Chris Christie And Honesty About Social Security

This article originally appeared on TheHill.

Last week, Governor Chris Christie dedicated time to champion entitlement reform at a 4-stop tour through New Hampshire. The governor said “Washington is afraid to have an honest conversation about Social Security, Medicare and Medicaid with the people of our country. I am not.”

 

So let's be honest.

 

The Trustees will soon release the 2015 Trustees Report which will give us new insight to the financial imbalances in Social Security. In the report issued last year, the Trustees projected that the financing constraints of the system will emerge in 2033, forcing a 23% reduction in benefits. That exhaustion point means that someone who turns 67 today on average expects to outlive scheduled benefits.

 

To be honest, the proposal that Governor Christie laid out does not “fix” Social Security.  The changes do not even assure us that Social Security will function for 75 years, roughly the time to get most existing contributors through retirement. The Committee for a Responsible Federal Budget projects that his changes create about 60% of the savings necessary to kick the can once again.

 

The biggest problem with Christie’s proposal is that the components do not address the structural issues within Social Security that are causing the imbalances reported by the Trustees. The package in total simply takes the projected reduction of benefits and codifies on whom the reductions will fall.

 

His proposal calls for the normal retirement age to increase gradually to 69.  What does a change in retirement age mean to someone who is 50? The person can still retire at 67, but with the lower benefit levels offered by early retirement.  Those rules translate into a 13.3% reduction of benefits for someone who elects to keep the retirement age that he has today.

 

This change would make sense if the problems within Social Security derived from increases in life expectancy of future retirees. The Social Security Administration projects that the life expectancy of a retiree will rise about 2.5 years between 1980 and 2030.  If adopted, Christie’s plan would make the increase the normal retirement age by 4 years over that time.

 

While Christie is telling the truth that Americans are living longer, he isn’t telling the whole truth.  The research of the Social Security Administration reveals that the largest increases in life expectancy occur at a time of life when people are generally contributing to rather than collecting from Social Security.

 

Christie’s proposal also includes the adoption of the Chain-CPI for future COLA adjustments.  He says that this measure tracks inflation more accurately. This is however not true.

 

If we are going to be honest, Chain-CPI does not measure actual inflation.  It measures in part how people respond to inflation. If I decide, for example, that my health insurance is too expensive, and increase my deductible so that my premium remains the same, Chain-CPI says that the cost of living hasn’t changed because I use less expensive insurance.

 

The use of Chain-CPI is a benefit cut which reduces buying power of benefits over time. This alternative is a very strange way to fix old-age insurance because the change progressively reduces benefit levels as someone ages.  The use of Chain-CPI for Social Security’s COLAs is somewhat like fire insurance which decreases its coverage as more rooms of a house burn.

 

The governor’s proposal would introduce the idea of means-testing the program. While some estimate that this change will save the program a lot of money, this alternative breaks a founding principle of the program.  Social Security should provide benefits without a means or needs test. 

 

The reasoning for this principle is sound.  The program was created to lower the likelihood that a retiree might fall into poverty-ridden old-age.  A means-test tends to discourage the savings that actually prevents poverty-ridden old-age. This approach is a strange way to fix Social Security.

 

If we are going to be honest, the worker who is 50 and younger is likely better off rejecting Christie’s proposal, and accepting the estimated 23% reduction in benefits when the Trust Fund is exhausted. The governor’s vision of Social Security offers even less benefits, and less protection of those benefits.  It secures the future mainly for politicians who get to argue about who is ‘fortunate enough not to need’ Social Security as today’s workers approach retirement.

 

But let’s be completely honest.  Governor Christie’s solution is a stop-gap measure that solves the problems for today’s politicians rather the concerns of the retirees who depend upon the system.  Today’s 50 year-old will be in 20 years back at the table of politics explaining to his children’s generation that Social Security will work if they just accept less.

The Real Social Security Debate

Between Chris Christie and Senator Warren (D-MA), Social Security reform is getting more media coverage today than at any time in the past 30 years. From hearing the details, you might conclude they are talking about different government programs.  They aren’t. 

These people are part of the changing debate that is taking shape in Washington.  For decades, any problem that developed within Social Security was fixed by shifting the cost to future workers.  Today that isn’t possible. 

What is the problem? Social Security contains a massive imbalance between resources and promises.  The Trustees of the Social Security’s Trust Funds estimate that the system carries roughly $25 trillion dollars of promises for which the system does not expect to generate cash.  The figure means that we would have to add $25 trillion dollars today to the Trust Fund so that Social Security can work for all generations. That is more than $1.50 of brokenness for every $1 collected since its inception.

The primary force driving the gap wider is time, not demographics. According to the Trustees, adding a year to the clock created roughly 900 billion in unfunded liabilities because the gap grows just as though it were a bond charging the system interest.  Time measures the nothing that Congress has done every year for the last 32 years, and it is driving the crisis forming in Social Security more than all other demographic forces combined. 

Someone who is 32 today was born in the year of the last Social Security reform.  Congress has done nothing about the imbalances since that time.  Someone under the age of 50 didn’t even have a vote at the time.  The point here is that less than half of voting aged-Americans had a vote in the how the system is structured today. So the Social Security debate is in part a discussion about how to allocate the brokenness of the system to people who had nothing to do with the creation of it.  

For example,

• Eliminating the cap would push the cost difference onto high wage workers.
• Adding means-testing to the benefits formula means that wealthy retirees would absorb the gap.
• Increasing the retirement age allocates the cost to future retirees.
• Increasing the payroll tax distributes the cost to future workers. 

In the past, Congress has largely shifted the cost from generation to generation.  The last major reform to Social Security in 1983 allocated the highest tax increases and benefit cuts on people who were 11 and younger at the time.  Today the costs to fix Social Security are so large that there is no way to completely insulate voters from the changes.

So the new debate that is forming today is how to redefine what Social Security does so that voters will agree that the system works.  The Far Left would like to transform the program into a welfare program to keep the elderly out of poverty.  The Far Right wants Social Security to become a form of forced savings, in which workers are required to save for their own retirement. These changes are somewhat like fixing a broken refrigerator by calling it a doorstop.

These ideas do not fix Social Security.  They simply change the role that it plays in our lives. Originally Social Security was designed to be old-age insurance which would help a retiree hedge the potential cost of longevity.  It is statistically possible that for a retiree to live to 100, the cost of which would be staggering.  The point of Social Security 70 years ago was to give that worker some protection against outliving their resources.

Americans should think seriously about these transformations. We are trading what we can’t get for something that we already have. The government already offers many welfare programs.  The government already incentivizes retirement savings with an alphabet soup of retirement plans.  There is no alternative for the vast majority of Americans who need old-age insurance. 

These changes haven’t been well thought out because the goal isn’t to fix Social Security.  The goal of the real Social Security debate is to create a program named Social Security that doesn’t hemorrhage cash.  For example, reformers would like to change the COLA to a new measure of inflation. This proposal would fix a system which is supposed to provide old-age insurance by reducing buying power of benefits as someone gets older. That is like auto insurance which increases the deductible as the car wreck gets worse.

Do you want to privatize Social Security? The math is simple. There is no way to privatize a negative number.  We will have to fill in the $25 trillion dollar hole before there is anything to privatize.

Do you want Social Security to be a safety-net?  Social Security has no visibility into the need of anyone.  Millions of Americans are not even eligible for benefits.  The irony of this approach is that the cost of supporting Social Security as a safety-net would drive even greater numbers of younger Americans into the poverty that the welfare program is supposed to alleviate.

There is no real debate about Social Security reform.  It is a shouting match where few people are actually listening. We aren’t trying to fix a broken system.  We are trying to find someone willing to pay for one.