Wednesday, April 27, 2005

Senate Finance Committee hearings on Social Security

Yesterday's Senate Finance Committee hearings on Social Security, the presentations from which are available here, had several interesting features. One was the hearing title, "Proposals To Achieve Sustainable Solvency, With and Without Personal Accounts."
The focus, in other words, is on the fiscal problem, not the Bush plan. "Sustainable solvency," by the way, is a phrase associated with the Diamond-Orszag (relatively Democratic-style) plan to restore Social Security's long-term solvency through a mix of tax increases and benefit cuts. It relates to the battle between 75-year and infinite horizon perspectives. As I have noted before, a 75-year fiscal perspective is inadequate since the out years predictably turn bad based on expected demographic trends, with the consequence that if we fixed the problem just for 75 years and there were absolutely no surprises in the next couple of decades, we would nonetheless face the financing problem all over again as soon as enough of the out years had moved inside the 75 year window. Diamond and Orszag propose 75-year sustainable solvency, i.e., at the 75 year point things are in good shape looking past a bit, and although this is less conceptually pure than the infinite horizon (which avoids arbitrary jumps in one's discount rate for the future as one moves from inside to outside the budget window), it is really good enough, for all practical purposes, if done right.
Senator Grassley, the Senate Finance Committee chair, is making it as clear as he possibly can that, as per the hearing title, the aim behind legislation he might report out is to address the fiscal gap, not to push the Bush plan.
Democrats have two reasons not to go along with this, however, one a bit crass but the other involving sensible prudence. The crass one is that they are hammering the Republicans to death on Social Security right now, so why help them out of the hole by choosing this moment for unpopular bipartisan compromise after all that the Bush-DeLay-Frist forces have been doing for years on everything else? The prudent reason for non-cooperation is that, no matter what Grassley says or indeed means, he absolutely cannot make any credible guarantee that, no matter what bill leaves the Committee and passes the Senate, it will not be amended in conference to be a pure Bush Social Security phase-out plan and nothing else. You reap what you sow, and the Republicans need a complete change in leadership before they can credibly offer good-faith compromise deals to the Democrats.
As for the hearing itself, four speakers. Michael Tanner of Cato and Peter Ferrara, formerly of Cato, simply offered the usual privatization line. Ferrara seems to think there is a free lunch via higher stock market returns, leaving aside risk, and ignoring the point that markets must be flawed, not working well as he generally tends to believe, if borrowing to hold stock (a net position that the financial markets value at zero) is actually a money machine. Tanner rightly points out that there really is a Social Security fiscal problem, whether one calls it a "crisis" or not, but condemns the current system as a one-size-fits-all cookie cutter approach to forced saving. The problem with this view, as noted by Peter Orszag in his remarks, is that anyone in his or her right mind would want a relatively secure fixed real life annuity as the bottom rung, in effect, of his or her retirement saving. The rest of one's saving, if one has the ability and the sense to save more, is where different risk-return preferences, betting preferences on the performance of different instruments, etc., have a reasonable place.
Speaker # 3 was Robert Pozen of MFS Investment Management, who has been involved in Social Security reform planning for some time. I am willing to give him two cents or so of credit for offering an idea that purports at least to increase Social Security progressivity in a manner that the Administration apparently finds acceptable. This is to continue indexing benefits to rising wage levels among low-earner beneficiaries, but gradually shift to mere price indexing (i.e., for inflation not real wage growth) as one moves up the scale towards the top. Pozen calls his proposal "progressive indexing."
The way Pozen proposes to do it has serious flaws, some of which Peter Orszag addresses in his role as Speaker # 4. For example, it hits the middle more than one might think from Pozen's description, and if done with Bush privatization endangers actual repayment of the effective loans to high earners. It also has the odd feature of cutting benefits more (relative to the current baseline) if our economy does better than expected, the contrary of what one might think makes sense. To be sure, measuring cuts relative to today's baseline is a dumb perspective, unduly privileging current law, unless one agrees that wage indexing actually makes sense. But I would say it does (in the sense that a stable, fiscally sound, and optimal program would have it), as illustrated by the considerations that (a) with just price indexing the value of retirement benefits in effect heads to zero, relative to the size of the economy, over the infinite horizon, and (b) if we think of Social Security as requiring a minimum level of forced retirement saving, on the ground that any less is likely to be irrational, we might want to think in terms of replacing some decent percentage of one's salary level just before retirement, albeit self-financed by the worker if we have no reason to make a net lifetime transfer to her through Social Security.
So I probably wouldn't include progressive indexing, even modified from the Pozen version, in my preferred Social Security fix. But, properly redesigned, it shouldn't be ruled out as part of a bipartisan compromise package down the road if Republicans find it easier to swallow than other progressive benefit adjustments.
Orszag's remarks, although in some respects I might nitpick or quibble with them, are so much more sophisticated than anything else that is being said prominently about Social Security that, as Brad DeLong puts it, "in a good world, [he] would be in the White House running Social Security reform." Compare, for example, Gregory Mankiw, loyally bleating on about the importance of "choice" in a setting where its relevance is much less than would usually be the case, and you would think Orszag had at least 50 more IQ points and a much better post-graduate education if you didn't give Mankiw credit for having to toe the Administration line (and possibly doing the nation some good by staying there, if he has helped influence the Bush Administration towards greater candor, such as in the decision to admit that private accounts are not a free lunch).

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Want you to pay for credit repair services before any services are provided;
Do not tell you your legal rights and what you can do-yourself-for free;
Recommend that you not contact a credit bureau directly;
Suggest that you try to invent a "new" credit report by applying for an Employer Identification Number to use instead of your Social Security Number; or
Advise you to dispute all information in your credit report or take any action that seems illegal, such as creating a new credit identity. If you follow illegal advice and commit fraud, you may be subject to prosecution.
You could be charged and prosecuted for mail or wire fraud if you use the mail or telephone to apply for credit and provide false information. It's a federal crime to make false statements on a loan or credit application, to misrepresent your Social Security Number, and to obtain an Employer Identification Number from the Internal Revenue Service under false pretenses.

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No one can legally remove accurate and timely negative information from a credit report. But the law does allow you to request a reinvestigation of information in your file that you dispute as inaccurate or incomplete. There is no charge for this. Everything a credit repair clinic can do for you legally, you can do for yourself at little or no cost. According to the Fair Credit Reporting Act:

You are entitled to a free copy of your credit report if you've been denied credit, insurance or employment within the last 60 days. If your application for credit, insurance, or employment is denied because of information supplied by a credit bureau, the company you applied to must provide you with that credit bureau's name, address, and telephone number.
You can dispute mistakes or outdated items for free. Ask the credit reporting agency for a dispute form or submit your dispute in writing, along with any supporting documentation. Do not send them original documents.
Clearly identify each item in your report that you dispute, explain why you dispute the information, and request a reinvestigation. If the new investigation reveals an error, you may ask that a corrected version of the report be sent to anyone who received your report within the past six months. Job applicants can have corrected reports sent to anyone who received a report for employment purposes during the past two years.

When the reinvestigation is complete, the credit bureau must give you the written results and a free copy of your report if the dispute results in a change. If an item is changed or removed, the credit bureau cannot put the disputed information back in your file unless the information provider verifies its accuracy and completeness, and the credit bureau gives you a written notice that includes the name, address, and phone number of the provider.

You also should tell the creditor or other information provider in writing that you dispute an item. Many providers specify an address for disputes. If the provider then reports the item to any credit bureau, it must include a notice of your dispute. In addition, if you are correct-that is, if the information is inaccurate-the information provider may not use it again.

If the reinvestigation does not resolve your dispute, have the credit bureau include your version of the dispute in your file and in future reports. Remember, there is no charge for a reinvestigation.

Reporting Negative Information
Accurate negative information generally can be reported for seven years, but there are exceptions:

Bankruptcy information can be reported for 10 years;
Information reported because of an application for a job with a salary of more than $75,000 has no time limitation;
Information reported because of an application for more than $150,000 worth of credit or life insurance has no time limitation;
Information concerning a lawsuit or a judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer; and
Default information concerning U.S. Government insured or guaranteed student loans can be reported for seven years after certain guarantor actions.
The Credit Repair Organizations Act
By law, credit repair organizations must give you a copy of the "Consumer Credit File Rights Under State and Federal Law" before you sign a contract. They also must give you a written contract that spells out your rights and obligations. Read these documents before signing the contract. The law contains specific protections for you. For example, a credit repair company cannot:

make false claims about their services;
charge you until they have completed the promised services; or
perform any services until they have your signature on a written contract and have completed a three-day waiting period. During this time, you can cancel the contract without paying any fees.
Your contract must specify:

the payment terms for services, including their total cost;
a detailed description of the services to be performed;
how long it will take to achieve the results;
any guarantees they offer; and
the company's name and business address.
Have You Been Victimized?
Many states have laws strictly regulating credit repair companies. States may be helpful if you've lost money to credit repair scams.

If you've had a problem with a credit repair company, don't be embarrassed to report them. While you may fear that contacting the government will only make your problems worse, that's not true. Laws are in place to protect you. Contact your local consumer affairs office or your state attorney general (AG). Many AGs have toll-free consumer hotlines. Check with your local directory assistance.

Need Help? Don't Despair
Just because you have a poor credit report doesn't mean you won't be able to get credit. Creditors set their own credit-granting standards and not all of them look at your credit history the same way. Some may look only at more recent years to evaluate you for credit, and they may grant credit if your bill-paying history has improved. It may be worthwhile to contact creditors informally to discuss their credit standards.

If you can't resolve your credit problems yourself or you need additional help, you may want to contact a credit counseling service. There are non-profit organizations in every state that counsel consumers in debt. Counselors try to arrange repayment plans that are acceptable to you and your creditors. They also can help you set up a realistic budget. These counseling services are offered at little or no cost to consumers. You can find the office nearest you by checking the white pages of your telephone directory.

In addition, nonprofit counseling programs sometimes are operated by universities, military bases, credit unions, and housing authorities. They're also likely to charge little or nothing for their services. Or, you can check with your local bank or consumer protection office to see if it has a list of reputable, low-cost financial counseling services.

Do-It-Yourself Check-Up
Even if you don't have a poor credit history, it's a good idea to conduct your own credit check-up, especially if you're planning a major purchase, such as a home or car. Checking in advance on the accuracy of the information in your credit report could speed the credit-granting process.

You're entitled to one free report a year if you can prove that (1) you're unemployed and plan to look for a job with 60 days, (2) you're on welfare, or (3) your report is inaccurate because of fraud. Otherwise, a credit bureau may charge you up to $9.00 for a copy of your report.

Credit bureaus usually are listed in the yellow pages of your telephone book under "credit reporting agencies." Three large national credit bureaus supply most credit reports: Equifax, Experian and Trans Union. You may want to contact each of them for a copy of your report.

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