DANA CHASIN | Social Security as a Political Hotcake

Dana Chasin has just commented on  the Social Security Board of Trustees  annual report, issued on Tuesday. Posted here by permission:

The Trustees' Report highlights the continued fiscal challenges that face the Social Security program (SSA). 

Based on current trends, without supplemental taxes or other changes, the SSA would not be able to pay 100 percent of benefits in 16 years:

• Disability Insurance (SSDI) has income sufficient to pay full benefits on program only though 2032
• Old Age and Survivors Insurance (OASI) has income sufficient to fund program only through 2034
• In 2011, the Board projected that Social Security would be unable to provide full benefits only through 2036; they have now adjusted that projection to 2034.
• Social Security is now paying out more in benefits than it receives in total revenue, years earlier than previously projected.

The Report describes the above dates as the years when these programs will be “depleted.” The debate around the status of the OASI and DI programs has centered around the program’s looming “insolvency.”

Social Security, of course, does not go insolvent. Suggesting Social Security is or may become insolvent or bankrupt raises hackles needlessly even as it delights ideologues.

While looming benefit cuts are a serious concern that can and should be avoided, the SSA is not a business. It is a facet of the American government that has committed to guarantee retirement funds to the American worker.

Looming Shortfall; Several Simple Solutions 

Experts warn that the longer Congress waits to solve Social Security’s pending shortfall, the more expensive it will be to fix. In 2011, the Social Security Board of Trustees estimated it would take $6.5 trillion to avoid benefit cuts over the next 75 years. This year, they calculate that it would take $13.2 trillion.

Fixing the program that economists call the most “valuable component of our retirement system,” will be relatively straightforward. House Republicans propose cutting benefits and raising the retirement age to buoy the SSA. Thankfully, this solution appears dead on arrival, given the public’s overwhelming support for maintaining or increasing current levels of Social Security benefits.

A particularly promising proposal in the House Ways and Means Committee is H.R. 1902, the Social Security 2100 Act. The bill currently has 172 Democratic cosponsors and would strengthen Social Security benefits by:

• increasing monthly benefits by two percent
• indexing cost of living adjustments to Consumer Price Index- Elderly (CPI-E)
• creating a new special minimum benefit equal to 125% of the poverty line

The bill would keep the Social Security Trust Fund “solvent,” ie paying out full benefits, for the next 75 years according to the SSA Board of Trustees. It would accomplish this by applying the payroll tax to income over $400,000 and gradually increasing the payroll tax rate on both employees and employers, among other measures.

Congress could also consider applying unearned income such as capital gains to Social Security tax. If we were to FICA a tiny portion (1-3 percent) of capital gains, we would solve the Social Security problem easily -- in fact, it would present a significant opportunity to increase benefit levels substantially, possibly by two times.

Midterm Political Challenge and Opportunity 

With straightforward solutions available, Congress has no excuse not to address Social Security’s long-term shortfalls. Exacerbated by a brand new $1.5 trillion hole in the budget, this is a year when people will hear threats to Social Security. They may believe it. Democrats, as they have in the past, will provide reassurance. This cycle especially, this reassurance is likely to provide a large benefit for them in the midterms.

LABOR | Low Participation II (Job-Finding and Disability)

Chart 1. BLS Data on Labor Force Participation Rates
(FRED chart, St. Louis Federal Reserve Bank).

I am continuing to think about the low U.S. civilian labor-force participation rate, encouraged by Marcus Roberts and the other busy demographers at MercatorNet in Auckland, New Zealand.

If the stubbornly low employment-population ratio (and the still-declining labor-force-participation rate shown in Chart 1) are explained by demographic shifts in work-family choices - such as men and women taking more time off from working as a lifestyle decision - then government policies may not require change. We might just have to accept that we will have fewer people working.

However, I just read a summary of a Working Paper (#20183) by Robert E. Hall, "Quantifying the Lasting Harm to the U.S. Economy from the Financial Crisis." It appears in the National Bureau of Economic Research (NBER) October Digest. Hall suggests two interesting explanations for the continuing low labor-force-participation rates, as of 2013, beyond the six mostly demographic ones that I suggested.

1. "Job-finding rates" are low. When recessions or job interruptions are short, workers can go back to what they were doing before. But when a high level of unemployment has occurred over a long period, some jobs are being destroyed completely in the interim. Workers who have been laid off can't shift over to another employer. Many examples of clerical jobs displaced by computers come to mind, such travel agents handling low-cost travel who are being displaced by increasingly user-friendly internet reservation systems.

Chart 2. Applications for Disability Aid and Acceptances,
1999-2013.

2. Disability (SSI) and food stamp program beneficiaries are growing rapidly. The number of  receiving SSI (disability) and food stamp assistance has, says Hall, been increasing persistently. The high implicit taxes on earnings that result from losing benefits means that this group of people has very little incentive to participate in the labor force.

Comment

The number of applications for disability assistance has certainly been increasing, at least through 2010 (see Chart 2). But the percentage of applications that are being rejected is increasing as well. More than half of applications were accepted in 1999 whereas in 2013 the acceptance rate was down to one-third. The number of applications that are being accepted has been declining since 2010.

The NBER Digest summary doesn't provide policy recommendations, but the demographic, job-finding and disability theories have some interesting implications.

• To the extent that the continued low labor-force participation rate (despite lower unemployment) reflects personal lifestyle choices or the changing composition of the American work force, government action may not be very useful. 
• But if the job-finding problem is driving low labor-force participation, it might be useful for the Department of Labor to educate displaced workers to the changing needs of the workplace and get across the fact that experience in a skill that is no longer called for isn't going to count for much in a new job.
• For displaced workers to get back into the work force it may require working hard to stay relevant, especially in tech-related jobs. 
• Returning to the work force may also require a lowering of income expectations and a conscious effort to be tolerant of "diversity", which means in part more co-workers looking and behaving in ways that were not usual five or ten years ago. 
• The job-finding problem might be partly addressed through entrepreneurship training, although entrepreneurs typically won't show up on payroll-jobs data (which are generated from filings for state unemployment-insurance programs) until they start paying themselves. At the same time, they also probably won't show up in the household surveys as unemployed or looking for work. Entrepreneurs may or may not appear in the labor force.
• The theory that disability payments make it unattractive to work raises the question of the direction of causality. One reason that disability enrollments are rising could be that those who are unemployed and are discouraged by the lack of good jobs turn to disability programs when their unemployment compensation expires. So one reason for the larger number of disabled is the high unemployment rate. 
• This causality would also help explain the higher rejection rates - the long-term unemployed are casting around for a replacement for their expiring unemployment checks and disability might look like a solution. 
• We should have enough data on earnings of disabled people to assess whether it would make sense to reduce the earnings penalty, i.e., the loss of benefits tied to levels of earned income.

Thank you for reading. Please comment - john (at) cityeconomist (dot) com.