Canada, Clinton, and Fixing Social Security

Social Security's current obligations will create large cash-flow deficits, according to economists.

Social Security’s current obligations will create large cash-flow deficits, according to economists.

There are two commonly accepted beliefs in the Social Security reform debate: that Social Security is going to become more challenging to fund as the US population ages, and that something at the policy level ought to be changed in order to mitigate these challenges. Of course, not quite everyone agrees on these two things. Paul Krugman has argued that the latter belief is wrong, mainly because he thinks the former is overblown. He argues that the long-run fiscal cost is relatively small, and in any case justified by the value of the Social Security program. Most Americans, on the other hand, including 85% of economists in one survey, agree that something needs to change.

I think a third important fact–one that might be controversial–is that the broad question of how to reform Social Security is actually adequately settled by observers–it’s just politically unfeasible. When it comes to tweaks to the existing structure, a majority of economists support raising the retirement age or making more direct benefit cuts. Most propositions for reforms at the structural level involve some amount of privatization, where Social Security funds would be invested in private assets in order to give a higher rate of return and far bigger benefits in the future. These proposals would all lead to lengthened solvency for Social Security and would reduce the burden borne by future taxpayers. From a disinterested perspective, reforms like this make sense. The structural reforms would create a solvent, successful social safety net for generations at the price of some short term pain. Funding in advance, not pay-as-you-go. My point is not that there aren’t legitimate differences of opinion on this; it’s just that if it were left to the technocrats, economists or even academics instead of Congress, we’d already have reformed Social Security. In one case of pension reform, Canada, it sort of was left to the technocrats.

So before you think that Social Security reform is anything radical, consider this. In Canada, the most equivalent program to Social Security is the Canada Pension Plan (CPP). In the 1990s, it became clear that CPP was going to run out of money within a couple of decades. The party in control of the government at the time was the Liberal Party of Canada (which on most issues is to the left of both major US political parties). Under the leadership of the Liberal Finance Minister, Paul Martin (who later became Prime Minister), a plan was quickly developed and implemented to save the CPP. The first major change was to reshape the CPP by increasing payroll taxes and reducing payouts. The government realized that the population was aging and that the old structure wasn’t working. Because of the quasi-authoritarian nature of majority governments in Canada, the public was obliged to agree. More significantly, the government created the Canada Pension Plan Investment Board (CPPIB). Whereas Social Security simply collects payroll taxes and buys US Treasury bonds (which fund the federal government), the CPPIB would be a legitimate, funded, growth-oriented pension fund:

Dr. Cook-Bennett [founding chairperson of CPPIB] discussed the mission set out by the reformers in 1997 and the CPP Investment Board’s innovative governance model. “That mission was not just to implement a world-class governance model, but to build a world-class investment organization – an investment organization able to compete with the very best of the best in the private sector, while maintaining an extraordinary degree of public accountability.”

Dr. Cook-Bennett also outlined a number of key features of the governance model: an independent, arm’s-length relationship with governments; an experienced management team that reports to an independent Board of Directors, not governments; a clarity of purpose through a singular, investment-only mandate; and a high level of transparency in operations. Further, the CPP Investment Board invests CPP contributions, not tax revenues. (From the CPPIB website)

The second paragraph seems not only to contrast the reformed CPP with the old CPP, but also perhaps with Social Security. Why would Canada, a country whose most established political party names itself “Liberal,” be the North American country to move toward a market-oriented pension fund? The new CPP has been a widely-acclaimed success. Why hasn’t the US made similar changes, when it obviously needs them? It’s not that no one has tried. Congressional Republicans led by Paul Ryan have made proposals to Barack Obama that involved partial privatization. George W. Bush failed multiple times to bring Social Security reform legislation into Congress. I wondered whether the pragmatic neoliberal Bill Clinton had favored Social Security reform, and it turns out he did. According to The Pact: Bill Clinton, Newt Gingrich, and the Rivalry that Defined a Generation, a book I haven’t yet read, Clinton and House Speaker Newt Gingrich had agreed on a plan to reform Social Security and Medicare in 1997. According to the author, it was only the Lewinsky scandal that derailed the process. Public opinion and Congressional attention turned away from policy and toward Clinton’s misdeeds.

The 1990s are gone. The new millennium has seen a collapse in the prosperity-driven political consensus that appeared to be building in the Clinton era. The paths taken by Canada and the United States have been divergent since then. Canada has seen profound reductions in government spending and taxation, increasing prominence on the world stage, and lasting political and economic stability. America, while still great, has found itself a victim of its own vices, repeatedly missing chances for reform and progress that have come from both wings of the American ideological realm. Twelve years after Clinton stepped down, America might be too politically divided to pass meaningful Social Security reform (let alone Medicare reform). The narrative of progress arrested by moral impropriety, symbolized in Clinton’s actions, has become America’s story. The struggle over Social Security, and all other federal policy, is not one of good versus evil. It’s one of competing, legitimate visions of society. These visions could be brought into focus, but it would take a unifying political superhero that neither Mr. Obama nor Mr. Bush has been.

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