June 8, 2010

Meeting the Long-Term Challenge of Old-Age Spending

What Can We Learn from the Greenspan Commission?
  • Robert Gillingham

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Is the United States going bankrupt? This question is asked with increasing frequency for two main reasons. First, deficits have soared in response to the financial crisis and the (recently ended?) recession. Second, spending on health and social security is projected to increase drastically over the next 60 years, engendering extraordinary fiscal pressure. Some action will have to be taken. The challenge is to take that action as quickly as possible, so that the fiscal future that we now face can be changed before it does significant and possibly irreparable harm.

Before deciding what to do, it is important to quantify exactly what the obligations of the federal government are. For better or worse, there are a number of measures of federal liabilities. Moreover, none of them is definitive for evaluating not only what obligations the government must meet, but which future costs it is most likely to honor. The most comprehensive picture of the assets and liabilities of the federal government is presented in the Financial Report of the United States Government (U. S. Treasury, 2010). In addition to the federal debt securities held by the public (plus accrued interest), the balance sheets recognize other liabilities that the government has committed to pay. What the Financial Report does not recognize as liabilities are any social-insurance benefits that are not yet due and payable. It does, however, include Statements of Social Insurance that provide the long-term projections for the social insurance funds prepared by the fund trustees.

There are two important reasons why the balance sheet of the United States government does not recognize future social-insurance benefits as liabilities. First, current law provides for full benefit payments only to the extent that there are sufficient balances in the social-insurance trust funds. If the trust funds run out, benefits must be delayed until the trust funds can be replenished. Second, the law states—and the Supreme Court has verified—that program participants have no accrued property right to benefits. This fact is emphasized by the Social Security Administration in the annual statements sent to all participants each year.

Only once has a major social insurance trust fund been threatened with insolvency and the specter that benefits would be delayed. The 1982 Annual Report of the Board of Trustees stated: "Without corrective legislation in the very near future, the Old-Age and Survivors Insurance Trust Fund will be unable to make benefit payments on time beginning no later than July 1983." To avoid insolvency, President Reagan issued Executive Order 12355 on December 16, 1981 establishing the National Commission on Social Security Reform (commonly known as the Greenspan Commission, after its chairman). The Greenspan Commission had to act fast to avoid trust fund exhaustion, and it produced a set of recommendations that were in large measure adopted by Congress, avoiding insolvency in the short run and significantly improving the cash flow of the system into the foreseeable future.

A number of observers have argued that the Greenspan Commission was simply a rubber stamp for a political compromise between a Republican president and Democratic leadership in the House of Representatives. Even if we accept this criticism at face value, it is not clear that would make the Greenspan Commission a failure. If the political compromise is viable and the recommendations are sensible, the commission could facilitate their acceptance without compromising its integrity. The social security system was at a crossroads, and the fact that the government was able to stave off insolvency was an important achievement, even if the final outcome was to postpone, rather than solve, the problem.

From today‘s perspective, the important question is whether a Greenspan-type commission could address the looming crisis in entitlement spending. One might argue that recent appointment of the National Commission on Fiscal Responsibility and Reform could fit this mold. However, this commission lacks the leverage of either special treatment for its recommendations—for instance, a "vote without amendment" provision—in Congress or a forcing event, such as trust fund exhaustion. Could a commission focusing on entitlement spending use the special status of the trust funds to force action?

Two factors reduce the likelihood of real reform in the near future. First, unlike when the Greenspan Commission was appointed, trust fund exhaustion is still a number of years off. Second, the structure of the entitlement-spending problem has changed. The Greenspan Commission could achieve its objectives with a few, politically palatable recommendations. The same approach might work again for social security, but the current spending problem for Medicare is much less tractable. It is unlikely that the entitlement-spending crisis can be resolved without explicitly addressing (1) the redistributive goals of social insurance and (2) the appropriate role of the government in the financing and provision of health care.

However, the key lesson from the Greenspan Commission is that government action will be required to address entitlement spending at some point to avoid the exhaustion of the social insurance trust funds. The political challenge is to use this fact to motivate action before trust fund exhaustion is imminent to (1) avoid lastminute "fixes" that might not address the problem in the most effective manner and (2) reduce the scope and smooth the timing of reforms to make them more palatable to the electorate.