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The Crass Distortion of Paul Ryan’s Social Security Proposals

Charles Blahous | 10/22/2010

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Welcome to an Election Year October, known to people inside the Washington beltway as the political “silly season”. It’s this time of year when public issues are frequently distorted, often by those whose political prospects are dimming. A classic example of this biannual spectacle is the spate of recent attacks on what has been (inaccurately) described as Congressman Paul Ryan’s Social Security plan.

Press coverage of important fiscal issues tends to oscillate. Much of the time, there is earnest reporting on the severity of the federal government’s fiscal problem, decrying the refusal of elected officials to get “serious” about fixing it. But when an elected official does put forward a serious proposal, many of these same media outlets naively quote from the most misleading attacks upon it. The electorate often ponders why politicians don’t simply suck it up and “do the right thing.” This regrettable, recurring pattern is a large part of the explanation.

Those of us who have been on the inside, in Congress and in the White House, have seen this routine time and again. Someone within Congress requests a study from one of the non-partisan scorekeepers, whether the Congressional Budget Office or the Social Security Actuary. The study as dictated slants the issues fairly severely. The report is completed by honest, public-spirited scorekeepers who, lacking the authority to reshape the contours of the study, must comply with the request as given. The seemingly-damning analysis is then transformed into a press release, with the hope (often realized) of an echo both from credulous press and from sympathetic policy advocates.

Those of us on the outside of this process, whether in the press or within the scholarly community, have a duty to skeptically dissect these staged episodes with an eye to fairly explaining the issues to the public. While no one should expect perfection from this process, both the press and the scholarly community at large need to do a much better job than we have been doing.

The recent propagation of scare tactics about Congressman Ryan’s Social Security ideas is a prototypical case in point. Earlier this week, a press release was issued, touting a study of the “plan” and decrying the “deep cuts” it would allegedly make in Social Security benefits. Already this line has been picked up in press coverage, with the Washington Post printing a story under the sensational headline, “Republican Rep. Ryan’s Plan would Cut Benefits for High Earners,” (The print edition of the Post was even more careless, entitling its story, “GOP Social Security Plan Would Cut Benefits for Higher Earners.”) The Post article came complete with a graphic appearing to show benefits for a mid-range (roughly $43,000) earner shrinking roughly 20% by 2050.

These descriptions are misleading in the extreme. Let’s examine some of the ways.

Point #1: The purported analysis does not evaluate a “GOP Plan” or “Congressman Ryan’s Plan”

The Post headline referred to a “GOP Plan.” The first sentence of the ensuing article also refers to a “Republican plan.” The aforementioned press release refers to “proposals. . . advanced by Republican Congressional leaders.” A graph printed with the Post article refers to a so-called “Republican plan to raise the retirement age.” There is even a bar on the graph that purports to represent the “GOP Plan.”

Where to begin? There is no specific “GOP plan.” There is no specific plan from the Congressional Republican leadership. There is a plan put forward individually by Congressman Paul Ryan. The provisions analyzed in the study do not correspond to that plan. The study, for example, analyzes a provision to change the calculation of the annual Social Security COLA by using a chain-weighted Consumer Price Index. That provision, however, is not in the Ryan plan. The Ryan plan also contains a provision increasing minimum benefit payments for low-income seniors, about which CBO stated, “benefits provided by Social Security are projected to be slightly higher under the proposal than under current law for each of the first 20 years and also in the long run. In the first 20 years, the increase in total benefits would occur primarily because of the increased amount of the special minimum benefit.” The study wholly ignores this provision.

Given all this, is it worth even continuing? Another note: The press release refers to the “benefit cuts under ‘price-indexing’ as proposed in the Ryan plan.” The Ryan plan wouldn’t establish price indexing. It contains progressive indexing, which is actually closer to wage-indexing (the current method) than it is to price-indexing. There are more errors, but that’s enough. By now, readers should have the idea: no one should construe this study as shedding much light on the Ryan proposal, let alone upon the broader Republican agenda.

Point #2: The depiction misleads as to the provisions’ effects on future benefit levels.

Even with respect to the provisions studied, the released materials distort projected impacts on future benefit levels. To understand how, we must step back a bit and recall the broader value choices involved in Social Security policy.

Under current law, Social Security faces a significant gap between scheduled benefits and projected revenues. That gap can be seen on the graph below.

(Chart 1)

This chart shows Social Security costs and income in relation to each worker’s taxable wages. So, for example, in 2008 (just before the recession hit) costs amounted to roughly 11 and a half cents of every taxable dollar earned by workers. The recession caused an immediate surge in system costs, which are projected to swell in coming years to exceed 16.5% of worker wages by the 2030s – in other words, this single program’s costs are projected to absorb roughly 1/6 of all taxable wages that workers earn. There is a long-running argument about exactly when Social Security hits the crisis point, but all serious analysts agree that costs are projected to grow dramatically and will well exceed both current and projected revenue levels.

Why are costs rising? Two principal reasons. One is that the number of beneficiaries is growing dramatically as American society ages and the baby boomers exit the workforce. The second reason is that the program’s benefit formula is configured to provide higher benefits (relative to inflation) to each succeeding cohort of retirees, as shown on the graph below.

In sum, costs are rising because we will have more beneficiaries to pay, and because we are paying each successive retiree class higher benefits relative to inflation.

Why does the current benefit formula produce these results? It does so because the benefit formula is indexed to grow with national average wages annually, which on average grow faster than inflation. This is done to maintain constant wage replacement at the normal retirement age – that is, benefits as a share of career wages – for the beneficiary population as a whole. This formulation was not an original feature of Social Security, but was added in the 1970s.

If either of two factors vanished, we wouldn’t have a fiscal problem. If our society never aged, wage-indexed benefits would be sustainable. If instead benefits simply grew with price inflation, then even a system with our demographics would be sustainable. But put those two factors together – population aging and wage-indexation -- and we have a big problem.

The argument over the appropriate future size and cost of the Social Security program is a fierce one, and there are impassioned arguments on all sides. We as a nation face a value judgment. If we want a wage-indexed benefit formula, then average benefits will grow faster than inflation and tax burdens will rise as shown on the first graph. If instead we want to avoid this large tax increase, we can still have benefits grow in real terms but at a rate significantly slower than wage growth. Fair-minded people can and do disagree on the best policy.

What is not fair, however, is to slant the presentation so as to obscure this fundamental value choice, and to create a distorted perception of what actual benefit levels would be. This is, unfortunately, what is done in the attacks on the Ryan proposal.

Much of the distortion arises from the misleading use of “wage-indexed dollars” to describe benefit levels. Instead of showing benefit levels in terms that most people would understand – for example, comparing them to the nominal value of current benefits, or to the inflation-adjusted value of current benefits – these charts employ the concept of “wage-indexed dollars”, creating the gross misimpression that benefits would shrink under the Ryan proposal.

For example, the analyses depict the effects of progressive indexing (incorrectly described as “price indexing” at some points in the press materials) upon a medium-wage worker’s benefits as looking like this:

A quick aside on yet another problem with this graph: it depicts benefits not at the “normal retirement age,” but instead those claimed at the age of 65. But under current law, the normal retirement age is gradually rising to 67. Showing benefits at the constant age of 65 thus makes little analytical sense. It doesn’t reflect when people are eligible for full Social Security benefits (nor does it even represent the age at which most people claim benefits). There seems little point to having raised the Social Security retirement age if we are going to treat benefits at the constant age of 65 as the continuing basis for comparison. In any case, measuring benefits at age 65 creates the misimpression that there is a benefit “decline” under the proposal that is actually a consequence of current law.

The bigger problem, however, is the use of “wage-indexed” dollars. Another chart in the Post article exhibits the same problem. It compares benefits under “the plan” not to today’s levels, but to “current scheduled” benefits in 2050, again in “wage-indexed” dollars.

By framing everything in terms of “wage-indexed dollars,” all of these graphs obscure the reality that benefits would actually rise under progressive indexing. In terms of real (inflation-adjusted) benefit levels, the chart above would look like this:

Now, that’s quite a different picture, isn’t it? Presented that way, it’s clearly evident that benefits under progressive indexing would rise in real terms, just not as much as under the (unaffordable) benefit growth schedule shown two graphs earlier.

Of course, someone on the other side can argue (and fairly) that it is perfectly legitimate to cite the current-law benefit formula, however implausible over the long term, as the sole basis for comparison. Similarly, it is perfectly legitimate to make the value choice that the policy goal of Social Security should be “wage replacement.” But any credible presentation should show what this means. It would mean that tax burdens on younger generations would rise enormously to fund far higher levels of future benefit payments. That is a value choice we can make; but we should make it with our eyes open.

The most troublesome aspect of the charts referencing “wage-indexed” dollars is that they create the visual impression that benefits would shrink, and specifically would shrink relative to today’s benefit levels. If the goal is to inform rather than to simply influence the reader, this cannot easily be justified.

Just for fun, let’s see what kind of chart can be created by using “wage-indexed” dollars to measure annual growth in the cost of living. Doing so, we could produce a chart that looks like this:

Obviously, using “wage-indexed dollars” changes the perspective quite a bit, specifically in a way that makes it appear as though other key economic variables are shrinking. Has the cost of living actually been declining all these years? In “wage-indexed dollars”, it indeed has. But this chart doesn’t prove that prices have been declining; it only proves that we can think up a metric by which that seems to be the case.

You see the problem. To be of any use in the public discussion, Social Security analyses need to clearly convey what is happening. That means being clear on what will happen with the real level of benefits and taxes both under reform and under the status quo. The attacks on the Ryan plan fail this elementary criterion.  

Point #3: The depiction misleads as to who would be affected.

Beyond distorting the level of benefits, the attacks on the Ryan proposal also distort who would be affected. Here I will focus on just two ways.

One method is through the materials’ citations of dollar figures to accentuate the modest income levels of those who would supposedly see their benefits drastically “cut”. One chart (see Chart 2 at the link) purports to show a 28% benefit cut for a scaled medium earner (earning $43,100), born in 2015 (retiring in 2080).

One big problem with this is that $43,100 is the income level for today’s “scaled medium earner,” not the “scaled medium earner” retiring in 2080 who is supposedly being hit with the 28% cut. There is no 28% reduction facing anyone with an actual lifetime earnings of $43,100, at any date. The “scaled medium earner”($43,100) claiming benefits in 2010 would see no change to their scheduled benefits. The so-called “scaled medium earner” retiring in 2010 would actually be a $98,000 worker (in today’s dollars).

The way that the current benefit formula works is to try to maintain constant replacement rates for similarly situated workers (that is, workers at the same percentile of the wage distribution) over time – rather than constant replacement rates for a given wage. As a result, both benefit levels and replacement rates would be far higher for the $43,100 wage-earner retiring in 2080 than they are today, on the logic that a $43,100 wage-earner then would be further down the income spectrum. That is true under current law and it would be true under the Ryan proposal.

The bottom line is that no $43,100 worker, at any time, would see a 28% cut (by any definition) under the Ryan proposal – the misimpression left by the chart.

The other distortion is one that simply arises because of opacity in how these “career average earnings” patterns are calculated. $43,100 sounds like a person of very modest income, doesn’t it? Actually, due to the vagaries of Social Security calculations, that person is in the upper half of all workers. What about another illustrated example shown, the person earning $68,900? Believe it or not, that person is actually in the top 20% of all workers.

How can these seemingly-modest earnings levels be so high up in the income spectrum? Basically, it’s because the Social Security system sees workers as having lower incomes than most of us think of ourselves as having. The system averages your top 35 years of earnings, including your early low-earnings years. Moreover, most of us have more than a couple of “zero earnings years” dragging down the average. Plus, the system doesn’t keep track of any wage earnings above Social Security’s taxable wage cap (now $106,800). Put all these factors together, and some high-income people appear in the calculations as though they are of fairly modest means.

By exploiting this confusion, benefit changes in Social Security can be made to look like they apply to much poorer people than they actually would. Experts should, of course, help to explain this to the press so that no confusion is created. Unfortunately in the case of the Ryan proposal, press graphs showing purported cuts in benefits for those “earning $43,000” betray that there is a lot of confusion out there.

Point #4: The attacks contain misleading assertions about Social Security’s past and future.

Though not directly pertinent to the numerical analysis of the Ryan proposal, the attacks have also been careless with respect to basic Social Security facts, in a way that detracts from their overall credibility.

One release states that the Social Security Trust Funds “are projected to grow to over $4 trillion before being drawn down, as intended (italics added), to help finance the costs of the baby boom generation’s retirement.” Actually, the Social Security Trust Fund has not been saved either in fact (most studies have concluded that the surpluses credited to the fund fueled additional government consumption) or in intent (the Greenspan Commission did not intend to pre-fund the baby boomers’ retirements through a Trust Fund buildup). My own book goes into this history at some length, though there is ample additional public documentation of these facts.

The same release asserts that “the total cost of Social Security will increase by only 1.3 percentage points of Gross Domestic Product (GDP).” Technically yes, but misleading. This modest depiction of future growth is correct primarily because program costs have already soared greatly as a consequence of the recent recession. Total program costs by the 2030s will actually be about 1.8% of GDP higher than they were prior to the recession; the recession has just caused roughly ¼ of this rapid spending growth to hit us ahead of schedule. In any case, the idea that costs for the government’s largest program have yet to grow by a further 25% should hardly provide comfort in the context of current historic spending levels.

All in all, there has been a concerning level of distortion leveled at Congressman Ryan’s Social Security plan, and at the Social Security issue in general. If we are ever going to make progress in solving our critical national fiscal problems, we must elevate the quality of our national discussion.

Charles Blahous serves as one of the two public trustees for the Social Security and Medicare programs. He is also the author of Social Security: The Unfinished Work.