CBO's New Estimates of Social Security Reform ProposalsJuly 23, 2004
The Congressional Budget Office (CBO) has released two new reports on the Kolbe-Stenholm Social Security reform plan: a 10-year budget estimate and a long-term analysis. CBO also released a long-term analysis of Plan #2 of President Bush's Social Security Commission.
Legislators are bombarded with politically motivated gibberish masquerading as analysis. CBO's new work sets a higher standard. As it improves over time, CBO's long-run estimates will help debunk some of the political nonsense and re-build Congress' analytic capability.
On Social Security reform, President Bush's leadership is fading. Republican leaders in Congress have also been mum. Most Congressional Democrats are more interested in scoring political points than offering constructive solutions.
It's ironic that while the political leadership for Social Security reform dissipates, improved analytic data and estimates are now becoming available.
The Social Security Administration's Office of the Actuary has done an excellent job showing the long-term costs of reform proposals.
Now CBO is joining the mix. The first examples of CBO's new work are on the Kolbe-Stenholm Social Security reform proposal (H.R. 3821) and Plan #2 from President Bush's Social Security Commission.
CBO's cost figures are familiar. Right now, Social Security revenues exceed benefit costs. But by the middle of the next decade, benefit costs will exceed revenues as the baby boom generation joins the Social Security rolls (see Figure 1).
Figure 1.
The gap between Social Security revenues and costs is the program's operating deficit. (Because revenues are currently higher than costs, the program is in surplus.)
However, CBO estimates that the Kolbe-Stenholm bill would virtually eliminate the Social Security deficit in the long run (see Figure 2). This pattern is almost identical to estimates from the Social Security actuaries.
Figure 2.
CBO shows two types of benefit estimates under current law:
1. Promised Benefits, and
2. Trust-Fund Financed Benefits.
Promised benefits are what the current Social Security entitlement says must be paid.
Financed benefits under current law are those that actually can be paid from scheduled Social Security revenues and the balances in the program's trust fund. (There are some economically dubious sources of Social Security revenues -- like interest paid by the general treasury -- but legally, all of Social Security's revenues "count" for the purpose of funding its benefits.)
Similarly, benefits under reform proposals are broken out into those funded by revenues and other tangible sources of funds, and those paid for by unfunded general revenue transfers.
By CBO's estimate, the Kolbe-Stenholm is fully funded -- its benefit payments are not dependent on unfunded general revenue transfers.
In general, the Kolbe-Stenholm proposal limits the "transition costs" of reform through several tax increases and benefit cuts. This reduces the need for unfunded general revenue transfers. By paying more of the cost up front, the Kolbe-Stenholm proposal allows many workers to receive improved benefits in the long run, despite the budgetary savings implicit in the bill.
CBO provides a rough estimate of the impact of Social Security reforms on workers with varying incomes. Table 1 below shows that when it is fully phased-in, the Kolbe-Stenholm bill would be more progressive than current law.
Table 1.
Future Social Security Benefits for Workers Born This Decade (2000-2009)
(in 2004 dollars)
| |
|
Current Law |
|
Current Law |
|
|
| |
|
Scheduled |
|
Trust-Fund Financed |
Kolbe- |
| |
|
Benefits |
|
Benefits |
|
Stenholm |
| |
|
|
|
|
|
|
| Low-Earnings |
13,000 |
|
9,800 |
|
15,700 |
| |
|
|
|
|
|
|
| Mid-Earnings |
26,400 |
|
19,900 |
|
20,700 |
| |
|
|
|
|
|
|
| High-Earnings |
37,600 |
|
28,400 |
|
25,700 |
Source: Centrists.Org based on Congressional Budget Office Long-Term Analysis of H.R. 3821, the Bipartisan Retirement Security Act of 2004 (Kolbe-Stenholm).
From a benefits point of view, the upside potential of personal account proposals like the Kolbe-Stenholm plan is high. For example, CBO estimates a range within which benefits might reasonably fall. The high-end of its range of uncertainty is that benefits in 2075 would be 75 percent above the "expected" estimates shown in Table 1. However, the "low-end" of the uncertainty range has benefits only 10 percent lower than the "expected" estimate.
CBO's long-term estimates of the President's Plan #2 are interesting, but because that proposal has been superceded by Senator Lindsey Graham's plan (S. 1878), they seem somewhat out-of-date. Graham's bill follows the general model of the President's proposal, but also contains several improvements. For example, benefits in the Graham bill are much more progressive, especially for workers with the lowest earnings.
The political climate in Washington is worse than ever. Bitter partisanship and divisive political tactics prevent a serious discussion of serious issues like Social Security. Hopefully, the new analysis by CBO and the Social Security Administration will help create an opening for policymakers who are interested in solving long-term problems, not just trashing the other party.
Links:
Congressional Budget Office Long-Term Analysis of Kolbe-Stenholm Social Security Reform Proposal, H.R. 3821 (July 21, 2004)
Congressional Budget Office Long-Term Analysis of President's Social Security Commission Plan #2 (July 21, 2004)
Congressional Budget Office 10-Year Budget Estimate of Kolbe-Stenholm Social Security Reform Proposal, H.R. 3821 (July 21, 2004)
Centrists.Org Testimony: Comparing Social Security Reform Proposals June 15, 2004)
Centrists.Org CBO vs. Trustees on Social Security: A New Model Tells A Similar Story (June 14, 2004)
The Kolbe-Stenholm Social Security Reform Plan (revised February 14, 2004)
Centrists.Org New Detailed Issue Summary: Social Security Reform
Congressional Budget Office The Outlook for Social Security (June 2004)
Social Security Administration, Office of the Actuary Memorandum Estimated OASDI Financial Effects of the "Bipartisan Retirement Security Act" proposed by Reps. Kolbe and Stenholm (February 11, 2004)
Centrists.Org A Preliminary Analysis of Sen. Graham's Social Security Proposal (revised December 14, 2004)
