Charles Blahous

Charles Blahous

Charles Blahous is a research fellow at the Hoover Institution and was recently confirmed by the U.S. Senate to serve as one of the two public trustees for Social Security and Medicare. He previously served President George W. Bush as deputy director of the National Economic Council, where he coordinated policy over the full range of economic policy issues. Prior to that time, Blahous served as Executive Director of the President’s Commission to Strengthen Social Security, and as Special Assistant to the President for Economic Policy, with a focus on retirement income policy. Blahous’s two most recent books, Social Security: The Unfinished Work, and Pension Wise, are being published by Hoover Institution Press this year.

Amid the irresponsible bipartisan rush to extend the current Social Security payroll tax cut (and to shift Social Security to income-tax financing as an offsetting measure), two lonely voices, one on each side of the aisle, took a stand against the proposal.

On the Democratic side Senate freshman Joe Manchin summarized the issue succinctly: “Letting Americans believe that we don’t have to pay for Social Security is wrong.”

On the Republican side another Senate freshman, Mark Kirk, made the same point: “This is revenue that supports the benefits that Social Security recipients depend on. . . if you vote ‘no’ you are supporting Social Security.”

The two Senators have it exactly right. Social Security’s lifeblood is the payroll tax. If we cut it, only one of two things can happen: either the program goes insolvent earlier, or we have to find another revenue source. The proposal on the table is to fund the program instead with income taxes and other general government revenues. This would sever the program’s connection between worker contributions and benefits, ending the historical principle of Social Security as an earned benefit and turning it into something more akin to welfare.

Proponents of the new policy adopted last year have been pointing to outside analyses suggesting that unless the payroll tax cut is extended, the economy will slide into recession. Three points in response:

  1. This positive effect applies only to the payroll tax cut, not to the accompanying provision that would issue additional debt to the Social Security Trust Fund. That provision serves no stimulus purpose whatsoever; it’s an accounting maneuver whose only purpose is to enable politicians to pretend that Social Security is unaffected as its tax collections are reduced.
  2. These models will always show economic growth slowing at whatever point the payroll tax rate is restored to 12.4%. Are we therefore to conclude politicians should never again raise it from its current “temporary” 10.4% level? If so, then just last year we doubled the already perilously-large Social Security shortfall.
  3. We must stop heeding the prescriptions of those who urge the shortest of short-term views of economic policy. It’s true that widely-employed models will show a positive near-term stimulus effect of adding still further to our record levels of deficit-spending. But this in no way implies that it is sensible economic policy to do so, any more than it implies that an alcoholic should embark on another day of drinking because he will feel better in the near-term than if he begins to wean himself from his dependency. At some point the painful process of fiscal consolidation needs to begin, and it only harms our economy’s overall prospects to continue to compound the size of that problem.

Today e21 published my piece tracking how the Social Security issue is faring on the campaign trail this year.  Excerpts:

Election season is always a high-stakes time for Social Security policy, because how well the issue can be addressed in legislation is partly a function of developments during campaign season. Important variables include but are not limited to:

  1. How accurately the relevant facts are presented by aspiring candidates and by the press; 
  2. The policy positions taken by the candidates who receive the support of voters; 
  3. The flexibility retained by victorious candidates to participate constructively in negotiations over Social Security’s future without betraying their election mandates.

Below I’ll describe the good, the truly impressive, the bad, and the ugly from the current primary season (see the link for additional details).

First, the good. As a group the candidates have generally recognized Social Security’s challenges and have left open most policy options for dealing with them.

The truly impressive: Perhaps the most impressive thing that has emerged from the campaigns so far is that more than one has put forward specific proposals that would actually solve the shortfall. Specifically, these proposals would gradually change eligibility ages and slow the growth of benefits on the higher-income end. These policies could in fact do the job if sufficient numbers of future beneficiaries were at least somewhat affected.

The bad: Some promising reform proposals have been combined with other suggestions that would make repairing the shortfall more difficult. Others have focused too narrowly on personal accounts as the sole answer to Social Security’s problems. The candidates have also missed opportunities to criticize an obvious target: the current misguided policy of temporarily cutting payroll taxes as a stimulus measure, while financing Social Security instead with general revenues (income taxes).

The ugly: In every campaign season some statements miss the mark entirely, such as one from a recent debate wrongly implying that the main problem with Social Security is that politicians are reluctant to repay what has been deposited by workers into its Trust Fund.

Overall, though, the Social Security issue is holding up quite well during the primary season. The candidates have generally acknowledged the problem in a realistic way, some have even put forward specific credible solutions, and most relevant policy options have remained on the table. None of this guarantees that the positions taken by the candidates in the primary season will hold up equally well in the general election. But at least through November 2011, the prospect of responsible Social Security policy remains alive.

Read Charles Blahous’ full post…

On Sunday, October 29, the Washington Post published a front-page article by Lori Montgomery about Social Security. A number of commentators on the left criticized the Post’s portrayal of Social Security finances. The following Sunday, the Post’s Ombudsman posted a follow-up piece that defended the article in some respects. Unfortunately, while attempting to accommodate the viewpoints expressed by critics, the Ombudsman committed some factual errors that undercut the original article’s informational value.

At least two different issues involving the Trust Fund strike many commentators as important:

  1. The bonds in the Trust Fund embody real interest-earning assets of Social Security, and the program has full authority to pay benefits so long as the TF has a positive balance.
  2. A positive Trust Fund balance by itself doesn’t tell us how we will generate the economic resources to pay for Social Security benefits.

Both of these statements are true, but they represent different perspectives. Many of the Post’s critics were focused on issue #1, while the article focused primarily on issue #2. The argument was thus less about the facts, and more about which perspective is more important.

The Ombudsman’s piece unfortunately made a couple of factual errors, the most glaring of which was the assertion that Social Security “does not contribute to annual deficits.” This is incorrect. Social Security is adding approximately $151 billion to the total federal deficit in 2011. Whenever program costs exceed tax collections this adds to the deficit, and neither the Trust Fund’s interest income nor any other general revenue transfers change this. The non-partisan scorekeepers all agree on this.  (See the full article for references).

The Ombudsman’s piece also contained this mistaken passage about the Trust Fund:

The Social Security Administration bought these bonds from the Treasury during the years when the trust fund was intentionally building up a surplus of payroll tax receipts because the baby boomers hadn’t started to retire. The 1983 reforms to Social Security, agreed to by Democrats and President Reagan, designed it this way. It’s working precisely as planned. (Emphasis added).

This is a myth – a widely-believed myth, but a myth nevertheless. One especially good resource on this history available online is a 1997 Congressional Research Service report on the 1983 amendments:  (See the full article for other references).

Various misperceptions of their intent have developed over the years, among them being that Congress wanted to create surpluses to ‘advance fund’ the benefits of post World                     War II baby boomers. . . There is, however, little evidence to support the view that the surpluses were intended to pay for the baby boomers’ retirement.

When the reforms developed by the Greenspan Commission and Congress were scored, the balance of the Trust Fund was not even counted in the calculations. Future interest earnings of the Trust Fund were also ignored. There is simply no way to square 1983’s scorekeeping decisions with an intent to pre-fund the Boomers’ retirements by building up a large Trust Fund.

In sum, the Washington Post had printed an important story about Social Security finances, one generally consistent with the analyses of non-partisan scorekeepers. In response to complaints from outside parties, the Post’s Ombudsman published a follow-up piece that got some critical points wrong. That’s too bad. The public should know the salient facts of Social Security finances, even if they’re facts that not everyone chooses to emphasize.

Read the full post by Charles Blahous at e21… 

(photo credit: Trisha Shears)

HHS Secretary Kathleen Sebelius has announced that she is pulling the plug on the “CLASS Act”, a long-term care insurance program contained in the health care law pushed through Congress in 2010. Today E21 published my piece explaining why this undoes the fiscal argument originally made on behalf of the law.

The demise of CLASS reflects on three criticisms previously offered by opponents of the bill:

  1. The CLASS program was a gimmick employed to show a positive budget impact during the ten-year window (as its start-up revenues rolled in), though the program was widely acknowledged to be untenable.
  2. The larger health bill’s favorable ten-year budget score was misleading; it was created by postponing its most significant costs until 2014. The bill appeared to have a positive effect only because ten years of savings provisions were being netted against six years of new costs.
  3. The net favorable score resulted from offsetting certain new spending with uncertain future savings. In particular, critics questioned whether Congress would ever follow through with certain Medicare payment reductions.

The demise of CLASS substantiates the first criticism and makes the last more salient.  What many have missed is that the end of CLASS also proves the criticism concerning the timing of savings and expenditures to have been right.

Without the CLASS Act the bill’s total positive score from 2010-2019 would have been attributable entirely to the two years of 2013 and 2014 – notably, before its spending provisions had fully kicked in.  Health care reform would have been scored as a net budget positive in the first five years of the ten-year window and a net negative in the later five years – that is, when it was fully in effect. Advocates’ claims of a positive long-term impact would have hinged entirely upon unquantifiable savings claims in the second decade and beyond, and on a thin $8 billion (1% of the bill’s 10-yr cost) plus in 2019 alone — after a net minus in each of 2016-2018. Given the uncertainty of the long-term Medicare savings, none of these claims could have been considered reliable.

Updating, the law doesn’t look better now — it looks worse. Its projected positive impact without CLASS has been lowered and its projected negative impact over 2015-2019 has worsened.  CBO’s updated picture of the law turns rosier only when we bring 2020 and 2021 into the picture — and bring enormous projected Medicare cost reductions along with them. Unfortunately, this is precisely the point in time at which many experts, including Medicare’s own actuary, have expressed skepticism that such savings will be realized.

The inclusion of CLASS was central to advocates’ claims in 2010 that expanding federal health coverage would somehow improve rather than worsen the budget outlook. And had it not been for the CLASS gimmick, critics’ arguments about the other budget gimmicks used to pass the law would have been substantiated as well.

For the numbers, graphs and information that substantiate all of this, see the full article at e21.

This morning E21 published my latest piece explaining the euphemism of “supporting” education jobs:  http://www.economics21.org/commentary/supporting-400000-education-jobs-unsupported-claim.  Brief excerpts:

The White House has circulated materials asserting that the President’s proposed American Jobs Act (AJA) would “support” nearly 400,000 education jobs. Similar claims were made earlier in the Administration with respect to jobs “created or saved” by the 2009 stimulus package.  The terminology of “supporting” nearly 400,000 jobs, as it turns out, is even more problematic. It, too, reflects an assumption rather than a metric that can be objectively tested and verified. But the “support” metric contains a more glaring problem: it has nearly nothing to do with the policy that it advertises. It does not illuminate the policy’s efficacy, barely reflecting even on its content.

To start the process of estimating educator jobs at risk, the Administration refers to a June, 2011 paper quantifying recent and projected shortfalls in state budgets. The Administration then assumes that shortfalls would be filled by a combination of tax increases and spending reductions, with spending cuts applied proportionally across all categories including education. As the Administration materials state, “These spending reduction numbers were then converted into estimates of educator jobs at risk. . .” The Administration then points to $30 billion in spending in the proposed AJA, and asserts that this is “enough for states to avoid harmful layoffs” and to “rehire tens of thousands of teachers who lost their jobs over the past three years.” Putting these and other informational items together, the Administration concludes that the AJA would “support” nearly 400,000 jobs.

What is the problem with this chain of reasoning? There are several. First, the initial assumption made is that in the absence of these federal appropriations, states would make no effort to prioritize education spending relative to across-the-board budget cuts. But the biggest problem is that even if numbers of “jobs at risk” were correct, this would tell us nothing about the desirability of the Administration’s proposed policy response. The figures presented effectively describe a set of assumptions about state budgets; they carry no hard information about the efficacy of the AJA.  And so we are left with a number that draws no clear connection between the policy advocated and the results claimed.  For evaluating the relative merit of policy alternatives, this is not illuminating.

The previous effort to rationalize and quantify “jobs created or saved” caused enormous public confusion and created unnecessary controversy. Let’s hope that the even more nebulous concept of “supporting” jobs doesn’t create still more.

Read the full post from Charles Blahous…

As a former colleague of mine has astutely observed, sometimes the most consequential policy mistakes occur because everyone is looking the other way. The President’s latest “jobs” proposal to extend, and expand, cuts in the Social Security payroll tax is a good example. While nearly everyone has focused on the debatable efficacy of temporary payroll tax relief as a stimulus measure, few seem to have noticed the severe problems it could create for Social Security itself.

Specifically, the proposal would accelerate a process begun last December: transforming Social Security from what it long has been—a benefit earned by worker contributions—into an income tax based system more akin to welfare.

As a Social Security Trustee, I believe it is critical both lawmakers and the public have a greater understanding of this effect before the policy is advanced further.

The payroll tax is Social Security’s lifeblood. If it continues to be significantly cut, then only one of two things can happen:

Social Security’s insolvency is accelerated, or;

Social Security must be financed by general (read: income tax) revenues.

Continue reading Charles Blahous…

Today E21 published my piece explaining why unearthing 2001 quotes on the advantages of fiscal stimulus is highly misleading under current circumstances.

Excerpts:

Federal policy makers are currently battling multiple problems, including both unsustainable budget deficits and a stubbornly sluggish economy. Invoking our 2001 experience to argue for more stimulus, as many have done, fundamentally misreads our current circumstances. 2001 was a case study in when policy makers gravitate to fiscal stimulus, as shown below in some detail.

Tax Revenues and Spending: In FY2000, federal revenue collections equaled 20.6% of GDP, the highest since World War II. Revenues dipped slightly in FY2001 to 19.5% of GDP but were still higher than in any year from 1982-1997 inclusive. Spending levels in FY2000-01 were at 18.2%, the lowest since 1966.

Budget Balance: The FY2000 budget surplus was 2.4% of GDP, the largest in more than half a century. FY1998-FY2001 were each rare years of unified budget surplus.

Federal Debt: By the end of FY2001, publicly-held federal debt was 32.5% of GDP, the eighth straight year of decline, and the lowest level since 1982.

How do things compare now, in 2011?

Tax Revenues and Spending: Federal spending in FY2011 is scheduled to be 23.8% of GDP, as it was in FY2010. Along with 25.0% of GDP in FY2009 these are the three highest-spending years as a share of the economy since 1946. Never outside of a world war have we spent so much so fast. This spending well exceeds tax revenues, which are 15.3% of GDP.

Budget Balance: CBO estimates the FY2011 federal deficit at 8.5% of GDP. This follows deficits equal to 8.9% of GDP in FY2010 and 10.0% of GDP in FY2009.

Federal Debt: Debt held by the public is projected to be 67.3% of GDP by the end of FY2011, the highest since 1950 and the fourth straight year of increase. In CBO’s “current policy” (more realistic) projection baseline, this debt will escalate to uncontrollable levels in the upcoming years as the Baby Boomers swell the ranks of Social Security/Medicare beneficiaries.

Unlike 2001, this is not a moment when, flush with surplus cash, federal policy makers returned revenue to taxpayers to help head off a recession. Today we are instead already a full three years into a policy of uncontrolled deficit spending, the likes of which America has never seen before. The bottom line: it’s not 2001 anymore. As policy makers wrestle with our current multiple fiscal and economic challenges, we should avoid making false analogies between conditions in 2001 and those in evidence now.

See the full article here.

The President’s latest “jobs” proposal would extend and deepen cuts in the Social Security payroll tax. While as a conservative I generally prefer to see lower taxes, as a Social Security trustee I am deeply concerned that the troubling implications of this proposal have beenscarcely discussed. Instead the public debate has focused mostly on the efficacy (or lack thereof) of such temporary tax relief as a stimulus measure.

Before this legislation is seriously considered, there needs to be greater understanding that it would take a major step toward transforming Social Security from what it has long been — an earned benefit, funded by separate worker payroll taxes — into an income-tax based system more akin to welfare.

A former colleague of mine has astutely observed that sometimes the most consequential policy decisions happen simply because too few realize that they are being made. In 1983, for example, Social Security faced an immediate financing crisis, which legislation was said to resolve for decades to come. What the public wasn’t told, and which too few policy makers recognized at the time, was that the solution would produce enormous annual Social Security imbalances going forward – big surpluses in the near term, followed by even larger deficits in the long term. And so for decades after the 1983 reforms, mounting Social Security surpluses allowed elected officials to mask deficits elsewhere in the federal budget, without meaningfully amassing resources to pay for the looming costs of the Baby Boomers’ Social Security benefits. So here we sit in 2011, with Social Security still technically “solvent” but running an annual $150 billion deficit of tax income relative to costs, and holding $2.6 trillion of debt in its trust funds that the general government is hardly in position to redeem.

Continue reading Charles Blahous…

The 12-member budget “super-committee” established by the recent debt ceiling legislation faces a tall order: to get seven of its members to agree to $1.5 trillion in deficit reduction over the next 10 years.

The recent history of bipartisan negotiations has much to tell us about which tactical approaches might maximize the committee’s chances of success. It also has much to teach us about the substantive compromises that might be reached. In particular, we should not anticipate a bipartisan accord on tax policy in the absence of a binding commitment to a hard cap on total federal spending as a percentage of GDP.

The two sides start with different assumptions: Republicans don’t want to raise taxes, whereas Democrats believe taxes need to be raised. But where recent White House-led budget discussions collapsed over the tax issue, all three Senate Republicans on the Simpson-Bowles commission supported a plan containing sweeping changes to tax law. Why were the results so different?

Continue reading Charles Blahous…

(photo credit: American Sherpa)