Arnold Kling  

No Entitlements Crisis?

PRINT
Survey of Regulation... Textbook Omissions...

Now that President Bush is proposing to reform Social Security, opponents are arguing that there is no crisis. They might wish to read Laurence Kotlikoff.


continuing to ignore the problem will simply let more generations, particularly older ones off the hook, and dump an even bigger problem in our kids’ laps...

Delay has a significant cost. Waiting 5 years, for example, to raise federal income taxes means having to raise them by 74 percent rather than 69 percent. The reason delay matters is that the $45 trillion of red ink, like our credit card bills and any other liability we fail to pay, accumulates at the rate of interest.


Kotlikoff sees a likelihood that the United States and Europe will be unable to extricate ourselves from the debts of our welfare states, and we will find ourselves printing money to pay the bills, creating hyperinflation.

Arithmetically, most of the problem of unfunded future liabilities is in Medicare. However, I would argue that most of the potential for cutting government spending is in Social Security. This ought to be done gradually, in a planned way. My favorite approach, of course, is starting to raise the age of government dependency (retirement age) for workers now under 50. One advantage of this approach would be that it could be applied to Medicare as well as Social Security.

Instead, the approach that is being trial ballooned elsewhere these days is substituting price indexing for wage indexing of Social Security benefits. That has the advantage of cutting the growth of benefits sooner. However, it would not give workers any means of offsetting the benefit cut by working longer.

Thanks to Stephen Karlson for the pointer.

UPDATE: on the topic of changing the index for calculating benefits, the AARP has a useful analysis. Thanks to reader Bill Sterling for the pointer.

For Discussion. Which will be harder to reduce--projected spending in Medicare or projected spending in Social Security?


Comments and Sharing


CATEGORIES: Social Security



COMMENTS (11 to date)

Since Medicare's little problem arrives first it will impact the solution to SS. So, one could say SS is thus the more difficult.

Lawrance George Lux writes:

The projected spending in SS benefits means relatively nothing, if Medicare and Medicaid can be capped. Nothing will be accomplished if they are not.

Kotlikoff is an excellent Economist doing prize work, but he is a bit of a hysteric. The fiscal imbalance remains bad, but in what terms? Current Account and Trade balances exhibit extreme fluidity. Cases in Point:

1) Cutting the Defense budget to 22% of current level, and abandoning current foreign adventures, would leave the United States equally protected and reduce or stop growth in the National Debt.
2) Raising the cost of Imports by sixty percent would only reduce current standards of living in the United States by 18-20% over a three-year spread, and lead to Currency flow into this Country of a Current Accounts surplus.
3) Elimintion of all Welfare transfers in this Country would only reduce the American standard of living some thirty percent over a three-year period, while creating a surplus in Federal budget, Current Accounts, and Trade balances.
4)Elimination of all Government funding of medical Costs--Federal, State, and Local--would still maintain 87% of current health care provision, and save 3% of American GDP. It would also cost about two months of American life expectancy, while not retarding the Pain-killing element of health care even the slightest.
5) Refusal to allow American Business Interests to deduct Wage payments to foreign labor would bring a Current Accounts surplus of over 7% within five years.
6)Simple passage and enforcement of a Constitutional provision for a balanced budget except within the context of declared war would entail curtailment of programs to the degree creating surpluses which would bring elimination of the National debt within 16 years.

The United States and Europe are in horrid fiscal shape, but claiming Doomsday scenarios as scare tactic is base and unworthy. The fiscal crisis is of Our making, and We can unmake it without total destruction. lgl

spencer writes:

How do you propose determining what is a payment for foreign labor. Would you eliminate the Mexican border industries?

Jim Glass writes:

"Now that President Bush is proposing to reform Social Security, opponents are arguing that there is no crisis"

It's even more interesting than that. To fight private accounts they have started making two contradictory, mutually exlcusive claims:

1) There is no crisis, all benefits are secured and will be easily paid -- so there is no need at all for private accounts to shore up SS; and

2) The crisis is unavoidable and SS benefits are sure to be cut -- so prefunding benefits with real investments is not future-cost-saving "beneficial prefunding" but an assumption of an extra cost, since it commits the government to fund benefits it would otherwise not pay.

Fruman, Gale, and Orszag have just made this argument on a CBPP position paper.

Their point is to refute Friedman and Greenspan, who have noted that SS's unfunded benefit promises are an "implicit debt" of the government that is every bit as real its explicit debt, if the government intends to pay those benefits. Thus, making the implicit debt explicit by funding it through private accounts costs nothing.

They answer that since we all expect the government won't pay a significant amount of the SS benefits it has promised, making the implicit debt explicit though private accounts will result in the government getting "stuck with" (their words) an obligation it would otherwise avoid -- paying all those SS benefits -- and the coming crisis is so bad the we can't afford that.

BTW, Krugman has clearly signed on with #2, recently describing today's promised SS benefit schedule as "nothing more than a suggestion to future Congresses".

Of course, #1 and #2 are totally and completely contradictory.

If #1 is true and all promised benefits will be paid, then not only are Friedman and Greenspan correct in saying prefunding them is not a cost, but it's also true that prefunding them now to avoid having to fund them after the fiscal crunch hits has got to be beneficial. So #2 is false.

If #2 is true and benefits will have to be cut due to the fiscal crunch, then obviously #1 is false.

But the Democrats are arguing both at the same time right now.

I've covered this in more detail over at my place.

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 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 Fammily?

Dewey Munson writes:

Uh oh! Medicare.

A completely different animal.

Here is where Capitalism and "the market" should recognize and solve the problem.

The market is about trading and in any trade it is necessary that traders be able to walk away.

In health matters means and need are totally offset in time and are in conflict in urgency.

Here's a problem for capitalism. How do you square a system which must include someone who never sees or needs a doctor with a youngster born with a heart defect?

Every idea I can come up with gets pretty close to socialism and Bureaucracy. Not a good thing.

mcwop writes:

Neither, general budget spending (non Medicare, non SS spending) will be hardest to reduce. So many want to raise the payroll taxes or apply other accounting fixes to generate more revenues for the general budget, which will not be able to tap the SS trust fund in about thirteen years.

Jon writes:

Jim Glass tries to summarize the opponents of private accounts as two simple arguments. Unfortunately this gross oversimplification, obscures the real arguments he is trying to refute, although it makes it easier to refute them.
A closer statement of the reasons for opposing private accounts.
#1) The proponents of private accounts overstate the problem.
#2) Private accounts will not fix the problem.

Both of these arguments are reasonable and not contradictory.

As previous posters have mentioned, the current system is merely a promise to current workers that they will get benefits in the future in exchange for the taxes they pay now. This neither the "lockbox" nor the "IOU to ourselves". It is a reduction of current government debt (through the surplus) in exchange for a promise that the future leaders will pay benefits from the funds that would have been paid to bond investor.

It is rather far into the future that the total amount of social security payments will exceed that is due to today's workers. Benefits could ultimately be cut (most likely through increasing the retirement age). 20 years in the future health improvements could allow more people to become productive into the 80s.

One must remember the purpose of social security was not to give people 30 years of playing golf in Florida, but to keep people who are no longer able to work, typically due to old age, from becoming totally destitute.

Even if social security benefits do not change, market forces such as decreased returns on investment coupled with greater earning capacity of elderly people, will cause the able bodied elderly to work beyond todays typical retirement age.

Jim Glass writes:
"It is a reduction of current government debt (through the surplus) in exchange for a promise that the future leaders will pay benefits from the funds that would have been paid to bond investor."

Alas, while there never was any evidence that the SS surplus ever reduced gov't debt at all -- or that this belief was ever more than wishful thinking -- there now is solid evidence that it has increased gov't debt by a trillion dollars.

To wit the Smetters study (.pdf)

"We find that there is no empirical evidence supporting the claim that trust fund assets have reduced the level of debt held by the public. In fact, the evidence suggests just the opposite: trust fund assets have probably increased the level of debt held by the public....

"... each dollar of Social Security surplus appears to have actually increased the debt held by the public in the past by $1.76.

"At first glance, this dramatic overspending of Social Security surpluses seems entirely implausible. However, the next section presents a simple game theory model that is consistent with this result..."
~~~~

One must remember the purpose of social security was not to give people 30 years of playing golf in Florida, but to keep people who are no longer able to work, typically due to old age, from becoming totally destitute.

That's becoming the story line of the moment, but until SS started paying negative returns of late nobody, including the Social Security Adminstration, ever denied that the purpose of SS was to provide a universal pension to everybody that provided a better return than was available from a comparable investment in the private sector ... with the largest dollar positive returns going to the highest income, richest people. Which they often used to finance their warm-weather vacations.

If the real purpose of SS actually was to keep people from becoming "totally destitute" then you've got to admit it has one heck of a design problem, what with the way it's paying benefits to Warren Buffett (funded with taxes collected from the paychecks of his Dairy Queen employees) and all. And the way it will soon enough be paying benefits to Bill Gates even as it has to start using income taxes or new debt to do so, to cover its cash flow deficit.

Personally, to the extent SS remains paygo, I'd favor turning it into the "destitution fighting" welfare program of popular myth by means-testing it back into paygo balance and cutting the rich out of it.

Means testing avoids the deadweight cost to the economy of higher taxes, avoids the regressive effect of all general benefit cuts (which all hit the poor hardest) and certainly seems consistent with the popular mythology of a SS that is merely insurance against poverty. (Why should the rich collect such insurance?)

But let's not kid ourselves that it wouldn't be a dramatic change in the program, in factual reality.

Jon writes:

As to Jim's second point, we don't do a means testing of social security for two reasons. One is to maintain broader support. The second is to limit the disincentive towards personal saving.

Jim Glass's first point (and that made by his source) is merely that because the government spends all of the "surplus" and more, we should not view this as a "reduction in debt." The argument rests on the claim that the public that is ready to manage public accounts is too dumb to understand that politicians play games with budget numbers. The support for this argument is given by a time series regression.

From a book keeping point of view, this is irrelevant. From a policy point of view, it is almost irrelevant as one cannot determine whether the politician's spending causes them to set the tax large enough to generate the surplus or the surplus generates the spending. The reality is the politicians generate both.

Deb Frisch writes:

Jon writes:

Jim Glass tries to summarize the opponents of private accounts as two simple arguments.

Unfortunately this gross oversimplification, obscures the real arguments he is trying to refute, although it makes it easier to refute them.

A closer statement of the reasons for opposing private accounts.

#1) The proponents of private accounts overstate the problem.

#2) Private accounts will not fix the problem.

Both of these arguments are reasonable and not contradictory.
-----
Thanks Jon for revealing the shenanigans going on here.

Comments for this entry have been closed
Return to top