Centerfield: Josh Marshall's "Phase-Out"

January 25, 2005

Josh Marshall's "Phase-Out"

Josh Marshall has two new posts this morning about the "phase-out plans" for Social Security -- his term for partial privatization plans that involve personal accounts.

A search of his site reveals that he's used the term "phase-out" in 70 separate posts on the topic over the last seven weeks. You could say he's intent on that phraseology.

Let's take a closer look at how these plans "phase out" Social Security.

The payroll tax that funds Social Security takes 6.2% out of each of our paychecks, and our employers match that amount, for a total 12.4% tax on earnings.

Of that 12.4%, the Kolbe-Stenholm plan would take 2% to 2.5% and put it in personal accounts. The Graham plan would take 4%. I haven't seen a plan that goes beyond the 4% in the Graham plan.

So, realistically speaking, these reform plans take between one-fifth and one-third of the payroll tax and put it in a personal account. None of them involve increases in this figure over time -- they take the same 2% or 4% of the payroll tax in projections 70 years out as they do in year one.

In other words, they don't phase out the program, and they never take more than a third of the program's funds.

Now let's look at the all-imprtant benefits side of the equation. How do these new private accounts impact benefits?

First, we should note that the plans typically include provisions aimed at controlling spending -- the kind of slight adjustments we might do anyway to make the program balance out in the coming decades. The Kolbe-Stenholm plan has an adjustment in the growth of benefits that would lower it by about .2 percentage points. This is a reduction in the growth rate of the program. Benefits don't go down -- they grow slightly less fast.

Second, we have the main mechanism these plans use to control costs -- something called an "offset". The private accounts are really small in the early years, so there is virtually no offset. But as the accounts grow, the new system reduces your traditional benefit by an amount equal to the growth in your private account.

It doesn't reduce your benefit according to the amount of money deposited in the account -- but rather according to a growth rate applied to that money.

The Kolbe-Stenholm plan uses a formula that reduces the traditional benefit mostly for individuals with above-average earnings in their private accounts.

The Graham plan uses a flat 2.7% offset. It assumes you will earn 2.7% on your private account funds, and reduces the traditional benefit by an equivalent amount. The 2.7% figure was chosen because it is the average gain on long-term government bonds.

That introduces a few wrinkles. On the one hand, it does make it possible to lose part of your Social Security benefit. If your private account doesn't grow by 2.7%, you won't make up all the difference between your new benefit and what the traditional benefit would have been.

However, since the Graham plan uses the Thrift Savings Plan as a model for private accounts, and since the Thrift Savings Plan has an option for investing in long-term bonds, each person has the option of basically matching the current non-privatized system. Just select the bond option, and watch as your private account grows at the same rate as the offset.

That's a weird kind of "phase-out" plan. It allows you to stay in the current system.

There's more. Both of these plans, it turns out, have built-in protections for those who's personal accounts perform poorly. The Graham plan sets a "floor" benefit of 120% of poverty. The floor does not include the personal account, so any amounts in the account would accrue on top of the base benefit.

The Kolbe-Stenholm plan adjusts this benefit according to years in the workforce. Those with 20 years of service have an 80% of poverty floor, while those with 30 years get 100%, and 40 years get 120%.

This is, again, a strange kind of "phase-out" -- one that guarantees a base benefit drawn from the traditional side of the program.

Why do the thoughtful proponents of partial privatization include these provisions? Because they don't want to eliminate the fundamental social protection function of the program. On the most fundamental level, they want to retain Social Security.

Josh can call this a "phase-out" fifty times a day, if he likes. He seems almost giddy with the term -- like it's his chance to frame the debate conceptually in a way that Republicans have done so successfully with other issues.

In this case, though, his terminology is almost totally divorced from the facts. It is, quite simply, a false charge, and one used by Josh to mislead his readers every day.

Posted by William Swann at January 25, 2005 11:21 AM

Comments

I'm not sure how I see his "changing the terminology" is much different than the Bush administration going from "private accounts" to "personal accounts".

Same tactics, different sides. Both equally at fault.

Posted by: Jack at January 25, 2005 11:57 AM

They're different because "phase-out" is synonymous with elimination, which is totally false.

Posted by: Scott at January 25, 2005 12:15 PM

Yes, both sides use that tactic. But "private accounts" and "personal accounts" are both accurate. "Phase-out" is factually wrong.

Of course, the administration uses rhetoric every day that may be equally wrong. The system is is a "crisis", or suggesting it will collapse. And there's all kinds of problems with the way the Republicans have reframed other issues -- the "death tax", the "marriage penalty".

I once saw an article that showed that before the "marriage penalty" was fixed, roughtly half of married folks received a tax benefit by virtue of being married and half received a tax burden. By that analysis, the new law created a universal "marriage benefit" -- it just made sure all married folks got better tax treatment than singles. You could call that a "marriage benefit" bill, or a "singles penalty" bill, I suppose, both of which would be more accurate than "marriage penalty".

That kind of Orwellian reframing happens, and is particularly successful on the Republican side. It doesn't make it right, nor a legitimate part of the reasoned debate on these issues.

Posted by: William Swann at January 25, 2005 12:28 PM

William:

This is from Marshall's post:

"The question is not whether President Bush gets to phase-out 30% or 40% or 25% of Social Security in 2005. At least, it's not a question or a distinction that should concern Democrats or, for that matter, Republican supporters of Social Security. In the long run, whether we phase out 50% this year or 25% this year and another 25% in 2007 or some other mix isn't a matter of great consequence. The question is whether we start down the path of phasing it out at all."

Marshall clearly states Bush wants to "phase out" a portion of SS, not the entire thing. That's no different than what is discussed in the two plans you alluded to. Both plans definitely do "phase out" a portion of traditional SS. The use of the phrase is not factually wrong. Marshall just believes this is the opening act in an effort to completely privatize the system. He may be wrong, or he may be right.

Now you can disagree with Marshall's view all you want, but he isn't being misleading or inaccurate in the way he his using the term "phase out". Context is important.

Posted by: tim at January 25, 2005 12:49 PM

"The question is whether we start down the path of phasing it out at all"

Doesn't this make it pretty clear what Josh Marshall is implying?

Posted by: Scott at January 25, 2005 01:25 PM

The White House is now putting the first dollar signs on its plan for gradually phasing out Social Security and replacing it with a system of government-regulated private investment accounts.

That doesn't sound like equivocation or shading to me, Tim, unless we're back to the issue of the meaning of "is." Especially as Marshall consistently refers to already-floated plans such as Kolbe-Stenholm as "partial phase-outs."

No, he means exactly what he says. He's claiming the Republicans want to dismantle Social Security. And he said so. Even though there is no such proposal being floated. Which makes his continued use of the term inaccurate and misleading.

(Re: "death tax"--you die, and they tax you. Pretty descriptive. I personally think the death tax will return from the ashes, with a much higher kick-in and automatic inflation adjustments, but the term itself is accurate. The justice issue is good for many threads--it's money you were taxed on while alive, and if you still manage to have enough when you die, they take some more.

And the "marriage penalty" did apply to me and mine, and the fix gave some relief. Why should we be taxed in higher OR lower brackets than we would be if single and filing seperately? Either way, an injustice. IMHO.)

Posted by: Tully at January 25, 2005 01:45 PM

I don't think he can wiggle out that way, Tim.

First, as I pointed out, the major reform plans proposed thus far include a basic benefit outside of the private accounts. They aim to keep the financial security function of Social Security by maintaining that basic concept -- that seniors should not be allowed to live in poverty.

Any system built on that concept is not phasing out Social Security.

Second, as I pointed out, the Graham plan models the new private accounts on the Thrift Savings Plan, which has a long-term bonds option. (The Kolbe-Stenholm plan uses Thrift Savings as well.)

This means that:

A. In the Graham plan, you have the option of basically keeping the current system, and

B. In Kolbe-Stenholm, you have the option of an improved version of the current system (since it reduces the traditional benefit mostly for above-average returns, you can choose the bond fund, get your low return, and still have your traditional benefit).

I would also point out that additional rounds of reform are not being discussed currently, and that almost anyone who understands the most basic fiscal circumstances will realize that an extra effort at privatization will not be initiated in 5 or 10 years.

These reforms all involve moving from pay-as-you-go to a partial pre-funding of the system. They therefore all involve big transition costs -- you're pre-funding future retirements at the same time as you pay current benefits. Given that the baby boom wave of retirements is about to start, it's virtually impossible to imagine an extra round of prefunding starting in 5, 10, or 15 years.

In fact, the current debate will probably end at this round. If we don't implement some form of partial pre-funding now, we will probably not consider it with any seriousness in 10 years. The numbers really do take a nose-dive once the baby boom retirements start.

It's unlikely that a second round of privatization would ever draw serious discussion.

I'm also pretty uncomfortable, just in general, with the "slippery slope" kind of argument. If I'm in favor of, say, civil unions for gays, does it follow that I favor gay marriage? If I propose a law that allows civil-unions, and if I succeed, can you reasonably expect me to propose a full gay marriage law in 10 years?

That trick is played by both sides in every debate -- imputing an additional agenda on top of the current one to make the current one seem more extreme. It's good rhetoric, but not good logic.

Posted by: William Swann at January 25, 2005 02:12 PM

Scott:

"Doesn't this make it pretty clear what Josh Marshall is implying?"

Or, it makes it pretty clear what he is inferring. It depends on your point of view. Either way, that's a different issue. He isn't factually wrong in his usage of the term "phase out" if you look at the context in which it was written.

Tully:

I'm not defending Marshall's views, only his use of the term. The president says the system is in "crisis". That's not true. It may be in crisis someday if the Feds continue to recklessly deficit spend, but the projections to 2042 are based on 2% annual growth from now until then. That low level of growth has never happened over a similar length of time in our history. Bush's own budget projections predict much higher growth.

Marshall has every right to his view the GOP wants to get rid of SS because they think they can. He also has every right to his view this is only a first step. That has been the track record of the GOP since 2001. One only has to look at the history of the tax cuts. Temporary cuts in 2001, followed by more in 2003, much of it backloaded. No sooner was it passed than they wanted to make it permanent. It's perfectly reasonable to believe they'll do the same thing with SS.

However, I still support changes and personal accounts. I'm just not very confident the "thoughtful" members of Congress will prevail when the final form emerges. There is a pretty good track record the last 4 years to back up that assertion too.

Posted by: tim at January 25, 2005 02:22 PM

William:

I posted my comment before your response. I see nothing wrong with either of the proposals you cite. It's an issue of trust with me. The people in charge at the GOP have not earned my trust, quite the opposite.

You make a good point that in 5-10 years it may be impossible to make changes. But politically that's a long time. Look where we were just 5 years ago and where we are now. Who would have predicted it?

Posted by: tim at January 25, 2005 02:29 PM

Re: "death tax"--you die, and they tax you. Pretty descriptive.

Except that they don't tax you, since you're not alive anymore. They tax your estate.

And the "marriage penalty" did apply to me and mine, and the fix gave some relief. Why should we be taxed in higher OR lower brackets than we would be if single and filing seperately? Either way, an injustice. IMHO.

True. And my understanding of the facts on this may be flawed. But I heard that it was basically impossible to equalize singles and marrieds without a much more simplified tax system than the one we have. Any more limited reform that helped marrieds would simply increase number of singles who pay at a higher rate. The reform that passed closed the gap for some couples, but it also increased the marriage bonus that some couples were already receiving. It basically shifted almost all married couples into the "marriage bonus" category (and upped the bonus for the ones already in that category).

If that's true -- and I'd have to check those facts -- the reform does something very different from what its label suggests.

Posted by: William Swann at January 25, 2005 02:35 PM

Uh huh. The meaning of "is." He believes the Bushies will wipe it out entirely, so he uses the term that means that for plans that don't.

Nope, no misleading rhetoric there.

Posted by: Tully at January 25, 2005 02:41 PM

"It's an issue of trust with me."

I don't trust the president either. I have a pretty negative overall take on his tenure so far.

One thing I would mention is that the president's plan is fairly likely to have provisions like the ones discussed here. The Graham plan may actually be pretty close to the president's plan, from what I understand.

The deciding factor for people like me -- moderates who take an overall favorable view of the idea -- will probably relate to the funding aspect of it. Our fiscal situation has deteriorated since the time guys like Graham and Kolbe wrote their plans. Graham himself has emphasized recently the need to look at the funding side of it and to put everything on the table.

The only way to draw up a fiscally responsible plan is to include some increases in funding for the system -- otherwise known as tax increases. That may mean raising the payroll tax cap (e.g., wealthier people paying more into the system). It could also mean an increase in the payroll tax. So, perhaps, we could go with Kolbe-Stenholm, and split the funding of private accounts so that 1% comes from the current tax and 1% from an add-on.

That approach has something in common with suggestions Democrats sometimes made, like Al Gore's "Social Security plus" proposal. There's a significant potential for bipartisan wrangling in that area, though I sense that is not the direction this debate has taken.

Posted by: William Swann at January 25, 2005 02:57 PM

Except that they don't tax you, since you're not alive anymore. They tax your estate.

It is considered somewhat polite to allow the victim to cease wiggling before attempting to carve out the pounds of flesh, no? :-)

But "death tax" is at least as accurate as "estate tax," or more so, by explicitly acknowledging the triggereing event of the taxation.

Posted by: Tully at January 25, 2005 03:52 PM

He's claiming the Republicans want to dismantle Social Security. And he said so. Even though there is no such proposal being floated.

Is this elimination of SS going to happen before or after the Republic-controlled Congress re-institutes the draft?

Posted by: Chris at January 25, 2005 03:55 PM

Chris:

Last year the administration disavowed their own economic advisor, Lawrence Lindsey when he said the Iraq war would cost between 100 and 200 million. If all 80 million that is about to be proposed is spent the total will be about 280 million. With no end in sight.

But we're supposed to believe them on SS and everything else?

Posted by: tim at January 25, 2005 04:27 PM

"..."death tax" is at least as accurate as "estate tax," or more so, by explicitly acknowledging the triggereing event of the taxation."

Yeah, but not everybody who dies triggers the estate tax. It only affects those people who have, y'know, an estate. It's like saying a tax on buying a yacht is a "water-use tax".

Posted by: David Fleck at January 26, 2005 08:44 AM

LOL. "If you're too skinny, we won't eat your flesh."

It's a tax triggered by only two things, David--dying, or attempting to avoid the tax. If it were simply an "estate" tax, then all who leave estates of any kind would be taxed, no? But they're not. So your line of argument is flawed, and "estate" tax is inaccurate by your own reasoning. Simply having an estate isn't enough to trigger the tax. You have to die. And you have to leave a big enough corpse to be worth eating.

You can't avoid dying. At least, short of religious claims, no one's ever managed it. You can conceivably avoid leaving an estate by giving it away. But the unification of the gift tax with the death tax means you can only give it to government-approved organizations. This is called "social engineering." No fair giving it your family. That triggers the tax, even if you're still kicking.

Posted by: Tully at January 26, 2005 02:27 PM

Tully, you write as if the estate tax takes everything. It doesn't. I think right now it kicks in at 1 million, essentially two million if there is a surviving spouse. The top rate is 55% until it goes away (permanently if the 2001 tax cuts are made permanent).

So maybe 55% is too high. Maybe it should be 35 or 25%. Maybe the exclusion should be raised to 3 million, 5 million, 10 million. I think there were would be bipartisan concensus for that type of reform.

But seriously, if I die and leave an estate greater than 10 million, and the amount exceeding 10 million is taxed at 25% or 40%, whatever, I don't think there will be any impoverished heirs. Do you?

You call it social engineering. Remember one of the reasons we fought a revolution is we fled old Europe, where all the wealth was concentrated in a few hands. If the estate tax goes away completely, it will only take a few generations to put most U.S. citizens in the same position our ancestors were in 300 years ago.

Wealth concentration is politically destabilizing.

Posted by: tim at January 27, 2005 09:12 AM

It's "death tax." This is the precise term used by legislatures. "Estate tax" is used for multiple reasons, one of which is to designate it as different from the other type of death tax, which is an "inheritance tax." It's a designator for which type of death tax it is. The other reason is to make it more palatable with the "eat the rich" symbolism you allude to. The word "estate" conjures up images of palatial homes and butlers. "Death" is not so glamorous. Breaking up the fortunes of the robber barons is one thing, beating up the merely succesful is another.

Yes, the rate is 55% for any amount over the exclusion, and yes, I consider that pretty damn confiscatory when talking about assets acquired with after-tax money. Let's also not forget state death taxes, which in some places can go as high as 21%. That's a potential combined rate of 76%.

The figures on the estate tax show that the highest effective rates aren't paid by the ultra rich. They highest collection rates are paid by people with estates in the $2 to $10 million range. After that the percentage collection rate drops off steeply--even though those with estates over $10 million are roughly half of all death tax revenues. The "wealth concentration" you allude to manages to escape largely untouched. The people squeezed are the succesful, not the truly wealthy.

The ultra rich get much more bang for their buck in avoidance techniques--and in legislation written for them. In addition, the ultra-rich are more able to have their legal residence wherever they want, as compared to the moderately well-off who will live where their businesses are. As a result, their effective rate of death tax is about the same as that for people with $1 to $2 million dollar estates.

If the death tax recission is NOT made permanent, then after one year of no tax in the (heh heh) terminal year it goes right back to where it was, with a $1 million exemption. That may sound like a fortune, but there's quite a few people out there who will have combined assets of over a million without being "rich," especially in areas with high real estate prices. Not to mention that inflation marches on, but that the exemption has a very real tendency to stay put.

You wanna nail the very wealthy? I have no real objections. I'm not against a little bit of social engineering against the powerful. But let's quit beating up on success with a high moral tone and eat-the-rich rhetoric. Bill Gates and Warren Buffet won't mind. It's Jack Jones with the auto dealership down the road who gets screwed the hardest.

Posted by: Tully at January 27, 2005 11:31 AM

Tully, I found your post enlightening. The super-rich can always have Swiss bank accounts and property on the Riviera. However, I believe I did state the 1 million exclusion should be raised dramatically, along with a reduction in the rate. You argued right past my post to some imaginary socialist rabble.

Personally, I think the guy who owns the car dealership should be taxed double. And he should have to drive my 13 year old Dodge Caravan for eternity.

Posted by: tim at January 27, 2005 01:21 PM

You argued right past my post to some imaginary socialist rabble.

I was still mostly addressing the semantics of "death tax" versus "estate tax," Tim, if somewhat hyperbolically. Sorry for not seperating my comments better. I happen to agree with you, at least as far as expectations of what will happen (and probably should) as you can see in my post farther up the thread. Boot the "floor" up quite a bit, index it for inflation to kill off the "bracket creep" problem, and maybe even knock the rates down a bit while tightening the exclusions and avoidance mechanisms. Or go from estate tax to inheritance tax, which would by natural dispersion reduce the "inherited blocks of wealth" problem. But we won't lose pressure to keep the death tax in some form or another as long as Bill Gates' personal wealth exceeds the GDP of many nations, and the government can find a way to get their hands on some.

Personally, I think the guy who owns the car dealership should be taxed double. And he should have to drive my 13 year old Dodge Caravan for eternity.

Maybe we should have other, more meaningful penalties for car dealers! Anything appropriate'd probably be unconstitutional under the "cruel and unusual" standards though. (There's a reason I learned enough mechanics to mostly avoid repair shops, and why I've bought only one new car in my life. One convinced me.)

Posted by: Tully at January 27, 2005 03:20 PM

You wanna nail the very wealthy? I have no real objections. I'm not against a little bit of social engineering against the powerful.

What is the "right" amount to soak the rich?

Posted by: Chris at January 27, 2005 05:48 PM

What is the "right" amount to soak the rich?

For Bill Gates? It varies between 1/4 of his estate and all of it plus some, depending on how well WinXP is running today. :-)

Seriously, from the social engineering standpoint, that's an open question. In terms of overall federal revenues, death taxes really aren't that much money, so I have to make the assumption that the purpose is social engineering more than revenue-raising. (The states might argue this, as some of them get a relatively larger portion of their reveneues from their estate taxes.) Namely, the purpose Tim alluded to, the breaking up of the control of large fortunes so they don't become inter-generational ruling family dynasties in and of themselves. That, and the usual popular wealth-redistribution mechanism.

But if that's the purpose, to penalize those who accumulate LARGE amounts of wealth and power and put a damper on its becoming a perpetual ruling class, then inheritance taxes make more sense as a means of reducing concentrated pass-through of mega-fortunes.

As I indicated, estates over $10 million make up over half of all estate tax collections, even though they're only a few percent of ET filings. How's $10 million in today's dollars sound to you? Why $10M? For the same reason Willie Sutton robbed banks.

Note about state estate taxes: Most states have used the federal credit approach, whereby they taxed estates exactly as much as the federal credit allowance given for state estate taxes. Their ET therefore had no effect on the overall rate, simply on who collected it. Essentially, these states were collecting a portion of the proceeds by picking the pockets of the federal government, not the deceased. Stealing from the thieves, if you prefer.

Some states however have different and much higher rates. New York goes up to 21%. Florida is an "allowance" state. Ever wonder why so many New Yorkers got to Florida to retire? It's not just the sunshine.

Posted by: Tully at January 27, 2005 06:18 PM

Centerfield

A Weblog of Centrist Voices in American Politics

January 25, 2005

Josh Marshall's "Phase-Out"