Arnold Kling  

The Deficit Argument, IV

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Growth in Flour... Romance or Signalling Game?...

Hal Varian gives a clear account of the concern with long-term deficits.


A recent study by the economists Alan J. Auerbach, William G. Gale, Peter R. Orszag and Samara R. Potter, "Budget Blues: The Fiscal Outlook and Options for Reform," lays out the facts...

According to the economists' projections, the spending on Social Security, Medicare and Medicaid will grow from 9 percent of G.D.P. in 2001 to 21 percent by 2075. "These three programs," the economists say, "would ultimately absorb a larger share of G.D.P. than does all of the federal government today."


Varian points out that under tax law as presently written, the Alternative Minimum Tax looms very large.

those who expect to gain from future tax cuts simply do not understand that much of the tax saving they anticipate will be taken away by the alternative tax.

Finally, he writes

There is no magic bullet for Social Security. Fixing it will involve some combination of increasing the retirement age, cutting the growth rate of benefits and increasing contributions. Medicare and Medicaid will be an even tougher problem.

For Discussion. Varian suggests that the tax cuts of 2001 should be replaced by repeal or reform of the Alternative Minimum Tax. What are the pros and cons of this idea?


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CATEGORIES: Social Security



COMMENTS (11 to date)
Jim Glass writes:

"There is no magic bullet for Social Security. Fixing it will involve some combination of increasing the retirement age, cutting the growth rate of benefits and increasing contributions"

Or alternatively, as per Milton Freidman, closing SS down in a day, giving everyone bonds worth the actuarial value of their net benefits earned to date, paying off the bonds with income taxes as government obligations should be, eliminating the payroll tax, and perhaps instituting a private account fully funded retirement system the same day.

Net results: Cost to the government, $0. The 12.4% tax on low-income jobs is eliminated, increasing entry-level jobs. Savings much less than 12.4% can provide larger retirement benefits than Social Security becuse of the higher returns real investments earn compared to the negative-to-minimal returns SS will provide in coming decades. The cost of paying off accrued SS obligations shifts to the rich from the poor. The bonds will be worked off over coming decades, helping the national debt situation rather than worsening it. Future retireee benefits are no longer a tax cost to anyone. The national savings rate increases, helping to finance Medicare.... Win-win-win-win.

Call it the "magic bullet" solution. ;-)

The only reason people don't see it is that politics binds them into thinking that SS can be changed only in small, difficult increments, due to fears of illusory "transition costs" and such -- as Friedman pointed out in "Social Security Chimeras", an op-ed in the NY Times a few years back, now online at http://www.ioptout.org/articles/990111.asp

It's political path dependence, "lock in" market failure in political markets.

David Thomson writes:

The Milton Friedman social security plan doesn’t have a snow balls chance in hell. Many of those paying into the system, for any significant amount of time, demand far more than just getting back their original “investment.” I personally think we should permit people to receive social security payments---and still continue to work! Wouldn’t this be a better idea?

Bernard Lewis is 86 years old and remains a very productive member of the scholarly community. This is likewise the situation for numerous, if not the vast majority of white collar professionals. Let’s be blunt: our dilemma mostly pertains to the retirement of the blue collar worker. Somebody who only worked on a production line often hasn’t a clue about what to do with their declining years. They will likely go out to the proverbial pasture and waste away their days playing shuffle board and watching “I Love Lucy” reruns.

Jim Glass writes:

** Many of those paying into the system, for any significant amount of time, demand far more than just getting back their original “investment.” **

That's one of Friedman's points. These people won't be getting back far more than their investment in the future from SS, and many many will in fact be getting back far *less*. Remember how Krugman (pre-NY Times version) called SS a "Ponzi game". How much more than their investment does the last generation to enter a Ponzi game get back? If they *actually* want to get back significantly more than their original investment -- and you are right, they do -- then they are going to have to adopt something like Friedman's solution, and sooner or later this will occur to them.

** I personally think we should permit people to receive social security payments---and still continue to work! Wouldn’t this be a better idea? **

People can do this right now, of course. Nothing stops people age 65 or over from taking SS benefits and continuing to work.

But note that this *lowers* the amount they get back from SS relative to their "investment" in it, since they have to keep on investing through payroll taxes if they keep working -- but these extra post-age 65 taxes do not increase the benefits they receive.

David Thomson writes:

"People can do this right now, of course. Nothing stops people age 65 or over from taking SS benefits and continuing to work."

I am confused on this point. It was my understanding that one is severely penalized if they receive SS benefits and still wish to earn added income.

GT writes:

Not sure I follow you Jim. Are you saying that there are millions of people willing to pay taxes to meet future obligations but will accept getting nothing in return?

Jim Glass writes:

David:
There is no benefit penalty for Social Security recipients age 65 and over who continue to work. There used to be but it was repealed a few years back. (There's still a penalty for people who take benefits early, age 62 to 64, and continue to work. One dollar of benefits is lost for every two dollars of earnings over $11,520 [in 2003]. But that ends at age 65.)

GT:
David said an obstacle to SS reform is that people want to get back from SS more than they put in. Then he suggested as a reform that people be allowed to work while receiving SS without penalty. I simply observed that this reduces the amount they get back from SS relative to what they put in.

GT writes:

Jim,

I was referring to your very first post where you talk of the win-win-win-win solution.

It seems to me based on the premise that millions of voters will willingly accept paying into SS for years and never getting a dime back.

Jim Glass writes:

"I was referring to your very first post ..."

Everyone would get back the exactly the value of what they have earned under the current program, no more or less. Those benefit payments would simply be financed from general revenue rather than from payroll taxes, all as per Friedman's explanation via the link.

GT writes:

Friedman's explanation is based on a scenario, that if true, could solve ALL the economic problems we have.

In other words, it's pretty much fantasy land.

For it to work there must be millions of workers who have just joined the labor force that must be willing to pay taxes for many years to payoff the SS obligations yet they themselves never receive a dime back.

Notice that it's not enough for them to accept a low level of return. They must basically accept zero return.

Millions more (say those around their 40s) must accept that they will continue to pay for the SS obligations of previous workers but their expected benefits will be drastically curtailed.

If you can manage that politically then why don't we ask those people to pay for everything else.

I'm a bit surprised you gave any value to this proposition. In fact I thought you were being facetious.

The bottom line is that there is no easy way out of SS. Somebody, somewhere must be willing to pay more or receive less.

There's a reason why the saying is that there is no free lunch.

Sol writes:

I thought the idea point of the proposal was that everyone would receive the estimated value they would receive under the current system? The proposal is simply a bookkeeping maneuver.

And GT, I don't know how old you are, but I don't know many people my age (30-something) who expect to get anything from SS. I just ran the figures through one of the online calculators, and it gives me a 0.6% rate of return, and claims the payroll taxes (using the current system) will have to be 29% at that time. Fat chance of that happening.

omid writes:

hello
I am omid,I am student,from Iran.
can you help me for to find email address milton friedman (economist)?
tanks
goodbye

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