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Alice Rivlin: "Now Is An Excellent Time To Fix Social Security And Medicare"

29 Jan 2009
Posted by Pete Davis

At lunch today, former CBO Director, OMB Director, and Fed Vice Chair Alice Rivlin spoke to a packed house at the National Economists Club in Washington, D.C.  A podcast of her remarks will be posted within the next few days.

Her most striking remarks were how forcefully she warned that we should undertake long-term deficit reduction measures now.  Without them we will face rising interest rates before the economy has enough time to recover as foreign purchasers of U.S. Treasury debt balk at buying a lot more of it.  She boldly asserted "Now is an excellent time to fix Social Security and Medicare."  She referred to how we fixed Social Security in 1983 as a model: extend the retirement age and index lower benefit growth for those under age 50 and raise the tax rate.  She added that we could save a lot of Medicare spending before we tackle health care reform by requiring competitive bidding on durable medical equipment and by allowing the Centers for Medicare & Medicaid Services to negotiate lower pharmaceutical prices.

Regarding the stimulus bill, she said stimulus of that size was necessary, but she had concerns about how well some of that money was going to be spent.  When asked how stimulative it would be, she defended its stimulative effects, particularly those amounts going directly to individuals through Food Stamps and tax cuts and to the states through the increase in the federal Medicaid match.

Focusing on the causes of the housing bubble and the subsequent crash of our financial markets and of the economy, Rivlin detailed numerous causes: too easy monetary policy; regulators failing to maintain credit standards; living beyond our means; and speculative fever.

Alan Greenspan got some harsh criticism from Rivlin for failing to heed Fed Governor Ned Gramlich's urging to rally regulators against lax home lending standards of state regulated banks.  However, in his defense, she explained it wasn't so obvious, except in retrospect, that interest rates were too low for too long following the 2001 recession.  Even the Fed's economic models fail when the current period differs too much from that of the historical data used to estimate the model.  It's hard to include factors like the breakdown of credit creation by non-banks.

One social commentary from Rivlin deserves note.  She charged that America's top business leaders have lost touch with reality.  "I know.  I serve on corporate boards with some of them.  They don't live in the same world we do."  By the time they realize they've made serious errors, it's too late, and everyone bears the consequences.

Rivlin predicted we will need a new revenue source to cope with our long-run deficit problem, a value-added tax.  I'm biased on this subject.  I formulated House Ways and Means Chair Al Ullman's VAT proposal in 1979.  There's no way to protect the poor and the elderly from such a tax, and it could become quite a money machine for a lot of government spending I would prefer to avoid.  Rivlin has promoted a VAT for a long time because it is a more efficient tax and because it would harmonize our trade with the rest of the world, almost all of which has a VAT.

Finally, Rivlin urged that we adopt policies to protect against the next speculative boom.  "It will come -- just in a different asset class."

 

Medicare: Problem SS: Not problem

Is Rivlin even looking at the SS projections? SS is on track to meet its obligations.

Yes claims against the SSTF are going to have to come from revenue elsewhere, but that was the flawed plan from the beginning. Reagan snookered the American public into cutting taxes for the wealthy and raising them for most workers with the last SS fix. What were people back then thinking?

Collecting more payroll taxes is regressive. It is used to offset taxes that should be paid by the wealthy who can afford it. SS seems to be the easiest path to regressive tax increases.

Why increase retirement age? Why not instead increase taxes on SS benefits paid to high income earners (which goes back into the SSTF)? That way SS performs a true INSURANCE function. You don't need this huge trust fund (slush fund for high end tax cuts). People who desperately need SS money to retire will get it. People who are well to do, receive less benefit (because of taxes) but the full insurance kicks in if they get an economic jolt (like a disease that wipes out your savings). Having good SS INSURANCE means that money that otherwise must be squirreled away in low return safe investments could instead be invested more productively.


Bakho, You suggest

Bakho,

You suggest "increas[ing] taxes on SS benefits paid to high income earners (which goes back into the SSTF)...People who are well to do, receive less benefit (because of taxes) but the full insurance kicks in if they get an economic jolt (like a disease that wipes out your savings)." That is essentially the same as means-testing SS benefits (based on income and/or assets) in the first place, right? So you are on board with means testing SS, right?


Time to Liberalize SS

Surely this is the time to lower the age for SS benefits and to make the benefits more generous. Fewer and fewer people have private pensions, 401K plans are being hit hard, massive lay-offs will leave older workers especially vulnerable.
How to pay for it? Make the SS tax payable on all wage income and add a surtax on all bonus and investment income (on a sliding scale, starting at say, 98% on over $500,000 and going down from there).


Not means testing

It's INSURANCE!!!!! People still get insurance payments when they need it. No need to means test. Just another way for people to pay into the system. High income earners already get the benefit of the cap. SS taxation collects more revenue at the time it is needed from those who don't need it. It is a better model than collecting money in advance from lower income earners in order to give tax breaks to the wealthy today.

Revenue to pay back the SSTF is going to have to come from the wealthy in the future anyway.


Bakho, What you are proposing

Bakho,

What you are proposing (higher taxation of SS benefits received by wealthier and/or higher-income seniors, with the tax revenue replenishing the SSTF or going directly to SS benefits) has the same effect as would simply means testing (lowering the SS benefits sent to those seniors upfront), right?

So why would you propose the former and oppose the latter? I realize that "means testing" is a term that some partisans don't want to touch, but that is not a rational reason for opposing it when one favors -- as you do -- doing the same thing via a different (and more complicated) process. So again, how do you account for proposing one and opposing the other?


Means Testing vs Taxing

Means Testing implies another set of forms to fill.
Taxing SS means using an existing way to do it.
But if you want your bogeyman, call it what you will; administratively a Tax is easier to collect than means testing


heh, If I want my

heh, If I want my bogeyman??

Look, I don't know your perspective, but the very reason I asked the question of Bakho is because some hyperpartisans absolutely refuse to stray from the talking points of their "side", and one of those talking points (among hyperpartisans of the left generally and of absolutists on SS in particular) is "No means testing" (usually without any rational thought regarding the trade-offs implied by their position, despite my urging that they apply such thought http://swordscrossed.org/node/2192 ). I don't recall from past blog threads whether or not Bakho seems to be such a person, but when I saw his advocacy of essentially the equivalent of means testing for SS, I wanted to see if he'd go ahead and admit that he would favor means testing (or give me a good explanation for the discrepancy), or if he'd stubbonly refuse to embrace the taboo term (among one side's hyperpartisans) for essentially the same policy he was advocating.

I must say I wish you hadn't interjected. I hope Bakho doesn't use your "another set of forms" to provide some pretense of a real response.

I would ask you, though, the following: If the means testing could be accomplished without "another set of forms" or via some negligible amount of administrative time on both ends, would you favor means testing to about the same extent that you'd favor higher taxation of SS benefits?


Means Testing vs Taxing

Means Testing implies another set of forms to fill.
Taxing SS means using an existing way to do it.
But if you want your bogeyman, call it what you will; administratively a Tax is easier to collect than means testing


Increase the incentive to save for retirement?

At a time like this? Sounds backwards to me.


Tax Brackets

Means testing is an investigative process.

People with higher incomes pay taxes at a higher rate on all sorts of income. We don't call it "means testing". We call it tax brackets.

The way to fix SS problems (if there are any problems) should not include denying benefits to the very people who need them the most.


Bakho, First of all, if

Bakho,

First of all, if possible, try to learn to use the "Reply" function.

As for your reply, you are all over the road.

You write:
The way to fix SS problems (if there are any problems) should not include denying benefits to the very people who need them the most.

What the heck are you talking about? We are both speaking of people of means (wealth and/or income), are we not? Whether we are speaking of means testing of SS benefits or of higher taxation of SS benefits -- which amount to the same thing from the standpoint of Social Security benefits received and Social Security funding -- neither of us is talking about "the very people who need them most". So, well, huh???

Second, you seem to be dancing around to avoid giving a straight answer to a simple, straightforward question: If you favor a policy under which Joe Smith would get, say (just to pick some round numbers), a $2,000 monthly benefit taxed at 50% due to his income level, leaving him a net benefit of (i.e., a SS check in the amount of) $1,000, why would you oppose means testing that was structured to simply lower his benefit (his check) to $1,000 upfront? (granted, there is a potential timing issue -- the period of income that serves as the basis, and the float, the latter of which could be adjusted for -- but let's leave that aside for the moment, since I don't think that's the source of your objection) Seems to me you just don't want to use the words "means testing" even though you are advocating a policy that would have essentially the same effect all around. If that's not what's going on here, please explain.


Denying benefits

Raising the age to collect benefits, reducing benefits across the board, etc can all have the effect of reducing benefits to those who really need them. This is neither wise nor necessary. Having the poor workers of tomorrow subsidize Bill Gates retirement is not a good use of SS funds.

Means testing would require that people would have to apply for SS every year based on income. It is bad enough that Medicare D requires people with Alzheimers, senile dementia, blindness, deafness and other disabilities to navigate the treacherous waters of flim flam artists and bogus insurance products to get prescription drug coverage. Means testing would expand the bureaucracy and paperwork unnecessarily. It would impose significant overhead costs on the system. There is also the timing mechanism that is far more important than you let on.

Means testing would be done in advance of payments. If benefits were reduced at the beginning of a year because of means testing, and the person was hit with huge hospital bills one month later, they might need the SS right away but not be able to get it without a long delay. Formerly wealthy people who might be denied access to SS benefits by means testing, would not have that problem under the taxation method.

Taxation (SS for high income earners is currently taxed with the revenue going back into the SSTF) is a way of maintaining the size of the insurance fund and paying out claims in a very timely manner. The overhead costs to the current mechanism are relatively low and it does not increase the size of the bureaucracy.

You act like I am suggesting something new and different. I am not. I am only pointing out that one way to deal with future SS shortfall with elderly boomers comprising a larger percentage of the population is to increase taxes on SS benefits of high income earners. Taxing future SS payments to high earners is far better than taking our tax money now in a very regressive fashion, to put into the general fund (separated by accounting tricks) so that the wealthy can be let off the hook now for their fair share of the tax burden. It is more fair. The original 1980s Greenspan plan was a massive shift in the tax burden from the wealthy to the lower wage earners. To double down on that mistake by increasing regressive taxation in order to build up the SSTF today would be bad policy. There are better options.


Bakho -- your retroactive means testing is ok with me

Bakho,

Raising the age to collect benefits, reducing benefits across the board, etc can all have the effect of reducing benefits to those who really need them. This is neither wise nor necessary.

I don’t know why you keep bringing up that point. We are speaking of means testing or higher taxation of SS benefits received by wealthy/high-income seniors, neither of which involve “those who really need them”.

But since you bring it up, you cannot rationally say that such measures (raising the eligibility age or reducing benefits across the board) are “neither wise nor necessary” unless and until you have a sense of what the trade-offs of foregoing such measures would be:
- less spending on some other programs (Medicare?),

and/or

- higher taxes (broad-based or just on “the rich” even if tax rates start getting so high that they severly impede economic growth – and thus jobs – and produce much less incremental revenue per dollar calculated via static analysis),

and/or

- higher debt (which ultimately means less spending and/or higher taxes).
For elaboration on the above, see http://swordscrossed.org/node/2192

Having the poor workers of tomorrow subsidize Bill Gates retirement is not a good use of SS funds.

I agree. That’s why I favor means testing, whether directly or via the indirect, back-door, retroactive means that you prefer (and which may indeed be better for reasons you’ve mentioned and to which I alluded to when I mentioned the “timing issue” – and I’m perfectly ok with that approach, using taxation to get the money back rather than not sending it in the first place). But do you realize that what you are advocating is, in effect, means testing, albeit retroactive? By using higher taxation of SS benefits provided to wealthy/high-income seniors rather than reduction/elimination of benefits upfront, the policy you are advocating tells these seniors essentially “It turns out you didn’t need that benefit (enough to justify the taxpayer expense), so you have to return part or all of it to the taxpayers, because if we knew then what we know now about what your wealth/income was going to be last year, we wouldn’t have sent you that cash in the first place.” I just find it to be a sad reminder of today’s pervasive hyperpartisanship and related talking points when I see someone advocating higher taxation of SS benefits who is also adamantly opposed to means testing, even though, other than the timing issue and perhaps some additional paperwork, they are essentially the same conceptually. Again, the timing issue may be quite real – it may indeed be preferable to provide the benefits up front and take them back after the high income/high wealth year rather than to do reduce/deny benefits based on the individual’s prior year financials – but I have the feeling that the refusal of some folks to get anywhere near touching the words “means testing” while being eager to utter words such as “higher taxes on the rich” has much more to do with hyperpartisan talking points than to the aforementioned timing issues. (I don’t know if that’s where you’re coming from or not.)

Means testing would require that people would have to apply for SS every year based on income.

Why? If eligibility is based on income, couldn’t that be determined automatically (or with minimal additional steps) from tax returns?

Means testing would expand the bureaucracy and paperwork unnecessarily. It would impose significant overhead costs on the system.

Well, although I assume you’re contrasting means testing upfront vs. higher taxation of benefits (essentially retroactive means testing), but just for the sake of others, if we are comparing means testing to no means testing at all (neither upfront nor retroactive via higher taxation of benefits), I assume the savings to the taxpayers would far exceed the administrative costs. Now, as for upfront means testing vs. higher taxation of benefits, your probably right that the former would require some additional administrative cost, although I don’t know if such costs would necessarily be significant (could very well be less than the money saved via the float if the government keeps the money in the first place).

There is also the timing mechanism that is far more important than you let on. Means testing would be done in advance of payments. If benefits were reduced at the beginning of a year because of means testing, and the person was hit with huge hospital bills one month later, they might need the SS right away but not be able to get it without a long delay. Formerly wealthy people who might be denied access to SS benefits by means testing, would not have that problem under the taxation method.

I don’t belittle the timing issue. It’s a legitimate consideration, per your argument. I mentioned it in an earlier comment, but set it aside only because, as I explained, I don’t think that that is the real objection to means testing on the part of hyperpartisan Social Security absolutists.

You act like I am suggesting something new and different.

I don’t know why you have that impression. And again, I don't object to your suggestion. Either upfront means testing or the retroactive approach to means testing (via taxation) that you advocate would be good policy.

To double down on that mistake by increasing regressive taxation in order to build up the SSTF today would be bad policy. There are better options.

Again, you are reverting back to a policy choice that you and I have not been discussing. We are both talking about denying SS benefits to wealthy/high-income seniors. You oppose upfront means testing, but advocate retroactive means testing (getting the money back from those who, it turned out, didn’t need it). I’m ok with either.




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