There He Goes Again...

by hilzoy

Here's a YouTube showing John McCain's shifting stands on whether he favors privatizing Social Security.

In 2004, McCain said: "Without privatization, I don't see how you can possibly, over time, make sure that young Americans are able to receive Social Security benefits."

Yesterday:

"My friends, I do not and will not privatize Social Security. It is a government program, and it's necessary, but it's broken, and we got to tell the American people that we've got to fix it, and we've got to sit down together the way that Ronald Reagan and Tip O'Neill did back in 1983 and fix Social Security. But my friends, I will not privatize Social Security, and it's not true when I'm accused of that. But I would like for younger workers -- younger workers only -- to have an opportunity to take a few of their tax dollars -- a few of theirs -- and maybe put it into an account with their name on it."

As Matt Yglesias says:

"In short, he stridently denies that he wants to favor privatizing Social Security. He just favors policies that are the same as the policies that were called "privatizing Social Security" before the GOP found out that privatizing Social Security is unpopular."

But there's more wrong with what McCain said than this sort of inconsistency. [UPDATE: "This sort of inconsistency" being not just the inconsistency between his past and present positions -- people get to change their minds -- but between his claim that he does not favor privatization and his claim that he favors, well, what everyone normally calls privatization. END UPDATE]

Just to go over a few of the highlights of the Social Security debate from a few years ago:

(1) Social Security does face a shortfall over the next 75 years. However, predicting this sort of shortfall is like predicting the weather: the farther into the future you project things, the less certain your predictions.

One way to see this is to look at how previous predictions of Social Security solvency have done in the past. If you look at Table 1 here, you can see these predictions for the past twelve years. Guess what? Twelve years ago, the Social Security Trustees predicted that the Trust Fund would run out of money in 2029. This year, they predict it will run out of money in 2041. Moreover, its projected 75 year deficit, as a percentage of GDP, has shrunk by over 20%. And all this as a result of doing nothing!

The point of this is not to say that we should go on doing nothing. (Though, personally, I think we can afford to wait a decade or so.) It is to say that we should remember that this problem is not projected to hit us for another 33 years, and that before we completely freak out, we should think about the possibility that those predictions are wrong. We should also remember that the projected shortfall is quite manageable. (It's worth bearing in mind that a lot of the projections are over 75 years.) For instance, as Table 2 here makes clear, we could make up for it simply by letting the Bush tax cuts on the wealthiest 1% of Americans expire and dedicating the proceeds to the SS trust fund.

Second, and more importantly: in the YouTube above, both in 2004 and yesterday, McCain talks as though letting younger workers put some of their FICA taxes into private accounts would help fix the Social Security shortfall. This is not true. Private accounts would make the Social Security shortfall much worse.

Recall the way Social Security works. I pay Social Security taxes. My taxes are used to pay the benefits of today's retirees. When I retire, my benefits will be paid by the taxes of the generation behind me, and so on. Suppose that we start allowing people to put some of their FICA tax dollars into personal accounts. That means that I will be paying not for the generation of workers who are now retired, but for me.

I have drawn some silly pictures to illustrate the problem:

The present system:

Here younger workers, on the left, are paying older workers, on the right. In time, the younger workers will be paid in their turn by today's toddlers.

McCain's plan:

Here, the workers keep their own money, leaving Mr. Scream, who had paid the generation that came before him and been counting on being paid by younger workers in turn, with nothing. (Obviously, you can alter this picture in various ways. For instance, if people divert part, but not all, of their FICA taxes to private accounts, Mr. Scream can say: "Where's that part of my money?")

Now: McCain has promised that Mr. Scream will, in fact, get his money. That means one of three things. Either it will come from the Social Security Trust Fund, in which case it will make the Trust Fund's solvency problems worse; or else it will come from Our Tax Dollars, which doesn't sound very pleasant, or else it will come from the Fiscal Fairy, who makes our numbers add up by magic.

Without the Fiscal Fairy, however, it's not just that there is no way at all in which personal accounts help with the problem John McCain says they solve. They make that problem much, much worse. It's hard to say how much worse without knowing what the details of McCain's plan are. But the President's plan for private accounts would have added $4.6 trillion to our debt in its first 20 years of operation. That's more than the projected Social Security shortfall for the next 75 years (see Fig. II.D4.)

(Note: just yesterday, I noted that depending on how you resolve McCain's apparent confusion about the Alternative Minimum Tax, you might have to add half a trillion dollars over ten years to the projected costs of his tax plan. If he's serious about these private accounts, they could add trillions more. And that's a whole lot of money, money that he has no proposal at all to make up.)

I could, of course, go on about why private accounts are a bad idea in any case. They put retirement security at risk; their returns are less than you'd think; and the details of many plans get pretty gruesome once you delve into them. (Anyone remember clawbacks?)

But the main point of this post is about McCain's grasp of the issues. He says he doesn't support privatization, but he supports the policy that term normally refers to. He seems to think it's a solution to Social Security's long-term solvency problems, but it would make those problems much worse than they are now.

Moreover, McCain isn't just confused about the issues; he's confused about what his own policy is. As publius wrote a few days ago:

"Though he’s recently flip-flopped, McCain has supported Bush’s private accounts. He told the WSJ this March:

"As part of Social Security reform, I believe that private savings accounts are a part of it -- along the lines that President Bush proposed."

When the WSJ informed him that his website only favored private accounts as “supplements,” he told the WSJ that he would change the website. (He didn’t, perhaps because McCain wasn’t grasping the policy details at the time)."

His web page still says that "John McCain supports supplementing the current Social Security system with personal accounts". The word "supplementing" is key here: it normally means leaving the system as is, but letting people put money over and above their FICA taxes into some sort of sheltered retirement account. But, as I noted above, he said yesterday that he'd like to let younger workers "take a few of their tax dollars -- a few of theirs -- and maybe put it into an account with their name on it."

Those are two very different policies. The first leaves existing Social Security intact; the second guts its funding. The first is the one McCain's web site endorses; the second is the one he says he supports.

It's yet another serious confusion on a very important issue, and yet another reason to wonder: is McCain really up to the job of being President?

Comments

[xanax]

Dramatically off-topic but in case you haven't heard, Tim Russert died this afternoon of a heart attack while at work at NBC.

Details here.

[cleek]

i resent McCain for making us rehash the Great SS Debate of 2005 just so we can demonstrate, once again, that he is a shameless liar.

[Tom Hilton]

It's yet another serious confusion on a very important issue, and yet another reason to wonder: is McCain really up to the job of being President?

No, I think that question is pretty much settled. This is yet another reason to wonder if McCain is really up to the job of being a Senator, or for that matter any elective office that isn't purely ceremonial.

[hilzoy]

It was the horror of rehashing the debate that made me take refuge in silly pictures.

[Ugh]

I'm sure someone will soon be along to explain to us why this post is completely wrong and how hilzoy is supporting the whisper campaign about McCain's age by using the word "confused."

I, however, will not participate in such a whisper campaign, HE'S FNCKING 71 YEARS OLD!!!

[publius]

i'm honestly not sure he knows the policy details here.

[cleek]

i do like the pictures.

will you promise to put them in all your SS posts ? :)

[KipEsquire]

"It is to say that we should remember that this problem is not projected to hit us for another 33 years, and that before we completely freak out, we should think about the possibility that those predictions are wrong."

Ah yes, the infamous Rob Simmons Plan to Save Social Security. Quite bold of you.

Look, I'm with you 100% on the "McCain is flip-flopping" stuff, but to say that demographic trend analysis is comparable to weather forecasting is a bit like saying that watching Meet the Press is comparable to watching The View.

And while none of us may have to worry about 75 years from now, I hope we all live long enough (McCain included) to worry about nine years from now, when the fraud of the "Trust Fund" is finally demonstrated even to the most obstinate and oblivious of its deniers.

Or I am just weather forecasting?

[hilzoy]

Kip: It's not as though I didn't provide any evidence for what I said, like the fact that the projected trust fund exhaustion date is further in the future now than it was 12 years ago.

It's also not as though I provided all the evidence I could have provided, like the fact that according to one of the trust fund's set of assumptions -- the one that has, iirc, been closer to right than the others -- it won't run out of money ever.

[hilzoy]

Also: I see no reason to bring his age into it. One way or another, he seems to have no idea what he's talking about on a number of very important issues. Why that's so is of no concern to me.

[OCSteve]

I like the art hilzoy. I was going to throw in “What’s actually in that lockbox?” but KipEsquire beat me to it.

Tim Russert – wow. Comments will be closed on that HuffPo post.

[Jack]

Very interesting. I live in Marin County and I see so many, would be successful people, with Obama ’08 bumper stickers. It is unbelievable.

I think everyone here needs an O-Bummer ’08 bumper sticker.

Check out: http://www.GodDamnAmerica.net

[(The original) Francis]

On the Trust Fund "fraud":

The day that the US Govt defaults on validly issued Treasury debt is the day that a global depression starts.

We do not have a SocSec problem. We have a warfare problem. Including DOD, DOE (nukes), VA, DHS and interest for debt incurred in the various wars, we pay over $750 billion in taxes annually. Reduce that number even a little and the USG can pay its obligations to the SSA indefinitely.

[Curtis]

Yup. He is simply not competent enough to be our president.

Life would be so much better in this country had we had a Gore-McCain campaign in 2000, though.

[felix culpa]

Hey, Ugh, easy on the old guys. He’s not losing it, he never had it. Remember his claimed (and adjudged) cluelessness as one of the Keating Five?
It’s just the light is brighter now and his dimness is more apparent.

hilzoy, great post. At last something I can bookmark to fire off at need at the Way-Dumb-Downs.
Good pictures, too.
Many thanks.

[hilzoy]

Obama's speech on retirement security: here.

[Bernard Yomtov]

but letting people put money over and above their FICA taxes into some sort of sheltered retirement account. But, as I noted above, he said yesterday that he'd like to let younger workers "take a few of their tax dollars -- a few of theirs -- and maybe put it into an account with their name on it."

Don't IRA's, 401(k)'s, etc. let workers take a few of their tax dollars and put them "into an account with their name on it?"

So what is McCain's proposal?

[J. Michael Neal]

Look, I'm with you 100% on the "McCain is flip-flopping" stuff, but to say that demographic trend analysis is comparable to weather forecasting is a bit like saying that watching Meet the Press is comparable to watching The View.

The demographic trend analysis isn't the hard part. Figuring out the rate of wage growth is the problem. If real wage growth doesn't meet or exceed the projections, we have bigger problems than the social security trust fund.

[J. Michael Neal]

Don't IRA's, 401(k)'s, etc. let workers take a few of their tax dollars and put them "into an account with their name on it?"

So what is McCain's proposal?

601(k)s. They're bigger, you see.

[Bernard Yomtov]

If real wage growth doesn't meet or exceed the projections, we have bigger problems than the social security trust fund.

This gets at a crucial objection to all the pro-privatzation arguments. Bruce Webb, the blogosphere's leading SS maven, has pointed out repeatedly that, more or less, if the economy doesn't grow at a rate adequate to fund SS, then private accounts aren't going to do very well. You can't assume robust growth for the purpose of private accounts and at the same time assume weak growth for the purpose of determining the viability of SS.

At least you can't if you're honest.

[now_what]

At least you can't if you're honest.

Um....this is *McCain* we're talking about here.

[John Spragge]

J. Michael Neal (10:03) nailed it. By my count (as a not too well informed outsider), Americans have at least four tax deferred retirement savings plans: IRA, Keogh IRA, and 401(k). I don't know if the Roth IRA makes a fourth.

I still don't get what the new accounts would do, but I can say this; either the accounts won't have a government guarantee, in which case McCain really proposes to abolish all or part of Social Security, and he should say so, or else they will have a government guarantee, in which case he proposes to have individuals directing the investment of funds guaranteed by the government. As one of the Keating five an experienced US Senator, he ought to remember the moral hazards of government guarantees for investments include (cough cough) recklessness.

[Jim Glass]

I have drawn some silly pictures to illustrate the problem... McCain's plan:

Cute picture, but it is just plain wrong.

This is just a re-hash of the "transition cost" argument -- but as Milton Friedman pointed out, there is *no* transition cost to private accounts (or even to complete abolition of SS while paying off all earned benefits to date!) because the shortfall is entirely in the *status quo*. It is exactly the same amount to the dollar if we keep the status quo or switch to private accounts (or abolish SS!). Arguing that a cost of the SS status quo is a cost of switching to private accounts is ... disingenuous.

That is, your last guy there holding his head is Mr. Status Quo. And note well that he is not standing 75-years out or over some infinite horizon. The SSA Actuaries say that the benefit shortfall for persons in the SS system *today* is $14.4 trillion.

And private accounts would have made financing SS *easier*, not harder, because in prefunding SS benefits through private accounts, every $1 of increased debt/taxes incurred today to pay current retirees would have *reduced* debt/taxes by $1 (or more) 30 years from now -- not recognizing this future cost reduction to the govt as a benefit is simply incompetent (or dishonest).

And 30 years from now it will be VASTLY HARDER to raise taxes/incur debt to pay SS benefits than today. The CBO has just projected that income taxes are going to need to be >50% higher than today in 2030 -- that's 22 years from now, not 75 -- rising to >90% higher than today by 2050.

That 2030 tax increase in GDP terms is larger than the post-Pearl Harbor tax increases enacted to fight World War II.

About one-third of it is to fund Social Security though the trust fund -- and frankly, there is NO CHANCE a tax increase that size (on retirees' pensions, IRAs, Social Security benefits!) is going to be enacted for SS, amid all the other tax increases of the day, without major benefit cuts and increases in means-testing ... see what happened in 1983 when the needed tax increase was teeny, tiny by comparison.

And yet more means-testing and benefit cuts enacted on top of what was done in 1983 will totally destroy SS for the young -- end of story.

But private accounts adopted in time could have avoided all that -- keeping SS from having any income tax cost in 2030 by shifting that tax cost forward to when it was far more affordable. SS's structure would have remained safe for additional decades.

Bottom line: Private accounts' net "transition cost" would have been $0 at present value, as per Friedman.

And by shifting the financing of SS benefits forward in time, to when it would be much *more affordable*, private accounts would have protected SS from the ferocious cost-cutting, benefit-cutting, fiscal and political pressures to come.

[Nombrilisme Vide]

This is just a re-hash of the "transition cost" argument -- but as Milton Friedman pointed out, there is *no* transition cost to private accounts (or even to complete abolition of SS while paying off all earned benefits to date!) because the shortfall is entirely in the *status quo*. It is exactly the same amount to the dollar if we keep the status quo or switch to private accounts (or abolish SS!). Arguing that a cost of the SS status quo is a cost of switching to private accounts is ... disingenuous.

This does not even begin to make sense. The cost of switching to private accounts is not the cost of the status quo. The cost of switching is the reduction or elimination of payroll tax revenue to fund Social Security. As you disingenuously point out, the cost of social security will not rise a cent, which I'll concede for the sake of argument. But. That's not the whole story. What will happen is that the funds from payroll taxes that had been projected to continue financing social security won't be coming in. However, unless we abolish Social Security for current beneficiaries, we'll still be paying out. What had been a slowly hemorrhaging "trust fund" will become a rapidly hemorrhaging one. Even if the costs do not increase, the ratio of the costs will increase relative to the funds available to meet them.

And by shifting the financing of SS benefits forward in time, to when it would be much *more affordable*, private accounts would have protected SS from the ferocious cost-cutting, benefit-cutting, fiscal and political pressures to come.

We have to destroy Social Security in order to save it? If we'd already cut costs and benefits, why, they wouldn't be there for someone to cut in the future?

[Nombrilisme Vide]

I failed to address what seems to be an implicit assumption in your above argument, namely that it wouldn't matter if SS was going to run out of funds sooner, because private accounts would give all current and future beneficiaries benefits exactly equal to (if not better than) what they would get under current SS projections. I.e., if I was gonna become a SS-welfare-monarch in 15 years, my brand-spankin'-new private account would give me enough cash-money to survive comfortably after I retired, either by itself or in combination with however long the SS trust fund lasted past my retirement date (assuming it would be solvent enough to last 15 more years w/o further income, which I can't be bothered to work out for your enthymeme). I'm... skeptical. Unless your wholly unsupported assumption is true, this hypothetical me would not be able to recoup some (or all) of the 30 years of payroll taxes that I'd paid in good faith with the expectation of SS benefits in return, and would be left as a "last guy there holding [my] head".