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Rep. Tim Penny on Strengthening Social Security

The Cascade Policy Institute organized a dinner event May 19th featuring a speech by former Representative Tim Penny (D-MN 1982-1994) on the subject of Social Security reform. Rep. Penny was also a member of the 1983 Greenspan Commission.

Rep. Penny was a member of the 2001 bipartisan President's Commission to Strengthen Social Security.

We were fortunate to have him in Portland; he was asked to join Treasury Secretary Snow at a different event but chose to do this instead. You may recall that Secretary Snow was in Portland in late March. I attended Sec. Snow's event as a member of the media, and Rep. Penny's event as a regular paying attendee (there was no media).

This was, by far, the better of the two events. In addition to a friendlier environment (food, chairs, no Secret Service agents) the speech was more informative. Even better, Rep. Penny was direct and generous about answering questions. Sec. Snow fled after my first question, but Rep. Penny indulged me for several.

A politician who answers questions instead of evading them? I wouldn't believe it but for experiencing it firsthand. :)

Rep. Penny's speech was fairly long, so I'll make no attempt to summarize it. Instead I'll mention and paraphrase the things I thought were most interesting.

Social Security was originally a very modest program, meant to insure people against poverty in old age. It wasn't a full-fledged retirement program. Taxes were only 2%, and only on the first $3,000 of income. Survivor's and disability payments were added many years later.

There were often "bidding wars" between the political parties over how much to increase Social Security benefits. In one year (1972) benefits were increased by 20%! Cost of living adjustments were actually meant to save money by regularizing benefit increases instead of going through bidding wars with each party trying to outspend the other to buy votes.

Social Security has worked, as measured by its original goals. It has lifted the elderly out of poverty. However, 20% of the elderly rely on Social Security as their only source of income, and two-thirds of the elderly get at least half of their income from Social Security. Without Social Security, about half of the elderly would be in poverty — with it, the figure is only 10%. (I look at these figures with a skeptical eye. People would save more if they knew Social Security didn't exist, and they'd also have more available to save if they didn't have to pay the 12.4% payroll tax. Social Security encourages people to be dependent on it.)

UPDATE 2005-05-23 05:29:00 UTC: Doug writes, and I agree with his point:

I do my parents' taxes, and I know they would be part of the two-thirds who get at least half of their income from SS. So what? The other part of their income is withdrawals from their IRA. They could withdraw more, but they don't, because if they did they would have to pay taxes on it. And they get by just fine with the money they have. Isn't the point of retirement that you are no longer earning an income? If so, how can the government (not) classify a retired person as being in poverty, where poverty is a measurment of income? By definition, shouldn't all retired people be 'living in poverty'?

The survivor's and disability components of Social Security can be thought of as insurable events, but the retirement component is different because nearly everyone knows it's going to happen to them. People don't think about Social Security as an insurance system anymore because we've been told for 70 years that it's a retirement system.

In 1935, when the program was enacted, the retirement age was 65 but life expectancy was just above 60. Today the retirement age is rising to 67 but live expectancy is about 80, so people are drawing benefits for much longer than they used to.

When the program was started, the maximum tax was only $60/yr. Adjusting that for inflation gives us about $900 in current dollars. But the maximum tax today is over $11,000, and about $8,000 of that goes toward the retirement portion of the system. The point of this is that the program has become dramatically more expensive over time, even adjusting for inflation.

People don't save enough. Only 25% of people aged 45 to 54 have created IRAs, and for those who have, the average balance is only $13,000. (I place significant blame for low savings on the punishingly high tax rates. People would have more to save if they were taxed less.)

Rep. Penny argues that personal accounts do help the system's solvency, when it's viewed from the perspective of the system's goal as a safety net. Personal accounts reduce the amount of safety net required.

He criticized the argument that private accounts are too risky. Guaranteed benefits are already scheduled to be cut by ~30% when the trust fund is exhausted, and this assumes the government finds a way to pay off the trust fund debt. Those things should be considered risks too.

He prefers personal accounts as a carve-out, not an add-on, to the current system. This is because poor people (due to high taxes — <ahem>) would be unable to contribute an an add-on account.

In his summary, he noted that if we started over it's unlikely that we'd create a program like the Social Security system we have today. We'd create a pre-funded rather than a pay-as-you-go system.

Interesting by omission was discussion of the Social Security trust fund. Rep. Penny only briefly discussed its funny nature as an accounting entity with no backing assets. (I've written about it if that issue interests you.)

The first audience question was about financial projections. One part was fear about using too-pessimistic projections, and the other was the argument that the Bush tax cuts were the size of the shortfall. Rep. Penny said that while there is some disagreement in the projections, they agree on the fundamentals and are not created by biased organizations. We make the best forecast we can, and err on the side of caution. I don't remember him answering the part about the Bush tax cuts, but I'd answer it by saying that Social Security is and has always been (on paper) separately funded from the rest of the government. The shortfall is between Social Security revenues and benefits, so it's a Social Security problem, and there'd still be a Social Security problem even if other federal revenues hugely increased because those other revenues aren't part of Social Security.

The second audience question was my own. I observed that young people are the ones most affected by Social Security reform, and asked if he's getting enough feedback from young people, and what the best way is to be heard. He replied that there's hardly any involvement from young people, but did mention a campus group (I think he means this one). He complained that large special interest groups are effective at shutting out the young by monopolizing the attention of lawmakers. He would rather see the AARP, for example, be taken much less seriously on this issue because none of the proposals being worked on will change Social Security at all for the retired or those near retirement. (I was hoping he'd say something like, "please have yourself and your friends contact my office, here's my number, we value your input, yes yours personally." Oh well.)

The fifth audience question (sorry I'm skipping 3, 4, and 6, but it's nearing midnight and I need to get this finished or it won't get posted until the weekend…) was from a person who has several children in their 20s who won't invest in IRAs because they believe Social Security is the answer. He believes it's the problem, not the answer. Rep. Penny responded that people expect Social Security to do more than it can really do. It's unfortunate that the tax incentives for IRAs aren't sufficient to induce more people to save, and added that little can be done to make IRAs more generous from a tax perspective than they already are. (This line of questioning doesn't bother me at all, because the people not saving are in their 20s. I don't believe people need to save for retirement their whole lives, particularly when they're young and are more likely to have high-interest debt. Rather, I argue that high taxes drive young people into high-interest debt, hurting them doubly by taking their money and also by the resulting interest they have to pay.)

After the event was adjourned, Rep. Penny stuck around to talk to people and answered two more of my questions. I explained that my primary concern about personal accounts is the risk that they could become a vehicle for government to influence business. Perhaps by the selection of which funds people are allowed to invest in, or by pressure on the fund managers to vote company shares in politically correct ways. I told him that I'd prefer the shares owned on behalf of personal accounts be made non-voting. I didn't think Rep. Penny had a very good response to my concern, but he did say that the fund managers would be people from the private sector rather than from the government. I was encouraged by the possibility of opening up the personal account to a wider variety of investments once the balance had grown to a certain level. Overall, I'm still not comfortable with the possibility of personal accounts moving us unintentionally toward greater government control of the economy.

I also asked him about the possibility of individual opt-out from Social Security. He believes there aren't enough people who want individual opt-out for it to be politically viable, and in any case that the "safety net" argument would win. I would still be pleased with the improvement if we could go to a "mostly opt-out" system where I paid benefits commensurate with some minimal level of benefits (around the poverty level). This would preserve Social Security as a safety net, although I don't understand why the program called "welfare" isn't more appropriate for this purpose.

I'm extremely grateful to get a thoughtful and serious reply to my question about individual opt-out. I won't give up on it personally until I see a poll showing that my desire for opt-out is significantly out of step with the thoughts of most other young people. And I hope that even the act of polling about it would raise awareness and support. I think many young people haven't even considered it as a possibility.

I estimate there were 85 people at the dinner. I didn't speak with very many people prior to the speech, but one gave me his business card so I'll give him a plug. Andrew Svitek is an attorney who very recently opened an office in Portland. He practices in business, real estate, estate planning, and consumer law. He does have a website.

I told myself "no lawyer jokes", but it's awfully tempting to parse that as "(no lawyer) jokes" instead of "no (lawyer jokes)". I'd better quit before I succumb to the temptation…

Tiny Island