The Agenda

The Barro-Biggs Social Security Consensus

As a great believer in the importance of at least trying to reconcile seemingly irreconcilable positions, I recently suggested that Josh Barro’s call for expanding Social Security was in many respects compatible with the work of Social Security reformers like Andrew Biggs. And now Biggs has written a post that clarifies his disagreements with Josh while also identifying where their approaches are compatible. 

Among other things, Biggs has called for reforming the Social Security program by (a) replacing the current Social Security benefit with a universal flat defined benefit designed to eliminate poverty, indexed to chained CPI; (b) creating a universal defined contribution account. that would be automatically annuitized on retirement; (c) and eliminating the payroll tax for workers over the age of 62. At first glance, this looks very different from Josh’s approach. The first component would do most of the heavy lifting in terms of generating savings for the federal government, and it also has the benefit of simplicity. Yet (a) is a true safety net rather than a vehicle for robust income replacement. This is where (b) comes in, which will, for obvious reasons, be sensitive to lifetime earnings. The challenge is that (b) has to be very carefully designed to avoid a political backlash and to increase the likelihood that it will deliver a solid income stream. Both (b) and (c) are designed to improve work incentives — particularly (c), which addresses the fact that older workers who are on the margin of deciding between remaining in the work force and retiring early might be nudged into working longer if they were allowed to keep a larger share of the earnings. Moreover, the “returns” of Social Security payroll taxes are abysmally low over the age of 62. One might prefer to link the end of payroll tax collections to years in the workforce, but this would introduce administrative challenges that might prove difficult to overcome. The purpose of Biggs’ proposed reforms is to preserve a defined benefit component, yet to shrink it to manageable proportions while creating a streamlined defined contribution component designed to minimize the cognitive burdens of saving for retirement (e.g., automatic annuitization, default investment in life cycle portfolios, etc.). 

Earlier today, Biggs also made the case against Josh’s idea of trading more Social Security for less Medicare:

What about Josh’s idea to cut Medicare to increase Social Security? I’d actually do the opposite. Consider this: what am I going to do if you reduce my future Social Security benefits? Very likely I’d work more, retire later, and save more in my 401(k). In other words, there are easily available substitutes to Social Security, all of which have the helpful byproduct of increasing economic growth. How about if you cut my Medicare, say, by reducing reimbursement rates for health care providers? I could top off doctors’ reimbursements out of my own pocket, except that’s illegal. I could set aside more money while working to cover health care in retirement, except that health costs are so variable that personal saving is a really inefficient way to do it. It’s simply much easier to substitute private saving for Social Security benefits than for Medicare benefits, which tells me that Social Security reform should fall particularly heavy on the benefits side in order to generate some breathing space for Medicare.

In this regard, Biggs is sensitive to the difficulties, substantive and political, of reforming Medicare. If it really were true that we could transform the U.S. health system into a consumer-driven system with relative ease, Biggs’ concerns would be less salient, as shrinking the Medicare program would encourage the growth of more efficient providers at the expense of less efficient providers. But given the political economy constraints on our planet, it seems reasonable to not bank on this outcome. 

This Medicare vs. Social Security disagreement notwithstanding, Biggs endorses one of Josh’s options for “expanding” Social Security — creating add-on personal account along the lines of (b):

All that said, I’ve got three words for Josh’s idea for supplemental private retirement savings on top of Social Security: Do. It. Now. (We might have done it yesterday, had it not been for the opposition of people who favored only accounts carved out of Social Security. Like me. What can I say? Sorry.) Supplemental private pensions have none of the downsides of the more-taxes-for-more-Social Security deal, which is almost certain to discourage work, displace private saving, and encourage earlier retirement. So while I disagree with a lot of Josh’s thinking along the way, he ends up in a place I’m very happy to support.

I was particularly impressed by Biggs’ mea culpa on carve-out accounts, which really do appear to have been a dead-end. And there was at least some support on the center-left for add-on accounts, which are more attractive still when understood as an alternative to an increase in the Social Security payroll tax.

My only objection to what appears to be the Biggs approach is that it doesn’t take account of the case for “fertility-neutral” payroll taxes, an idea floated by Charles Blahous and Jason Fichtner in “Limiting Social Security’s Drag on Economic Growth.”


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