Andrew G. Biggs, Senior Fellow at the American Enterprise Institute and a leading voice on Social Security and retirement policy, examines a critical question facing lawmakers: could fixing Social Security with tax hikes actually backfire?
Transcript:
Jeffrey Snyder, Broadcast Retirement Network
We’re going to welcome back to the program Dr. Andrew Biggs of the American Enterprise Institute. Andrew, Andy, it’s good to see you.
Thanks for joining us this morning.
Andrew G. Biggs, PhD., American Enterprise Institute
Great to be with you again. I’m always happy to be back.
Jeffrey Snyder, Broadcast Retirement Network
It’s always a pleasure to talk to you. And I just want to put a point of clarification out there for our friends at Google. Just to confirm, you are not Andy Biggs, an elected official running for governor in Arizona, are you?
Andrew G. Biggs, PhD., American Enterprise Institute
I am not the Andy Biggs from Arizona. I’m the Andrew Biggs from the American Enterprise Institute.
Jeffrey Snyder, Broadcast Retirement Network
Sometimes confused. Sometimes confused, especially by Google AI. Okay.
So great to see you as always, Andy. And what I like about what you can take what are arguably very complex topics and make it easy for someone like myself to understand. So I really appreciate you coming on.
We’ve talked to you before about social security. It’s no secret that based on estimates, there will be some level of depletion if we don’t do something. And by we, I mean the Congress, the people elected to represent us to do something.
So you’ve been looking at this. We’ve had you on numerous times talking about that. You’ve been looking at this for quite some time.
Do you have an update? I know you wanted to bring up a Penn Wharton report. Maybe we start there.
So why don’t we start with Penn Wharton? Well, sure.
Andrew G. Biggs, PhD., American Enterprise Institute
Well, just as for background, I mean, the Social Security Retirement Trust Fund is projected to run dry sometime in 2032. At that point, the system by law can only pay the benefits that it can afford through the taxes it collected. It won’t have any more trust fund to rely on.
So that means about a 22, 23% cut in benefits. So it’s not like Congress is going to allow that to happen. But the question is how they fix it.
If you say we’re going to fix it all through raising taxes, that’s the biggest peacetime tax cut in history. If you issue debt, we really have to start worrying about how the financial markets respond to it. So we’ve got a real challenge here.
I mean, I’ve been working on Social Security for 25 years. And there was always the sayings back then, you know, the easier to fix the roof, all the sun is shining, you know, the earlier you start, the easier it is. And we chose not to do that.
So we’re going to have some very hard decisions to make. The study I wanted to talk about came out from the Penn Wharton budget model, which is up at the University of Pennsylvania at the Wharton School of Business. And it’s different than a lot of these analysis that are done by Social Security actuaries, say.
So the Social Security actuaries use a very static model. They say, well, if you raise the retirement age by this much, well, then it cuts benefits by that much. And it does, you know, some percentage of the funding gap.
If you raise the tax rate by this much, it’ll have these effects. But it doesn’t. It talks about what we do to Social Security through the different policies.
But the standard actuarial analysis does not look at how people react to what we do. If we raise taxes, what do people do? If we cut benefits, what do people do?
All that kind of stuff. And the Penn Wharton budget model, there’s an economic model that is designed to capture those reactions. That’s very similar to the Congressional budget offices model.
And they looked at a range of potential Social Security reforms. These were not, you know, assigned to any given member of Congress or administration. They were just stylized reforms that range from fixing Social Security entirely by raising tax, say by increasing the payroll tax rate, increasing the payroll tax cap, having a surtax above the cap.
That would fix it all with taxes. Or on the other end of the spectrum, fixing Social Security entirely by cutting benefits. They’ve reduced the initial benefits people would get.
They would reduce cost of living adjustments. They would increase the retirement age. See, all of these stylized reforms are designed to almost precisely fix the Social Security funding gap over 75 years.
So in that sense, they have the same effects. But then what the Penn Wharton model does is it says, what are the effects going to be on the economy from this? And when you have an effect on the economy, the thing that budgeteers worry about is what the debt to GDP ratio, which is, you know, how much do you owe in dollars?
And how big is the economy that supports that debt service? So it’s that ratio is the crucial thing. And what they found is that the reforms that reduce benefits produce much higher economic growth in the future than the reforms that rely on tax increases.
And the logic for this is, particularly higher income people, they treat Social Security benefits and their own savings kind of as a substitute. So if you reduce people’s future Social Security benefits, high income people at least start saving more, they work more in order to make up for the cuts. That, that boosts the economy that boosts the denominator of the debt to GDP ratio, it also actually boosts tax revenues on top of what we do with Social Security, because if people are working more, they’re paying more income taxes, and they’re saving more, they might be paying more in, you know, dividend or capital gains taxes.
And so these combined have a really pretty dramatic difference in terms of where the debt to GDP ratio ends up, you know, say 30 years from now. And what the Penn Wharton model found was the reduction in the ratio of debt to GDP, that skyrocketing debt is twice as high using a Social Security reform that relies on benefit reductions than it is if you do a reform that relies on tax increases. And so it’s, this gets a really, really important aspect of Social Security reform, because the program itself is so big that the things you do to Social Security, changing tax rates or benefit levels, they don’t just affect the program, they affect the economy as a whole.
And I think this, I mean, the CBO itself has done some basic projections saying, you know, if we reduce benefits, the economy will grow faster. But these are much more detailed, the Penn Wharton figures, and I think they really are something the policymakers need to pay attention to, because we’ve got a lot of fish to fry with the budget. And if you can double the reduction of debt to GDP through Social Security reform, that means fewer cuts to Medicare, fewer tax increases elsewhere.
So we really need to think holistically, economy-wide about Social Security reform.
Jeffrey Snyder, Broadcast Retirement Network
So thank you for that. That’s a great explanation. And I have to agree that I like when you think about the unintended, what I’m going to call the law of unintended consequences is what happens when you do something.
I think that is the right way to approach things. You know, obviously, I’m not an economist, I’m not a legislator, but from a common-sense perspective, if I do A, what does that mean for X, Y, and Z? So I appreciate that approach.
So I think that’s a good, healthy conversation. Our members of Congress who are currently running for re-election, I’m surprised, candidly, that no one’s talking about Social Security or asking people about Social Security. But what’s the likelihood that this Penn-Wharton budget model and the unintended consequences, as I’m calling it, will have an impact on that new Congress?
Because nothing’s going to get done between now and January. So that new Congress.
Andrew G. Biggs, PhD., American Enterprise Institute
Right now, most members of Congress really don’t know much about how Social Security works, nor do they think very much about how it affects the broader economy. And people have sort of ideological dispositions of higher taxes or lower taxes, but they’re not really thinking in a very rigorous way about it. Now, Social Security’s trust fund is going to run out in 2032, so we don’t have that much time.
But we do have enough time that you can have congressional hearings where you start educating policymakers about the bigger effects of the policy choices they’re going to have to make. So, I mean, right now, your average citizen isn’t asking very much about Social Security reform. Because, to be honest, the people who care most about Social Security are older Americans.
The longer you wait on Social Security reform, the more likely it is for somebody to raise taxes and not cut their benefits. I mean, that’s the dynamic that people have always taken on Social Security before. If you delay, that tilts it towards raising taxes and maintaining benefits.
So a lot of people who are older are just like, keep quiet for now. And the average member of Congress of either party isn’t going to raise the issue. Because once you start looking at how tough the choices are, they would rather just avoid the topic.
And of course, that’s what we’ve been doing literally since about 1990. That’s when the Social Security trustees first urged Congress to start getting on top of the problem. Every year Congress, you know, people think about it like, I’ll take a pass, because it’s just too politically difficult.
But then the next year, the problem gets bigger. Oh, and it’s even more politically difficult, because you pass again and again. And it becomes this problem.
And the Social Security funding gap is a lot bigger today than it was, say, 20 or 25 years ago. People are like, well, if we just raise the retirement age by a couple years, increase the payroll tax ceiling from, you know, $185,000 to $250,000, I’ll do it. That might have died 25 years ago.
That’s not going to do half the problem today. I mean, we really are facing a much bigger problem than people think.
Jeffrey Snyder, Broadcast Retirement Network
So just to kind of follow up on that, so they’re going to hold hearings when that is, you know, they’ve already started hearings. But there have been some. There have been some.
So they educate themselves. But there’s, you know, one of the proposals has a commission of lawmakers that come together. You know, I like transparency.
I think we, you got to educate the lawmakers. You got to also educate the public. And it’s got to be, candidly, it’s got to be, I love C-SPAN.
I used to watch it all the time as a kid. But it’s got to be beyond C-SPAN. It’s got to be, you know, this is the type of thing that has such an impact societally that it’s almost like when the president gives the address to the nation, it’s almost to me to that level.
But what about, what do you think about, is that transparent enough to have a body of lawmakers, you know, elected, you know, it’s like a conference committee between the House and the Senate. They represent their bodies. And then their job is to vet all these things and talk about things we’re talking about this morning.
Andrew G. Biggs, PhD., American Enterprise Institute
There are a couple of different proposals for commissions on social security. If it’s going to be just members of Congress, you could work it through the congressional committees. I mean, Ways and Means and Finance have jurisdiction.
A lot of these ideas for commissions also include outside people, you know, or say representative from whoever is the president at the time. So the administration gets by and experts who understand the issues a little bit better. People like you, right?
People like Andrew Bates, the American… One of my first jobs, I was on the staff of President Bush’s 2001 Social Security Reform Commission. So yeah, I got to see that up front.
But having that outside expertise, I think, matters. I mean, your average member of Congress, I hate to tell you, even those serving these committees that are dedicated to social security really don’t understand very much. And this is a big issue.
And so people tend to have reflexive solutions. They’re not really thinking about what they’re trying to accomplish. So I think an outside commission has a good chance.
But one of the key parts where you talk about transparency, and I hate to say, I mean, you know, I’ll be the one guy in the universe who’s against transparency. But the problem with social security reform is it’s about breaking promises. We promise people, if you pay this tax rate on this part of your earnings, you will get benefits from this formula.
Now, those two promises are mathematically incompatible. The members of Congress know they have to break those promises. And yet it’s really hard to do it in public.
And I think if they get together, and they’re able to talk, and they can say, look, I know I promised I wasn’t gonna raise your taxes. But in the interest of fixing social security, and because the other side compromising their promises, we’re going to jump together. I think that kind of process works.
If you’ve been in a congressional hearing these days, it’s just not capable of that kind of stuff. I hate to say the system has failed on things like entitlements, but it has. We just can’t manage these things.
So some alternate process. It’s not perfect. It’s not what I prefer, but it’s where we are, unfortunately.
Jeffrey Snyder, Broadcast Retirement Network
So, you know, we’ve got this election coming up in November. Clearly, no one wants to kick the can, or they want to kick the can, because they don’t want to talk about this. It’s just one more thing.
I think, look, if I was sitting in one of those town hall meetings, I’d be asking the question. I’d be like, okay, what do you think about this, Mr. or Ms. Congressperson? But be that as it may, is this on the agenda regardless of who is the speaker, what party is in control?
I mean, I gotta think with all the, you know, Andy, I was looking, you said, I think it was like $25 trillion, the 75-year shortfall exceeded $25 trillion last year.
Andrew G. Biggs, PhD., American Enterprise Institute
I’m sorry. I must get a date. It’s $30 trillion now.
Jeffrey Snyder, Broadcast Retirement Network
Okay. So it went up as we were talking. So it was $30 trillion.
But, you know, this has an impact. We were joking, but I was joking about it. You weren’t.
You know, that impacts American debt, the creditworthiness of the United States. So our ability to borrow, you know, we don’t want to be a banana republic, right? So does this get picked up January of 27 with the new Congress sworn in January 1st?
Andrew G. Biggs, PhD., American Enterprise Institute
I doubt it. And, you know, you talked about members of Congress wanting to kick the can down the road and people always assume, okay, well, we’ve done that for decades, but, you know, come 2032, the trust fund is going to run out. And then there’s, you know, there’s no more road to kick the can down.
But, you know, there’s members of the Senate who said, oh, we’ll just take money from the general fund, take general tax revenues and put it in. The problem is the general fund is $2 trillion in deficit. So where’s the money going to come from?
We’re still going to borrow it. And yeah, there’s various studies that try to look at how much debt can the U.S. government sustain? At what point do the financial markets just say, hey, we’re out?
And there’s no hard limit. The reason we don’t have a debt crisis today is the financial markets assume at some point we’re going to act like adults and figure out some plan to pay it back. But they say a debt crisis could be precipitated by some event that just triggers the panic.
It’s like the run on the bank or something. Now, if Congress says, okay, we told you for decades, we’re finally going to fix Social Security, but guess what? We’re just going to borrow, you know, $400 billion a year that we can’t ever pay back.
That might be the precipitating event where the financial markets are like, okay, we’re out. And that just makes things worse because then interest rates rise because you attach a risk premium to them or people are afraid of inflation. That means your annual debt service costs go up even higher and you get the debt spiral.
So it’s one of the lessons of this. I mean, the United States can get away with a lot. You know, we are the biggest, strongest economy in the world.
We still have the most dominant currency in the world, but there are limits. And what you see when countries do have these sort of debt or financial crises is often, you know, they can borrow pretty reasonable rates right up until the end. And it becomes the run on the bank.
Once financial markets think you can’t service your debt, then they’re out. And at that point, you can’t roll over your debt at any price. And so these things can move pretty quickly.
And so we don’t have forever on it.
Jeffrey Snyder, Broadcast Retirement Network
We don’t have forever, but doesn’t like, you would think like our creditors, the people that hold our debt, like doesn’t China hold a great majority of American? No, they hold, they used to, they hold less than they used to. They have got rid of a lot, you know, take that for what it’s worth.
Yeah. I mean, look, they hold that. But I would say, I would think, you know, your creditors will come to you and say, hey, Mr. and Ms. American, you guys got to deal with this because we’re holding your debt instrument. Let me, before I let you go, and we’re already at the 17 minute mark, but let me, let me ask you about this. Structurally, is there any, because, you know, we’re at this point where, and I’m just going to throw it out there. You know, I’m a guy of just common sense.
I don’t have the expertise of being in like you and others making policy decisions, but it just seems like structurally with social security, you know, that we talked about this in the previous program, that the trust fund was changed in the 1930s, I believe, where they weren’t actually putting contributions that people were making away and investing them. Is that a way to, you know, let the market grow at some rate of return and some financial instrument to shore up? Because as demographics change in this country, we’ll be right back at this thing again when the demos continue to shift, if they continue to shift.
Andrew G. Biggs, PhD., American Enterprise Institute
But when social security started in 1935, it was intended as a pre-funded system. The tax rate was pretty high.
The idea is put aside extra money for the future. In 1939, it switched that pay-as-you-go financing. So the trust fund really for most of social security’s history is really tiny.
Even up to 1980s, it was very small. So you can invest in whatever you want. It doesn’t make any difference.
If they’d invested the money in the 1980s, okay, we would have had more money today. But the issue is that that meant the rest of the budget would have had to find more money to finance its own deficits. That probably would have been a good thing to do for transparency purposes.
The issue today is there’s just no extra money to invest. I mean, we’re drawing down the trust fund. In six years, it’s going to be gone.
So this is like saying, okay, imagine if you’re six years away from retirement. You’re 59. You want to retire at 65.
You don’t have enough money. Well, sure. I mean, putting all your money in stocks might be a way of doing it if you get lucky.
But the reality is you just don’t have that much time to make that much of a difference. And so we’re going to need extra money just to pay benefits. When people say, oh, we need to now invest in the stock market, oh, it means you need extra money on top of the extra money.
And one thing Americans don’t like to do is pay more for these programs. I mean, we want everything. If you compare social security benefits in other countries, the benefits are pretty good.
But the difference between us and Europeans, we don’t want to pay for them. And at some point, the bill comes due. And we’ve just got to act like adults.
Jeffrey Snyder, Broadcast Retirement Network
Well, I would argue that the Europeans want the United States to pay for it because we do, at least when it comes to national or their national defense. And that’s a whole different topic. Andrew G.
Biggs of the American Enterprise Institute. Get that, Google. Thanks so much for joining us.
And we look forward to having you back on the program again very soon, sir.
Andrew G. Biggs, PhD., American Enterprise Institute
Thanks, Jeffrey. My pleasure.