happened with PPACA; we accidentally "spent" the cuts, and the political capital, we needed to do deficit reduction.

Looking at each program in isolation is, unsurprisingly, a favorite trick of people in budget meetings when cuts are on the table--emphasizing the downside of the cuts, while protesting that the expenditure is but a small part of the organization's overall spending.  Novice financial executives who fall for this soon realize their error:  almost everything is but a small part of the organization's overall spending, and yet if you don't cut some of it, you will still end up in bankruptcy.

Like a struggling company, we have a big budget gap, and a limited reservoir of tax increases and spending cuts that we can "spend" on fixing it.  Every time we raise taxes or cut spending to fund one program, we leave less that can be used for other programs.  Taxes cannot go to 100%.  Spending will not go to zero.

The question, then, is not simply, "Should we raise taxes or the retirement age to fix Social Security?" The question is, "What are the best spending cuts and tax increases to bring our budget into balance?"  There are a number of reasons that raising Social Security taxes, and the retirement age, are among those--fiscal reasons (there's a lot of money there), economic reasons (social security encourages people to leave the labor force earlier, which raises spending and shrinks the tax base), political reasons.  You can argue that these aren't good reasons--that there are better reasons to leave it the way it is.

But the one thing you can't do is argue that we should leave benefits the way they are and just hike taxes because some 18-29 year olds told a pollster so.  People in polls are lunatics on the budget; they consistently oppose tax increases, oppose spending cuts, and strongly support balancing the budget.  Depressingly, pollster Doug Rivers says that this is true even when you inform them of the sums involved--i.e., make sure that they know you can't close the budget gap just by slashing foreign aid.  Despite being informed about the relevant tradeoffs, when they are again asked the question, they continue to insist that they very much want to close the budget deficit--without raising taxes or cutting any major programs.  Subgroups may generate a majority in favor of something that mostly affects someone else.  But the population as a whole doesn't.

So it's hardly shocking that while a majority of adults think that Social Security and Medicare are a serious problem for the budget, there's only a bare plurality for tax cuts over spending increases, with neither achieving majority support.  There isn't majority support in the polls for any substantive measure to close the budget deficit.  Nonetheless, it must be closed.

The declared preference of the US voter being virtually useless, how do we decide what to do?  We can try to look at revealed preference--the last election seems to indicate, at least in part, that voters aren't to thrilled about the spending side of the equation.  We can do some wonky introspection.  What we can't do is punt.

So the commission has proposed a little bit from Column A, a little bit from Column B--a lengthy phased in hike in the retirement age; a refocus of benefits on the bottom 50% of the lifetime earnings distribution; and, of course, more taxes, so that Social Security levies will ultimately cover about 90% of taxable payrolls.  Perhaps this isn't the best way it could be done--but I think it's better than trying to divine an answer from the polls.