Peter Orszag and the Drive to Cut Social Security

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Thursday, 04 November 2010 04:02

Peter Orszag, President Obama's former budget director, seems determined to cut Social Security. Like most people involved in this quest he is prepared to leave the facts behind and is quick to resort to name calling.

He begins his column by telling readers:

"The budget deficit figured prominently in much of the discussion surrounding yesterday’s election."

This is partly true since the media tend to prominently feature the views of people who discuss the budget deficit in all contexts, but it is absolutely false insofar as the implication is that the deficit was an important factor in the Democrats' defeat. All the polls show that high unemployment was the major factor in the Democrats' loss; the deficit was at most a minor issue. 

Orszag goes on to tell readers that progressives should be happy to see Social Security reform on the agenda since:

"the key issue progressives had been concerned about — individual accounts within Social Security — has been definitively won in their favor (for now)."

It might have been helpful if Orszag had used names, since I don't know any progressives who have this as their "key issue." The progressives who are most visible on this issue have been concerned about a Social Security benefit that is already small by international standards being made still smaller.

This issue of accounts divides progressives, since many support some form of government managed saving accounts as a supplement to Social Security. If Social Security is cut and, as a separate matter accounts are established to supplement Social Security income, it is logically identical to an outcome in which a portion of Social Security is explicitly replaced by private accounts. It is not clear whether Orszag is simply confused here or is deliberately trying to mislead readers.

The next item on Orszag's list of reasons for early cuts is:

"acting now would allow changes to take effect more gradually, cushioning the blow."

It is important to understand this argument, since it is unlikely that many who do understand it would endorse it. Given the 75-year planning horizon, if we cut benefits for people who are retiring in the near future, then we will have to raise taxes and/or cut benefits less for people who are working/retiring in later years. In other words, if we squeeze some money out of the current cohort of near retirees, we will have to get less money out of people in 2050 and 2060.

Is this a good idea? Well, we know that the vast majority of near retirees will have almost nothing other than Social Security to support themselves in retirement. The reason is that the people who always talk about budget deficits were too ignorant of the economy to recognize the dangers of an $8 trillion housing bubble. Since these people were controlling economic policy, middle class workers saw much of the wealth they had accumulated as home equity or in their 401(k) disappear. In other words, the deficit hawks who want "changes to take effect more gradually" want to kick again the people whose wealth was destroyed due to the incredible economic mismanagement of these deficit hawks.

By contrast, the Social Security projections show that workers and retirees will on average be about 40 percent richer in 2040 than they are today and about 70 percent richer by 2060. Why exactly is it important to cut benefits from retirees in 2015 or 2020 who will have very little income, so that their far richer children and grandchildren end up with an income 50 years from now that is only 69 percent higher net of taxes rather than say 70 percent? Orszag obviously feels this redistribution from the relatively wealthy to the relatively poor is important, but he certainly doesn't explain why.  

Orszag concludes by referring to "the left's strident opposition to any serious discussion of Social Security reform." So, the people who disagree with Orszag are "strident." The name-calling might be more warranted if Orszag had a better argument.