Comprehensive Entitlement Reform

These cites form an excellent strawman starting point to address in a bipartisan manner the question of Social Security Reform as well as the overall Entitlements question. Please chime in....John
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Social Security Finances…How Best to View the Problem
http://www.concordcoalition.org/issues/socsec/issue-briefs/SSBrief4--Measurement.htm

Over-simplified measures of Social Security's long-range financing problems create debates that can be distracting. Regardless of how the program's future deficits are presented, the program's benefits are entitlements that are financed by taxing the nation's economic output. Ultimately, the resources the program requires will have to be drawn from the economy of the future, and it is the dimension of that draw then that best reflects the problem

If the federal government could eliminate its budget deficits and use excess Social Security receipts to buy down the federal debt, then the idea that excess Social Security taxes could be saved would be plausible. But there is nothing in the post World War II period that suggests the government will run budget surpluses for any sustained period of time -- particularly those equaling the size of the Social Security surpluses. And there is nothing to suggest that a commitment by one Congress to set them aside will be binding on the next. As budget developments of the past few years year amply demonstrate, Congress' "lockbox" promises in no way guarantee prudent fiscal behavior.

Looked at this way, it is not the deficits between income and outgo that best reflect the Social Security problem -- it is Social Security's rising costs. If allowed to grow as scheduled, the share of the nation's payrolls that the program requires will grow from 11 percent today to 17 percent over the next 25 years, and to more than 19 percent over the next 75 year. As a share of what the nation produces, it will grow from 4.26 percent of GDP today to 6.14 percent of GDP in 2030 and 6.39 percent in 2080. Either way one looks at those numbers, it means that Social Security's draw from the economy will rise by 50 percent or more over the next few decades… that's the problem.

The bottom line is that, no matter how it is measured, there are just two ways to address Social Security's financing gap without over burdening tomorrow's workers and taxpayers: reduce Social Security's long-term cost and make the remaining cost more affordable by increasing national savings and hence the size of the future economy. A workable reform plan should do both.

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http://www.concordcoalition.org/issues/socsec/doc/050203testimonyexecsummary.htm
Framework of Reform, The Future of Social Security - Robert Bixby, Exec Dir, The Concord Coalition, Testimony at Senate Special Committee on Aging, Feb 3, 2005

Executive Summary

Any Social Security reform plan should be designed to meet three fundamental objectives--ensuring Social Security's long-term fiscal sustainability, raising national savings, and improving the system's generational equity:

• Reform should ensure Social Security's long-term fiscal sustainability. The first goal of reform should be to close Social Security's financing gap over the lifetimes of our children and beyond. The only way to do so without burdening tomorrow's workers and taxpayers is to reduce Social Security's long-term cost.

• Reform should raise national savings. As America ages, the economy will inevitably have to transfer a rising share of real resources from workers to retirees. This burden can be made more bearable by increasing the size of tomorrow's economy. The surest way to do this is to raise national savings, and hence ultimately productivity growth. Without new savings reform is a zero-sum game.

• Reform should improve Social Security's generational equity. As currently structured, Social Security contributions offer each new generation of workers a declining value (“moneysworth”). Reform must not exacerbate--and ideally it should improve--the generational inequity underlying the current system.Meeting these objectives will require hard choices and trade-offs. There is no free lunch. Policymakers and the public need to ask the following questions to assess whether reforms honestly face up to the Social Security challenge--or merely shift and conceal the cost:

• Does reform rely on trust-fund accounting? Trust-fund accounting obscures the magnitude of Social Security's financing gap by assuming that trust-fund surpluses accumulated in prior years can be drawn down to defray deficits incurred in future years. However, the trust funds are bookkeeping devices, not a mechanism for savings. The special issue U.S. Treasury bonds they contain simply represent a promise from one arm of government (Treasury) to satisfy claims held by another arm of government (Social Security.) They do not indicate how these claims will be satisfied or whether real resources are being set aside to match future obligations. Thus, their existence does not, alone, ease the burden of paying future benefits. The real test of fiscal sustainability is whether reform closes Social Security's long-term annual gap between its outlays and its dedicated tax revenues.

• Does reform rely on hiking FICA taxes? Hiking payroll taxes to meet benefit obligations is neither an economically sound nor a generationally equitable option. The burden will fall most heavily on lower and middle-income workers and on future generations. Younger Americans in particular will be skeptical of any plan that purports to improve their retirement security by increasing their tax burden and by further lowering the return on their contributions.

• Does reform rely on new debt? Paying for promised benefits--or financing the transition to a more funded Social Security system--by issuing new debt defeats a fundamental purpose of reform. To the extent that reform relies on debt financing, it will not boost net savings and may result in a decline. Without new savings, any gain for the Social Security system must come at the expense of the rest of the budget, the economy, and future generations. Resort to borrowing is ultimately a tax increase for our kids.

• Does reform rely on outside financing? Ideally, reform should achieve all necessary fiscal savings within the Social Security system itself. Unrelated tax hikes and spending cuts may never be enacted, or if enacted, may easily be neutralized by other measures, now or in the future. Unless the American public sees a direct link between sacrifice and reward, the sacrifice is unlikely to happen.

• Does reform use prudent assumptions? There must be no fiscal alchemy. The success of reform should not depend upon rosy projections of future economic growth, presumed budget surpluses or lofty rates of return on privately owned accounts. All projections regarding private accounts should be based on realistic assumptions, a prudent mix of equity and debt, and realistic estimates of new administrative costs.

While fixing Social Security's problems, reform must be careful to preserve what works. Social Security now fulfills a number of vital social objectives. Policymakers and the public need to ask the following questions to assess whether reform plans would continue to fulfill them:

• Does reform keep Social Security mandatory? The government has a legitimate interest in seeing that people do not under-save during their working lives and become reliant on the safety net in retirement. Moving toward personal ownership need not and should not mean “privatizing” Social Security. Any new personal accounts should be a mandatory part of the Social Security system. Choice is not important in a compulsory social insurance program whose primary function is to protect people against poor choices.

• Does reform preserve Social Security's full range of insurance protection? Social Security does more than write checks to retirees. It also pays benefits to disabled workers, widows, widowers, and surviving children. A reformed system should continue to provide insurance protection that is at least equal to what the current system offers.

• Does reform maintain Social Security's progressivity? While individual equity (“moneysworth”) is important, so too is social adequacy. Social Security's current benefit formula is designed so that benefits replace a higher share of wages for low-earning workers than for high-earning ones. Under any reform plan, total benefits, including benefits from personal accounts, should remain as progressive as they are today.

• Does reform protect participants against undue risk? Under the current system, workers face the risk that future Congresses will default on today's unfunded pay-as-you-go benefit promises. While reducing this “political risk,” personal account reforms should be careful to minimize other kinds of risk, such as investment risk, inflation risk, and longevity risk--that is, the risk of outliving ones assets.

If we reform Social Security today, the changes can be gradual and give everybody plenty of time to adjust and prepare. If we wait much longer, change will come anyway--but it is more likely to be sudden and arrive in the midst of economic and political crisis.

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Social Security Reform – Hard Choices Ahead
http://www.concordcoalition.org/issues/

As our leaders in Washington consider the best way to remedy Social Security’s long-term funding gap, it is essential for them to confront the hard choices that a meaningful reform plan requires. They should reject both the “do nothing” approach and the “free lunch” plans that rely on substantial long-term borrowing to appear painless. Both offer a false hope. Deficit financing is neither a viable nor a responsible way of avoiding the hard choices that must be made on contribution and benefit levels.
The basic case for reform is a matter of arithmetic, not ideology. Well within the lifetime of America’s baby boomers, the current system faces a growing gap between what it promises in benefits and what we are setting aside to pay for it. Doing nothing to address this problem will eventually result in steep tax hikes, deep spending cuts, or massive borrowing from the public.

Ensuring a more sustainable system will require change, meaning that someone either in the form of higher is going to have to give up something  contributions, lower benefits or a combination of both. No Social Security reform will succeed unless this fact is acknowledged up front.
Responsible reform options must make sense within the context of sound fiscal conditions and the need to raise national savings. Moreover, the fiscal challenges facing Social Security, while substantial, are not as great as the long-term fiscal, moral, and technological challenges we face on Medicare reform. If we can’t make the hard choices on Social Security we can never hope to tackle the problems of our health care entitlements. In all the reform ideas we must realize that there are no free lunches. Further borrowing with no new contributions or contemporaneous benefit cuts, raises many concerns. We must ask these questions on any meaningful reform:

Do they add to national savings?
A fundamental goal of reform should be to improve national savings. As America ages, the economy will have to transfer a rising share of resources from workers to retirees. This will be easier in a prosperous growing economy. The best way to ensure this is to raise national savings, and ultimately productivity growth. Social Security reform that relies on deficit financing will not boost net national savings, and may even result in lower savings if households respond to the new personal accounts by saving less in other areas. Without additional savings, any gain for the Social Security system must come at the expense of the rest of the budget, the economy, and future generations.

Could it worsen the already precarious fiscal outlook?
The 10-year cost of roughly $2 trillion would come on top of the $5 trillion deficit that appears likely if current fiscal policies are continued. Yet the greater fiscal danger with most such plans is that they require additional borrowing for decades to come. In the most widely discussed plan produced by the 2001 President’s Commission to Strengthen Social Security, the magnitude of the borrowing equals or exceeds the cost of the new Medicare drug benefit well into the 2020s. Meanwhile, the increased deficits and debt exceed the promised savings until the 2050s. Official projections already indicate that current fiscal policies are unsustainable long before then and the new deficits would only make the problem worse. Savings programmed for the 2050s won’t be enough to prevent us from going over the cliff well before that time.

Could it send a dangerous signal to the markets that we are not taking our fiscal problems seriously?
With our large budget deficit and low domestic savings rate we are borrowing record amounts from abroad. This year’s increase in foreign debt is likely to approach $700 billion. If we “pay for” Social Security reform by running up the debt further, rather than making hard choices, it would signal to increasingly wary financial markets that Washington has no intention of doing what is necessary to get its fiscal house in order. This would increase the risks of a so-called “hard landing” such as a spike in interest rates, rising inflation and a plunging dollar. Promises that all the new debt will be paid back starting in about 50 years are unlikely to satisfy the concerns of those who are watching to see what Washington does now to improve its fiscal position. If markets looked out 50 years, current interest rates would be through the roof. Because the trade-offs that genuine reform requires can appear painful, many leaders try to find excuses for not confronting the hard choices. Yet the truth is clear. Social Security reform involves real resource trade-offs. It’s time to get serious about reform—and face up to the hard choices.