Tom Vilsack's Very, Very Bad Idea

by hilzoy

I didn't watch the Democratic debate (debates? This early??), but then I noticed (h/t Atrios and Matt Yglesias) that Jonathan Singer at MyDD wrote this:

"Final question covers Social Security and Medicare. Vilsack talks about balancing the budget of these programs by reindexing the program to prices, not prices and wages."

Price indexing? Yikes. Like Matt, I didn't want to leap to conclusions, so I turned on CSPAN's video of the debate and proceeded to take a shower, clean my study, and so on, until I got to the relevant part of the debate. (If anyone else wants to do this: the question is at 41 minutes into the clip; the quote below is at around 42 minutes.) Here's Vilsack's actual quote:

"First and foremost, you're going to have to take a look at the way in which Social Security is indexed. Currently, it's indexed based on wages and price; we can index it on price and still maintain the stability of Social Security and maintain the purchasing power of Social Security without necessarily jeopardizing the future of Social Security."

Darn. I didn't know much about Tom Vilsack, but he was somewhere below Chris Dodd and Bill Richardson, but above Hillary Clinton and Mike Gravel, on my list of people to consider if Obama self-destructs and Clark doesn't run. With that one paragraph, however, he has dropped to the spot right above Dennis Kucinich.

Price indexing is a very wonky concept. I tried to explain it as clearly as I could here; explanations by actual economists, with tables, are here and here. Anyone who actually knows economics should head for the latter two links; the merit of my post, if it has one, is that since I started out having no clue what price indexing was, I explain it in terms suitable for people who don't have any clue either.

While price indexing itself is a bit complicated, however, its effects are simple. It would, essentially, transform Social Security over time from a program in which people who pay more in get more out to a program in which people who earn over a given (low) amount (in the version the President seemed to favor, this was $20,000/year) all get the same benefit. Or, in short: within 80 years or so, Social Security becomes a program in which no one gets more than what the poor get today.

This is a very, very bad deal. It guts Social Security as an element of retirement security, since it makes most workers' Social Security benefits shrink dramatically, even though the taxes they pay in remain the same.

But we have ways of getting back at Tom Vilsack. Not only have I bumped him way down on my list, and not only will I link to the picture of him dressed as Winnie-the-Pooh, I'll post the picture that shows Tom Vilsack dressed as the crocodile from Peter Pan his Social Security plan on the verge of devouring your benefits:

I wasn't going to do this -- after all, he gets into these costumes for the sake of his wife's literacy events, and I think that a willingness to look silly in a good cause is a good thing in general, and a very rare good thing among Presidential candidates -- but if he's going to go around endorsing price indexing, then the gloves are off.

***

UPDATE: Vilsack has responded here. Excerpt:

" am against any so-called “reform” of Social Security and Medicare that cuts, reduces, freezes or privatizes benefits. I will work with Congress so that we maintain the stability and purchasing power of Social Security and Medicare, always remembering that it is first and foremost about people.

But, I will not ignore the fact that we have a big problem before us. I will not be satisfied by letting our children and grandchildren deal with this problem. And I will not allow a solution that includes privatizing Social Security and Medicare because it exacerbates the problem. Grassroots activists throughout the country helped shine a light on the problems of Pres. Bush’s proposal. I will do everything I can as President to protect Social Security and Medicare from those who want to reduce benefits for whatever reason."

Frankly, I'm not sure I see how to square price indexing with not cutting benefits. When the campaign clarifies this, I'll post it (if I see it.)

Comments

[Neil the Ethical Werewolf]

Wow! Do you have a whole library of pictures of politicians in compromising animal suits?

[Anderson]

but if he's going to go around endorsing price indexing, then the gloves are off.

The wrath of Hilzoy! Tremble, Vilsack!

But to give Vilsack credit, he is very, very unlikely to claim that the croc-hat photo was "stolen" by being copied from a publicly available website, and then casually out [redacted] in an orotund manner that itself seems to be lifted from an object of Kingsley Amis's satire.

("Redacted" by Anderson, of course.)

[hilzoy]

Neil tEW: Just one more reason why Governing Magazine's blog should be more widely known. It's sort of like FP's Passport, only domestic.

[even-toed ungulate]

I didn't know much about Tom Vilsack, but he was somewhere below Chris Dodd and Henry Richardson...

I couldn't help but notice your error. For future reference, the gentleman's first name is Bill, as in Governor Bill Dodd. Please make a note of it.

[hilzoy]

Good lord. Henry Richardsom in a philosopher. I will correct forthwith.

[hilzoy]

Is, not in. Clearly not my night.

[Flush it all away]

I kinda liked it the way you wrote it...it's like one of those comic-book exclamations. "Henry Richardson in a philosopher! Those cybernetically-enhanced apes are on the rampage!"

[Medallion of Ferret]

Yes, Vilsack blew it. But..."if Obama self-destructs and Clark doesn't run"? I think I see another Republican president in the offing, if all the Democrats offer is one amateur or another.

[nilsey]

please, just stay away from trevino and the light saber. please.

[CaseyL]

I don't understand why Vilsack would come up with that, since the point has been made repeatedly that most if not all of SocSec's projected shortfall can be made up by raising the cap on income subject to SocSec tax. His proposal doesn't even make political sense: the people who want that kind of "reform" want to end SocSec one way or another, and they won't vote for a Democrat in any case.

[destor23]

Gaaaargh. The whole price vs. wage indexing debate is THIS simple -- wages rise faster than prices but that's why the standard of living tends to increase over time. You earn more than you have to spend. If you index social security to wages, then you give people who are retired a chance to keep participating in the rising living standards. If you index it to prices, the living standard stagnates. You wouldn't be very happy in 2007 if all you could afford were the things you bought in 1980.

[hilzoy]

destor23: actually, I don't think it is that simple. At least, you make it sound as though you think that it's benefits that would be price-indexed. In fact, they already are price-indexed. What's usually called price indexing, in the social security debate, is the indexing of bend points. If you don;t know what bend points are, read my old post (linked above.) If you do, then sorry ;)

[Phoenix Woman]

He's just gotta keep reminding us that he's in the DLC, doesn't he?

[Bill]

What's your beef with Kucinich?

[jross]

tom vilsack was featured in a canadian comedy special program--this hour has 22 minutes-- several years ago called 'talking to americans'....in the style of ali g/borat, rick mercer (the host) convinced vilsack to appear on camera to congratulate the canadians (as i recall) on building their first 'national igloo' or some such bizarre idea. you got to see it to believe it: he doesn't seem to be even vaguely suspicious that it is a giant put on.

[p.lukasiak]

hilzoy, there is a reason why its called Social Security Insurance...

now, I'm personally not sold on the whole "social security will run out of money" thing to begin with, but if its real, then we should remember that SSI is an insurance program designed to provide Seniors (and some others) with a minimum standard of living. "Price indexing" ensures that this minimum will not force future generations of seniors into living in rat-infested hell-holes with a diet consisting of canned dog-food.

Regardless of future benefit levels, those who are currently paying the most into social security will continue to be in a far better economic position to set aside additional funds to guarantee a higher than "minimum" standard of living after retirement.

Vilsacks proposal may not be perfect, but its a hell of a lot better than the various "privatization" proposals floated by conservatives, and should be recognized as such. (Personally, I'm for restoring and increasing the estate tax, and using that money to supplement the Social Security Trust...but that's just me.)

[Glen Tomkins]

More important than keeping benefits higher

The most important reason to keep SS benefits indexed to wages, is that this keeps the interests of retirees and current wage earners aligned with each other. Our enemies, the enemies of our society, use the bogeyman of "generational warfare" in much the same way as they use "class warfare", to divide us so that we can be conquered. The very best way to keep the important voting bloc constituted by retirees and seniors interested in a strong union movement, is to make it in their very clear interest to keep current wages up with the growth of the overall economy. Keeping SS benefits indexed to wages, not prices, does this simply, elegantly and transparently. Absent this connection, we risk people being lulled into the belief that the economy is doing fine as long as the stock market is rising, or GDP is rising. But the economy is not doing fine unless workers are doing fine. Everyone needs to have a clear interest in making sure workers are doing fine.

[Sanctuary Keeper]

Unmfortunately, you misunderstand wage and price indexing..it's a complicated issue. In general, wage indexing would allow future retirees to receive more--above inflation--than today's retirees get. Over time, that gets to be a very large increase over today's retirees. Moving to price indexing means that all retirees in the future will get a benefit just as large as today's retirees, inflation adjusted. In other words, buying power would stay the same. And, no, benefits would not all be the same in the future -- the progressivity would remain. I think we should go to price indexing, and at the same time, raise the minimum benefit so that low-wage workers would get more than they are scheduled to now. Their benefits are too low. But for everyone else, why make our kids pay billions more to increase the benefits beyond what today's retirees get?
What's wrong with that? No, b

[agave]

Why are you posting Vilsack's Wedding Pictures?

The nerve.

.

[Edgar]

One thing I've never understood -- how is telling higher income workers that they will pay the same taxes but get lower benefits than currently promised a bad thing that will undermine the program, but telling them that they have to pay higher taxes and won't get any higher benefits (which is the only way that raising the cap gets anywhere close to closing a significant portion of the long-term gap) a good idea. If the concern is about weakening the social insurance nature of the program and undermining support for the program among higher income workers, relying on busting the cap to solve the problem is far more dangerous.

[hilzoy]

Sanctuary Keeper: I really don't think that's true. Again: are you assuming that what would be indexed to prices, not wages, is benefits? It sounds like it.

Benefits are already indexed to prices. That's not an issue. What price indexing would index to prices, rather than wages, is: the bend points. That is: SS replaces your adjusted average monthly earned income up to $n at 90%, your adj. av. monthly income between $n and $m at 32%, and your adj. av. month. income between $m and I forget what maximum $p at 15%.

Presently, the values of n, m, and p are adjusted by the inflation in wages. Price indexing would adjust them using inflation in prices. (The plan the President seemed to be moving towards was a sort of hybrid, involving the creation of a third, price-indexed bend point at around $20,000.)

This means that over time, if prices rise more slowly than wages, the values of the bend points would be less under a price indexing system than under a wage indexing system. And since these 'bend points' are used to calculate the levels at which your income stops being replaced at 90% and starts being replaced at 32%, or stops being replaced at 32% and starts being replaced at 15%, when the bend points lose value, people who make above n get lower benefits.

Moreover, whereas the difference between indexing benefits to prices rather than wages only involves the difference between the two rates over a given worker's working and retired life, the difference between indexing the bend points by wages v. prices goes on compounding in perpetuity.

[stogoe]

There's a much better pic of Vilsack in a Winnie the Pooh costume somewhere. Hard to be more ridiculous than the alligator up top, but it absolutely is.

[liberal japonicus]

In order to give hilzoy plausible deniability, here. it is. Think of it as an expotition...

[hilzoy]

D00d: I linked to Pooh in the body of the post.

[liberal japonicus]

Wow, I didn't think you'd do the double whammy of someone who I assume is Charlie of Maisy fame AND Pooh. Stone cold, hil, stone cold.

[Lyle Seaman]

What if prices rise MORE quickly than wages? Wouldn't this potentially create a vicious cycle? Ordinarily, price rises are limited by wage growth: if you don't earn more, you can't pay more, so reduced demand holds prices down. But under a price-indexed scheme, a significant portion of the population (because of the shape of the demographic bulge) would be participating in a program with a positive-feedback loop. It would be one thing if the impact were limited to $50/gallon Ensure, but retirees also participate in markets for the same goods that workers must purchase.

[Sebastian Holsclaw]

Hey, I find Ensure very useful when I wake up late in the morning! (Which is I'm afraid at least twice a week.)

[owen paine]

"While price indexing itself is a bit complicated, however, its effects are simple. "

true enough but too much for you it would seem

this is plain wrong:

"It would, essentially, transform Social Security over time from a program in which people who pay more in get more out
to a program in which people ...all get the same benefit"

what you describe is a ceiling benefit :

" (those)who earn over a given ... amount all get the same benefit."

as this benefit falls behind wage growth
indeed
" .. within 80 years or so, Social Security becomes a program in which no one gets more than what the poor get today " so long as you understand
that means " poor get today relative to median wages today
what ceiling benefits will offer in 80 years
relative to median wages in 80 years "

perhaps that escaped you

the key to hold on to

tie benefits to wages
keeps the benefit system
in the same relation to concurrent payscales
obviously that is the only way to go

[owen paine]

imagine a car (the levels of benefits) crunching up as it flattens itself
against a barrier

the barrier is moving
but slower then the car
eventually in toonville the car is a pancake
the maxium is also the minimum

[Gary Farber]

Who doesn't like free verse?

[Steve]

It's like a cross between Ezra Klein and e.e. cummings.

[KCinDC]

Owen, if the maximum is also the minimum, then how is poor, confused Hilzoy "plain wrong" to say that "all get the same benefit"? Is it just that she's esthetically incorrect because she uses complete sentences and punctuation?

[Dantheman]

"Who doesn't like free verse?"

Me. I preferred it when you had to pay to get verse, so you knew that the poet had an incentive to put some effort into it and what you were getting was actually worth something.

[Feverishb]

Agree or disagree with Vilsack's idea, at least he's willing to advance something that would close the Social Security shortfall. If only more political figures were willing to talk about what they're for, rather than what they're against, we might actually be able to get Social Security onto a financially sustainable path.

Vilsack has correctly put his finger on the nub of the question: Currently the Social Security benefit formula is indexed to wages, which will lead to much higher real benefits in the future, and much higher tax burdens as well, if the benefit formula isn't changed.

Our policy choice is whether we should try to keep Social Security tax rates and real benefits close to today's levels, or whether we want the next generation to have to pay much higher tax rates than we do, to fund much higher real benefit levels. If we want the former, we've got to change the formula. Wage-indexation will cause the cost of paying benefits to go from 11 cents out of every worker's paycheck today, to over 17 cents in a little over a generation. Throw in Medicare cost growth, and we'd be asking future workers to pay one-third of their wages to fund two government programs alone.

It also bears noting that wage-indexation was not part of Social Security's original design. Moreover, when Congress's advisory panel studied the issue in 1976, they strongly recommended against it, noting that it wouldn't be financially sustainable, but Congress ignored them.

Agree or disagree with Vilsack, at least he is doing his homework and offering solutions. It would be a shame if he were beaten down to the same vacuous platitudes that most candidates utter about Social Security.

[Feverishb]

CaseyL wrote:

I don't understand why Vilsack would come up with that, since the point has been made repeatedly that most if not all of SocSec's projected shortfall can be made up by raising the cap on income subject to SocSec tax.

**end quote**

Unfortunately, that's not true. AARP publishes figures alleging that raising the cap to cover 90% of taxable wages will fix 40-50% of the problem, but that's based on a very misleading metric. In reality, it would close only about 13% of the program's outyear deficits.

Even eliminating the cap completely would only delay the onset of Social Security's permanent cash deficits by seven years, from 2017 to 2024.

Anyone can go to ssa.gov and see all the projections for these tax-based proposals. They're not all their cracked up to be.

[nobody]

anybody know how social security is indexed after the initial benefit is calculated?

I would just point out that based on what Vilsack has said, nothing can be said about his plan except he wants to index something.

An argument for indexing all but the lowest blend point would be that the plan should be smaller for higher income people (essentially an insurance mechanism instead of an enforced and paternal retirement system).

One of the arguments against it is essentially a "something for nothing" argument that I thought were more common among conservatives than liberals, but I'm constantly surprised. The argument goes that the benefit will be cut but the payments will go down so we are worse off. But there is only one place money can come from (taxpayers) and there is only one place money can go (taxpayers) and really the overhead of social security are frighteningly low, especially when compared to private firms that do the same things. In the end, either the reduction would allow for a future decrease in the tax, or remove a far future non-liquidity that may or may not exist.

From my perspective, the premise of the program is odd. It should be that you get so many dollars per month if you can't work for one reason or another regardless of your annual income before retirement. This way it acts as insurance and allows for richer people to plan or not for a better than baseline retirement. In addition, the tax should not be regressive.

[hilzoy]

nobody: after the initial benefits are calculated, it's already price-indexed.

[nobody]

hilzoy,

I answered my own question the following link at SSA indicates that they are wage indexed after the initial payment is calculated.

http://www.ssa.gov/OACT/COLA/colaseries.html

I can't quite make sense of your answer though. I can think of several possible interpretations but none that make much sense. Do you understand that indexing to a certain year doesn't indicate indexing to future years? i.e. if a payment were indexed to 2007, it would not be indexed to 2020. Also, it's never price indexed under the current system, it's always wage indexed. Again, I just can't undeerstand your statement.