TCS Daily


When Wonks Attack

By Ramesh Ponnuru - July 18, 2002 12:00 AM

Democrats, eager to campaign this fall on the premise that Republicans are planning to shred Social Security, think they received intellectual ammunition in June. Two economists-Peter Diamond of MIT and Peter Orszag of the Brookings Institution-issued a study arguing that the reform plans advocated by President Bush's commission on Social Security would drastically cut benefits. Several Democrats, notably Senator Jon Corzine of New Jersey and Paul Krugman of the New York Times, have trumpeted the study's findings.

Several press accounts have cited the study uncritically, not even mentioning that economists who worked on the commission vigorously dispute it. Julie Kosterlitz, who went into the specific charges and counter-charges for National Journal, had the best write-up of the controversy. But she took an overall tone of agnosticism, suggesting that people without economics PhDs would never be able to get to the bottom of the issue.

But this isn't a shades-of-gray story where both sides make reasonable points. The truth is that Diamond and Orszag have done a dishonest hatchet job on Social Security reform.

Everyone, very much including Diamond and Orszag, acknowledges that the existing Social Security program cannot afford to pay all the benefits it has promised. Under current law, indeed, benefits are slated to be cut by 25 percent starting in 2041. What the president's commission argued is that if workers are allowed to invest some of their Social Security funds, they will be able to earn a return that puts them substantially ahead of what they can realistically expect to get from Social Security. Some benefit cuts or revenue infusions will be needed to make the program solvent, but personal accounts can limit the damage.

The key move that Diamond and Orszag make to obscure this truth is really quite simple. Instead of comparing the commission's reform plan to what Social Security can actually pay-comparing it to a Social Security with benefit cuts or tax increases but without private accounts, for example-they compare it to what the program merely promises. They compare it, in other words, to a Social Security program that has no funding difficulties. A program that, in the real world, does not exist.

When the study was released, Comptroller General David Walker testified to the House Budget Committee that its comparison of reform plans to "promised benefits" is "fundamentally flawed and unfair." In 2001, the Congressional Research Service concluded-using the understated language of a carefully non-partisan bureaucracy-that comparing benefits under a reform proposal to promised, but unpayable, benefits from the existing program "can be misleading." The Concord Coalition, a group concerned about runaway entitlement spending but no cheerleader for free-market reform, also criticizes comparisons that force reformers to try "to out-promise a system that is unsustainable."

Diamond and Orszag offer three justifications for comparing the commission's plans to "promised" benefits. First, they say that including other numbers for purposes of comparison would "confuse" readers. Right: It's important to keep studies simple if their point is to be used in attack ads for the fall campaigns. Second, they say that other analysts have used the same methodology before-but the analysts cited were in fact more open about the costs of shoring up Social Security than Diamond and Orszag are.

Third, they say that "promised benefits" are necessary to maintain "replacement rates." That is, today's average retiree gets benefits worth about 40 percent of his wages; with promised benefits, tomorrow's retiree will also get benefits worth about 40 percent of his wages. Diamond and Orszag argue that reform plans that yield benefits below this rate are cutting benefits. But this is just to sidestep the key question: Can the program afford to maintain replacement rates? All Diamond and Orszag have done with this defense is to re-describe the promise that Social Security cannot fulfill-but which they half-pretend can be. (In the 1970s, incidentally, Diamond argued against placing so much weight on replacement rates.)

Accompanying this grand distortion are a series of smaller ones. Diamond and Orszag assume that private accounts would earn no higher returns than the government bonds held in the Social Security Trust Fund. Not only the commission, but even the actuaries of the Social Security program itself, have assumed higher returns. Of course, they're not trying to help Democrats get elected.

The commission's plans envision that the government will transfer trillions of dollars to Social Security to keep it on track. Diamond and Orszag criticize the commission for not saying where these trillions will come from. It's true that the commission does not come up with the money. But making Social Security solvent will require huge transfers of money as it is. The commission's plans reduce the size of the transfer that will be required. One of the plans reduces the amount of money needed by half. Even Diamond and Orszag concede that the plans would make the financial hole smaller (although they quibble, unconvincingly, about how much the plans will help).

Don't get lost in the minutiae. The outcome of the Social Security debate will determine how tens of trillions of dollars are spent and how dependent Americans are on Washington. Peter Diamond and Peter Orszag know and acknowledge that some combination of benefit cuts, tax increases, and revenue transfers is needed. They refuse, however, to offer a plan to make the program solvent and compare its pros and cons to the reform plans that have been advanced. Instead, they attack those plans as though no painful changes were needed. All they have added to the debate is the sum of their dishonesty.

 

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