Interview with Charles Blahous-part 2

Part 2 of my interview with Charles Blahous focusing on Social Security. Here is Part 1.

Charles Blahous, one of the two public trustees for Social Security & Medicare, is a research fellow at the Hoover Institution, and was the Deputy Director for the National Economic council from 2007-09, and served as a Special Assistant to the President for economic issues from 2001-07. He is the author of Social Security: The Unfinished Work (2010: Hoover Institution).

Below are the questions I submitted to Dr. Blahous, along with his answers.

  • What is the problem(s) facing Social Security?

In a nutshell, it’s program costs that rise faster than the underlying tax base. And that in turn is driven by the increasing numbers of beneficiaries, the increasing number of years that they draw benefits, the decline in the ratio of workers to collectors, and the rise in per-capita benefit levels resulting from various program amendments over the years.  All of this is manifested in annual program cash deficits that began last year and which will rise dramatically under current law through the 2030s.  The other main problem I see in Social Security is the collapse of the previous bipartisan consensus as to what constitutes sound program financing.  The last time we fixed Social Security in 1983, there was a shared bipartisan understanding that the resources to pay benefits came from incoming worker tax contributions. There was indeed a Trust Fund then, but its assets weren’t counted when the trustees calculated the program’s actuarial balance, because no one seriously considered the Trust Fund as a viable means of covering for tax shortfalls for extended periods of time.  But now you have many people who point to the Trust Fund as the reason why we don’t need to fix anything until it technically runs out in 2036.  It would be nice if life were that simple, but it’s not.  If it were, all we’d need to do would be to issue more bonds to the Trust Fund and call it a day.  But the Trust Fund simply represents the program’s claim on future economic resources; it doesn’t answer the far more important question of what resources we are going to tap to pay those benefits.  I write a lot about this in my book, Social Security: The Unfinished Work.  We really have two problems in Social Security: we have a substantive problem — how do we finance the benefits of the baby boomers — which completely dwarfs the problem faced in the last Social Security crisis of 1983.  But we have an additional political problem, which is that our large Trust Fund on paper makes the problem appear, at least to some eyes, less urgent.  When you have a bigger problem to solve but a lesser sense of urgency about solving it, that’s a prescription for trouble.

  • What is the Social Security Trust Fund?

Mechanically, it consists of special-issue Treasury bonds.  Whenever Social Security runs a surplus, the surplus is used to finance current federal spending, and in return for the money the General Fund issues bonds to Social Security.  Those bonds earn interest at market Treasury bond rates.  They can be called in when needed to pay benefits.  In sum, the Trust Fund represents Social Security’s authority and financing source for benefit payments whenever incoming tax revenue falls short of benefit obligations.  That authority is limited by the size of the past surpluses Social Security has run, times interest.  Last year in 2010, Social Security tax revenue began to fall short of its benefit payment obligations.  But it could still send out the full benefit checks because there was a positive balance in the Trust Fund.  The Trust Fund really tells you just one thing; how long you can keep sending out the checks. It doesn’t tell you whether existing benefit schedules are equitable, whether existing tax schedules are equitable, where the resources will come from to finance benefit payments, nor when the projected shortfall has grown larger than the political system is still willing to solve.  There’s a tendency to read more information into the Trust Fund balance than is actually there.

  • It looks to me from the Social Security Trustees’ Report that the disability portion of the Social Security program faces an earlier date at which benefits must equal taxes received. Do I have this right, or can monies from OASI (Old Age Survivor Income) cross subsidize the DI (Disability) program?

You have it right.  Legislation could be enacted to reallocate revenues from OASI to DI, but that requires action by Congress.  DI would be insolvent by 2018 under current projections.

  • Are there any technical questions that need to be answered to enable Social Security reform, or are all the questions simply political in nature?

Per my answer on the Social Security Trust Fund, I believe there are a lot of important technical questions.  Sometimes there’s too much of an attitude of, “Hey, this is a relatively easy problem to solve,” without fully recognizing that some of the consensus has broken down on what solving the problem really means.  Do we want first of all to “solve the problem” for 50 years, for 75 years, for 100 years, or so that the central tendency of projections is indefinite sustainability?  After the 1983 reforms, we had a host of bipartisan technical panels and advisory boards come forward to say, in effect:  “It’s not enough just to have a non-zero trust fund if program operations are swinging wildly from large surpluses to even larger deficits, so make sure you’re ultimately on a path of annual balance.”  But increasingly you have some policy advocates just ignoring that standard because they don’t want to meet it.  The Simpson-Bowles commission, rightly in my view, produced a plan that met both standards of maintaining the trust fund and ultimately reaching annual cash balances.  If you don’t observe both, you allow for solutions that are really based on nothing more than budget gimmicks.  So, yes, we need to nail down agreement on those technical questions first.


The Interview concludes tomorrow with Medicare.

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