Bad, but not self-contradictory

Although I consider Social Security a key part of my beat here, I initially didn't comment on the DeMint proposal to revive Bush's private accounts by funding the accounts with the annual Social Security cash flow surplus for as long as it lasts, for two reasons. The first was that it seemed too silly to be worth much attention. The second went to comparative advantage as a commentator. While I think I have a good conceptual feel for how to analyze Social Security policy at a broad normative level, I certainly don't have the institutional knowledge about different reform plans that economists who have gotten into the issue possess. This analysis by Jason Furman and Robert Greenstein seemed to me to pretty much do the job that needed to be done in evaluating the DeMint proposal.

But I enter the fray now for two reasons. The first is that I gather this highly dubious plan is actually going somewhere. I simply raised my eyebrows initially when, for example, Wall Street Journal editorials trumpeted the claim that the proposal had fundamentally transformed the public debate about Social Security reform. (I'm not sure what polls they were reading, or what they were smoking.) But recent reports suggest that the House Republican leadership is considering trying to pass it, even though it presumably it has no chance in the Senate. My second reason for weighing in here is that I now feel I have something to say about it, pertaining to the sorts of fiscal language issues that I am writing about these days.

Critics of the DeMint plan who were less well versed in it than Furman and Greenstein have argued that it shows Republican hypocrisy in the following sense. First the Republicans said the Trust Fund is meaningless, as in Bush's photo op in front of the file cabinets, but now they say it is meaningful and they want to use it.

For what it's worth, I think the Republican stance on this actually is internally intellectually consistent. First they say the Trust Fund is meaningless, because it's spent as it comes in, leaving behind nothing but IOUs. Then they say, let's prevent this from happening by actually spending it as it comes in to help Social Security beneficiaries.

Unfortunately, being internally intellectual consistent, while a virtue of a sort, is not enough. A key fallacy on which the DeMint plan rests (or alternatively, that it tries to exploit) is that Social Security participants are helped by spending these particular dollars on them. Problem # 1, money is fungible. Problem # 2, when you're on an unsustainable path, promising new benefits without any new net financing (other than possibly future cutbacks in traditional Social Security benefits) doesn't help. Problem # 3, making the government's fiscal picture worse via new unfunded benefits (see Furman and Greenstein for the point that there is no reason to expect this plan to increase the prudence of other Congressional decisions) is not especially helpful to the people whose future benefits are made even more unaffordable. Problem # 4 (applying to the extent that ## 2 and 3 don't), presumably the people who get the new accounts would be forced to pay something for them via traditional benefit cutbacks, just as under the Bush plan. So this is really just the Bush plan all over again on a smaller scale that has no coherent rationale and that, in some ways, as Furman and Greenstein show (e.g., administrative costs relative to the $$ per account) actually makes it worse.

The political appeal of the DeMint plan (if any) rests on its exploiting the fallacy that, by doing it this way instead of the Bush way, we actually aren't taking money from Social Security because it's just the surplus that would otherwise have been diverted. But if there is a diversion under one, then there is a diversion under both. Or, viewed more accurately, promising new benefits makes no sense, and avoiding net cost by trading fixed for risky benefits makes no sense in the Social Security context, since the idea is to assure people who may be imprudent some minimum level of retirement resources, and since people with other net saving can invest as riskily as they like anyway.