Arnold Kling  

Kinsley on Social Security

Or is it Medicaid?... Carnival of the Capitalists...

Here is the crux of the issue in Kinsley's argument:

if [privatization] contemplates reducing Social Security payments proportionally to the reduction in taxes -- and counting on people to make up the difference with their new investments -- people will be, and will feel, no richer than they were before and there will be no supply-side incentives.

What Kinsley is saying is that people will work as hard and save as much in a formula-based tax-and-subsidy scheme as in a private market. To see the oddity of this presumption, turn it around.

Suppose that today we had a completely private retirement system, with mandatory savings accounts. Then tomorrow, the government announced that it was going to replace the mandatory savings accounts with Social Security, meaning taxes on current workers to pay for current retirees. This would tend to reduce labor supply and saving, because you no longer are accumulating your own savings but instead are making "contributions" into the system.

If a transition from private accounts to Social Security would reduce labor supply and saving, then obviously a transition the other way would tend to increase labor supply and saving. I am not saying that this effect would be so strong as to eliminate the Social Security deficit, but that strikes me as an artificially high bar. Anything that reduces the deficit, even without eliminating it, is a net plus.

UPDATE: see also Reform Club's Alan Reynolds.

For Discussion. Will privatization's effect on saving be significant?

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CATEGORIES: Social Security

COMMENTS (8 to date)
Dewey Munson writes:

The Govt is only an (expensive) intermediary in the SS transaction.

CURRENT workers contribute CURRENT wages to Retired workers at the CURRENT value of money.

CURRENT workers in the future will receive wages from the then CURRENT workers at whatever value money will have at that time.

Implicit in Pay-As-You-Go is "no debt" and "no savings". The tax rate should be only what is necessary to transfer current funds at current value of money.

Pay-As-You-Go is inflation proof.

Being obscured is the intent to protect the destitute by means testing the benefits. Failure to do so unnecessarily inflates the tax rate required.

In days of yore wages were income. Today income is in many forms and, given the purpose of SS, it difficult to understand why the tax isn't applied to all income.

The real problem is with the flow of Govt money. Once it starts flowing everyone forgets the purpose (of Social Security)and tries to get in line.

The dumbness of wealthy people is remarkable. I live in a state (CT) where we get taxed about $1.50 for every dollar we get from State and Feds and we still promote "Let the State/Feds pay for it" I guess that's new math.

Back to the subject.

I have 3 kids out there and I often wonder if their SS tax equals my SS income? All in the Family?

mcwop writes:

For Discussion. Will privatization's effect on saving be significant?

If you have personal accounts, then saving will go up (if you do not count SS as savings). The change may not be significant, as I do not expect personal accounts to be some sort of impetus for people to increase their savings rate in addition to the personal account savings. Maybe, if the accounts allow people to put in additional tax deferred savings (if they are not covered by such a plan at work), then you may see a more significant change in savings rates.

From the Kinsley Article:

Privatization would deflect some money from the Social Security trust fund into private investment, but the government would have to borrow an equal amount to replace it.

Ah, the crux of the problem! Proposals to make SS fairer for ALL workers circles right back to the general budget question. Where will the general budget get the money it needs? Simply, instead of borrowing from the SS surplus (currently it does this without having to market new bonds) it will have to go to the market to borrow. Meaning that current account interest expenses increase and the bond market will have to consume the new issues (which it may well do without any problem). The proposed fixes that SS supporters make (increasing the retirement age, increasing the wage cap, and increasing payroll taxes) are all designed to extend the SS surplus and feed the general budget.

I think this was his worst moment:

Many responders made a related point, "Compared to what?"

Whatever its flaws, is privatization inferior to the current system, with its looming inability to keep its promises? One problem with this question is that privatization itself doesn't address this looming gap. Privatization plans call for borrowing a "transitional" gazillion dollars to close the gap. With a transition like that, any plan will work, including no plan at all.

Since he doesn't seem to realize that that is what the current system is going to have to do too, unless benefits are cut, or taxes raised.

What a dummy.

Lawrance George Lux writes:

Will privatization's effect on saving be significant?

Economists would say it will increase labor supply and Saving, but the exact opposite will state effect. Labor supply and Savings are both based upon expectations, not formulas. Labor will see that no matter what they do--work or Save--they will recieve less Retirement income. It is likely to reduce both labor supply and Savings. lgl

JoA writes:

Please stop acting like Social Security is welfare. We have put in 6.2% on $87900 and our boss has paid the same amount again.

$13,489 a year if you include the medicare 1.4% paid in plus matched by the boss. Year after year we have paid in the maximum. Whatever we were asked to pay.

The government employees can retire at 55-60. If you want to save money work on that.

You never figure those people in that die before they draw their social security.

"Means testing or working til they are seventy" will be the biggest rip off ever of the American worker. I don't think it will fly.

We had a lot of money in there when Reagan raided it, then in 1983 we started paying in extra. You can call it "pay as you go" til the sun goes down, but we started paying the surplus in 83 to cover the baby boomers.

We have paid in enough to pay for our grandchildren's retirement.

It is time the rich paid their fair share of the taxes and stop using our surplus social security.

AGBDC writes:

Kinsley's basic argument is that if the transition to accounts is financed with debt, the negative effects of the debt on national saving, tax levels, labor incentives, etc. would counteract the positive effects of the accounts.

Considering Arnold's example, if we switched from a funded system to a paygo system we'd have a temporary budget surplus which we could use to lower taxes, repay debt, etc. The positive effects of doing so would counter the negative effects of shifting from funding to paygo.

Kinsley's broader point is that there's no free lunch (or at least not much of one).

Bruce Bartlett writes:

In essence, Kinsley believes that the manner in which a tax (or benefit) is assessed is meaningless. To him, the incentive effects would be the same if we levied a 100% tax rate and rebated most of it, had a steeply progressive rate schedule or a a flat rate as long as the dollar amount of the tax was the same at the end of the day.

Boonton writes:

Actually Kinsley's argument was, in essence, that for this theory to work everyone must believe it to be wrong.

Take the disincentive to save caused by Social Security. Kinsly acknowledges that a person may not save as much knowing he will soon be getting a guaranteed check each month from the gov't for life. But if the person had a 'privatized' account of equal value then why would he have more incentive to save? He wouldn't because he would be, in essence, exactly where he was with social security.

Savings has to be increased though because for every $1 the gov't will put into a private account will be offset by $1 incurred in gov't debt. Otherwise we are essentially were we are now.

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