Arnold Kling  

Social Security Wage vs. Price Indexing

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The Democratic National Committee accused the Bush Administration of trying to cut Social Security benefits by shifting to price indexing from wage indexing. I suggest that the administration should plead guilty.

Future benefits that are promised under the current system are higher than what can be covered by taxes under current law. That means that either benefits have to be cut or taxes have to be raised. The status quo is not sustainable. If you are planning to retire in 2022, 2042, or 2075, either your benefits have to be cut or your taxes have to be raised. Those are your choices.

Elsewhere, Tyler Cowen gives a cautious thumbs-up to price indexing.

Also, Brad DeLong has some important proposals, including a nonpartisan board to adjust the retirement age and a private account that supplements Social Security instead of replacing it.

For Discussion. What would be the advantages of disadvantages of using private accounts to supplement Social Security?

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CATEGORIES: Social Security

COMMENTS (6 to date)
pgl writes:

So we keep real payments constant even as real wages rise over time. Doesn't that mean Max Swaicky's "Little Nell" pays more taxes than you and I will but receives the same retirement benefits? I wish Marginal Revolution had comments so I could address this directly to Tyler.

Edge writes:

SS benefits are currently about 4% of GDP.

SS revenues are currently about 5% of GDP, have been so since roughly 1983, and will continue to be so till about 2018. So, for about 35 years, we'll put something like 1% of GDP above benefits into reserve.

From 2018 till 2030, benefits will jump up to 6% of GDP, but from there, benefits will level off and rise at a slower pace. We think.

We'll have capital equal to close to 1/3rd of GDP available for financing SS benefits. That ought to generate inflation plus 3%, if held in treasury securities. 3% of 33% of GDP works out to about 1% of GDP available to supplement FICA tax revenue to cover benefits.

So, to a first approximation, we should be able to cover close to the 6% of GDP projected for benefits with something close to the current 5% of GDP provided by taxes (first approximation).

Benefits now represent a fraction of your wages at retirement, adjusted for inflation. It's pretty reasonable to assume that people retiring 75 years from now will have similar needs for retirement income as people retiring today, as a fraction of their wages at retirement.

As people live longer, it seems reasonable to presume that we should provide AT LEAST as big a fraction of wages towards benefits as we do now.

I think it's reasonable as a first approximation to work with the revenues that are already there, rather than, as a first approximation, adjusting revenues upward to match the formula applied for benefits.

But, as a first approximation, we shouldn't take away 40% of revenues, acknowledge the "transiton cost" for the first ten years, then run out the trust fund and reach a day of reconing when we'll either have to fund benefits out of general revenues or further cut benefits, or admit that "transition costs" will be recurring at till about mid-century when the forumla for benefit cuts finally catches up with the diverted revenue.

If we wanted to, we could tweak the initial benefits forumula every so often on autopilot, to keep projected benefits match up with projected revenues and maintain a few years buffer in the trust.

Separate topic, Arnold - what do you think about an independent trustee, having worked for the Federal Reserve? And, what do you think about giving the trustee flexibility to supplement trust fund assets with something other than government securities?

re: supplemental accounts independent of SS, good idea. Supplemental accounts tied to SS would have to be too tightly regulated to be beneficial for the economy, I think.

Any privatization that tries to compensate for a lack of savings with borrowing is too risky. A leveraged buyout of Social Security with treasury debt would put the USA onto the path of Argentina.

jan writes:

Private accounts to supplement Social Security would
duplicate IRAs, Roth IRAs and 401Ks. I think it would just be more bureaucracy without any new benefits.

Lawrance George Lux writes:

Private Accounts will inflate the Markets for financial instruments worse than they are now.I knew an old man who was a Millionaire when I was a child. He always said,"To become wealthy, when the Earnings are not there, the funds are not there. The Money is lost to the smart Money."

The only way indexing to Prices for SS benefits can work is with a 'One Benefit' system of set largesse, so under-rating will drag Consumption. lgl

p writes:

While Brad Delong provides some context, I think that his suggestions are problematic. The rationale for why the administration is targeting SS is a bit mean spirited. First, the dollars are very substantial. Second, the intergenerational social tension SS creates is very substantial. Third, the ability to effectively address the problem is greater than the others listed.

The small FICA tax hike he suggests is NOT small to those taxed (It is very large). In addition, it is not just. The suggestion for exploring the retirement age is reasonable given an actuarial perspective.

In summary, Brad's mean spirited attack on Bush appears to reflects more of his bias than the facts he asserts to have at his disposal.

"So, for about 35 years, we'll put something like 1% of GDP above benefits into reserve."

Uh huh, meaning we keep a record of what we spent that 1% on for thirty-five years on a completely separate piece of paper.

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