Arnold Kling  

Social Security Ad Nauseum

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I have an essay that looks at recent writing by Brad DeLong and Paul Krugman.


To economists, raising the retirement age is the obvious fix for a system that otherwise faces an ever-declining ratio of workers to retirees. Unfortunately, it appears to have never stood a chance politically. For that reason, DeLong proposes creating an independent board, modeled on the Federal Reserve, to focus on keeping Social Security in balance.

If you just cannot get enough analysis of Social Security, Andrew Samwick has a pointer to an email list discussion among economists.

One issue that I am just starting to think about is life expectancy, which is discussed in another Samwick post.

For Discussion. Today's life expectancy calculations pretty much assume that a good proxy for your death rate 10 years from now is the death rate last year of people 10 years older than you. What alternative approaches are there?


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CATEGORIES: Social Security



COMMENTS (5 to date)
spencer writes:

It is a very simple matter to calculate a trend growth rate for life expectancy and apply that.
If you do that you find that the growth rate was about 1% from 1900 to 1950 and slowed sharply to about 0.25% between 1950 and 2000 and in recent years has slowed to about 0.1%.

On this basis it would be safe to assume it increases about 1% over the next decade.

This analsis pretty much assumes that the biggest factors behind rising life expectancy were public health measures like clean water rather than treatment of individuals that got sick. Unless you have some reason to expect major changes in the treatment of people that are already old there is little reason to expect a major reacceleration in life expectancy over the next decade.

Edge writes:

Krugman's op-ed today has more Type-C arguments.

In particular, the $1-2 Trillion transition cost acknowledged if we divert 20% or so of payroll taxes to private accounts understates transitional financing considerably, because traditional SS revenues and benefits would go into a deficit condition immediately and not return to balance until about 2050.

The balance around 2050 would occur because of dramatic cuts in traditional benefits. But we'd borrow a total of about $15 Trillion between now and then. I presume net present value of that transition financing is only about half of that $15 Trillion, but it is still an awful lot to borrow to get to a system that will be paying a quarter of the traditional benefits of the current system before that debt is inflated away.

At roughly $1000 of interest payments due on each $Trillion of federal debt, for each family of four, $15 Trillion of debt amounts to $15K of annual future taxes for an average family. You'd need a heck of a lot of equity premium to both pay back the traditional benefits you trade away to get a personal account and also pay back your share of the deferred taxes.

Regarding the idea of an independent SS board of trustees, I believe the idea is as much to make the trust itself independent as it is to allow tweaking of benefits. I think it is reasonable to tweak benefits to match revenues over the long trem, but more important for the trust to get a reasonable, low risk return on assets. It appears that political risk is high, so it is time to put real assets in the trust and restore confidence that the trust will have assets with which to pay benefits.

Lawrance George Lux writes:

The correct analysis for life expectency is (medical success rates times medical incidence times Population times Cost of Treatments) divided by total Payment able to be generated. Seniors are already missing consistent Checkups because of the emplaced Co-Payments. Life expectency can be expected to decline within a decade, but not at a rate which can alone save the SS system. lgl

GT writes:

Arnold,

It simply makes no sense to spend any political capital fixing a program that needs no fixing now and may never need one in the future. There are more important things to address before we get to SS if your goal is to improve the US fiscal situation, starting with Medicare.

Dezakin writes:

Oh yes. I'm hopeful that the Bush administration makes some traction in the right direction and rationalizes social security, but I'm very doubtful after what they did with medicare.

It would have been far better to have a Democrat as president and a Republican congress that hated him and pass no laws at all for the past four years than the Medicare cow that was carved up. Ideology will drive the package, rather than economics. Maybe we'll get lucky, but after the last four years, I doubt it.

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