Jonathan Cohn and Jonathan Chait have each written posts in the last few days slamming McCain over Social Security. I’m not going to defend McCain. His proposal for a bipartisan commission is, as Cohn says, a bit of a dodge, since he has not said what ideas on bringing about solvency he would bring to the table. But their comments strike me as pretty wrongheaded in other respects.
Cohn writes that McCain is wrong to compare the current situation to the one that Social Security faced in 1983. There was a deadline by which Congress had to act back then. Fair enough. But Cohn adds, “As countless experts have reminded us, today Social Security does indeed face a long-term financial shortfall. But it’s a small deficit that we could fix pretty easily with some combination of very modest benefit and tax changes. (In fact, Obama has actually proposed one.)”
This is doubly wrong. First, the long-term shortfall we face now is larger than the one we faced in 1983 if you use the same accounting methodology both times. (See this history of balance estimates and then a note of methodological changes here, starting on p. 86.) Second, Obama has not proposed anything that “fixes” the problem. His proposal is to raise payroll taxes on people making more than $250,000 a year by 2-4 percent of their wages. Our best estimate is that imposing an extra 12.4 percent tax on all wages above $100,000 would solve about one quarter of the funding shortfall. Applying a fraction of that tax on a fraction of those wages would solve even less of it.
Chait, meanwhile, faults the New York Times for reporting that “it was not clear that investment accounts alone could address the financial shortfall that the retirement system could face in coming decades.” Personal accounts, Chait writes, “do not improve solvency at all. They make it worse.” His concern is that money that could be used to pay for benefits is instead “divert[ed]” into the accounts, requiring cuts elsewhere. But the accounts are themselves a source of benefits; they are a partial replacement for traditional benefits. If they are designed so that the present value of the revenues put into the accounts is less than the present value of the unfunded benefits they replace, then they improve solvency. Almost every personal-account plan is so designed. The Social Security actuaries have found that several bills introduced in the last few years would make Social Security sustainably solvent. All of those bills include personal accounts.
One additional point. If you are going to sock away money for tomorrow’s retirees, you need to make sure the government won’t spend that money. Locking it up in personal accounts that are the property of those future retirees will probably keep that money from being spent better than just putting extra money in the Social Security trust fund. We have seen how Congress treats that fund. That’s another way, not accounted for by the actuaries, that the accounts are helpful in financing Social Security.