Arnold Kling  

Social Security Debate

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The Washington Post presents a wide range of viewpoints.

Mark Weisbrot and Dean Baker write,


The bottom line is that Social Security is more financially sound today than it has been throughout most of its 69-year history, according to Social Security trustees' numbers. If workers in 2050, who will be earning on average 68 percent more in real, inflation-adjusted dollars than they are today, have to pay 1 or 2 percent more of their income in taxes -- as they have in the past -- they won't be able to complain much. They will still enjoy higher living standards than we do today.

In other words, keeping sticking the older generation's hand in the younger generation's pocket. We've done it for over 60 years now, and it's been fun, so let's have more.

Laurence "generational storm" Kotlikoff thinks that the fun ought to stop, and that the Bush plan won't do it.


The indexing wipes out a large and growing portion of the benefits promised to our kids. And the option to invest comes at a big penalty. According to the fine print, every dollar invested leads to a further loss of Social Security benefits equal to that dollar compounded at a 2 percent rate of return after inflation. If our kids invest in a safe manner, they'll be lucky to earn 2 percent after inflation. Indeed, the current real yield on long-term inflation-protected U.S. Treasury bonds is less than 2 percent.

The investment option is no real option at all. It's a side show to divert attention from the main point of the plan -- wiping out most of our kids' benefits and thereby raising their net taxes.


Kotlikoff wants to see some increased taxes now, so that the current elderly bear some of the burden for the huge debts that the government has incurred on behalf of future generations.

Jonathan Rauch writes,


the attempt to create private Social Security accounts is essentially conservative social counter-engineering. Government should help provide for unforeseeable contingencies: tsunamis, unemployment, open-heart surgery. But if there is one event in all of life that is wholly foreseeable, it is the advent of old age. Why, then, shouldn't people save for their own retirements, instead of relying on welfare from the government -- which is what Social Security, as currently constituted, really is?

Jeffrey Brown writes,

By providing a clearer link between individuals' Social Security contributions and the benefits that employees receive, personal accounts could increase the perceived rewards for work and thus boost economic activity.

...If the transition to personal accounts were partially funded from new revenue or decreased spending, then national saving -- and thus the size of the economic pie -- would increase.


Laura D'Andrea Tyson favors private accounts in addition to Social Security, which is a position that other former Clinton officials seem to take (in contrast with hard-liners like Paul Krugman, who appear to think that private accounts are anathema). Tyson writes,

[Private accounts in addition to Social Security] could address the dilemma of what to do about inadequate retirement saving among moderate and low-income families by supplementing, not replacing, traditional Social Security benefits. Contributions to these accounts would be voluntary but would be encouraged by generous tax incentives and federal matching contributions to enable households of modest means to build adequate retirement savings.

Finally, Alicia H. Munnell is skeptical that individuals can make the right choices.

The experience with 401(k) plans in the United States is even more telling. People make bad decisions at each step. A quarter of those eligible to participate choose not to do so. Less than 10 percent of those who do participate contribute the maximum. Over half fail to diversify their investments, many over-invest in company stock, and almost none re-balance their portfolios in response to age or market returns. In addition, the majority of participants "cash out" their balances when they change jobs.

...A spartan system with government administration would hold down costs. Limiting investment options would control costs and lead to better investment choices. And life-cycle funds that automatically rebalance would prevent individuals getting stuck near retirement with too much in equities if the market suddenly tanks.

For Discussion. Should Social Security continue to be an intergenerational transfer?


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CATEGORIES: Social Security



COMMENTS (17 to date)
Jim Glass writes:
"If workers in 2050, who will be earning on average 68 percent more in real, inflation-adjusted dollars than they are today, have to pay 1 or 2 percent more of their income in taxes -- as they have in the past -- they won't be able to complain much."

-- Mark Weisbrot and Dean Baker

How about a 93% increase in income taxes??

The SS Trustees say that the general revenue demands of SS and Medicare will increase by 7.94 points of GDP by 2050.

Total federal income taxes today are 8.5% of GDP -- of which 7.94 is 93%.

Of this 93% increase most (53 points) will be needed to cover the operations of the trust funds (SS and HI, few people mention for some reason) which have been collecting payroll taxes supposedly to prepay these costs.

Trust funds are a great help, eh?

The rest is for general revenue expense of Medicare programs.

What do we call people who describe a 93% income tax increase as one of "1 or 2 percent more of income"?

Shouldn't Krugman be getting angry and calling these guys liars?

P.S.: Weisbrot and Baker also don't talk about how those workers of the future will be getting back from SS so much less than they put in with their increased taxes -- as never happened to other workers in the past.

Will those workers have something to complain about there?

Jim Glass writes:

Re. Weisbrot and Baker's observation that those who are richer than the predecessors "won't be able to complain" if they get hit with a charge, this logic of course should work both ways.

E.g.: The days when seniors were the poor among us are long gone -- today seniors are the richest demographic group by far, and they are pulling up and away from the rest every year.

So how about the idea of seniors -- who are far richer as a group than they were, say, 45 years ago -- taking a benefits haircut so taxes can remain at their current level on workers into the future?

Do Weisbrot and Baker think seniors "won't be able to complain" about such a scheme? ;-)

Timothy writes:

I don't think it should continue as an intergenerational transfer. As a single, new member of the workforce the amount of tax I pay for SSI is about twice what my health insurance costs. What's more, is I think politicians are only thinking from the perspective of the AARP lobby. As a new worker, who could conceivably be retiring in 2050 or so, I expect exactly $0 in Social Security. People younger than me, today's children to whom those outlays are "promised", don't even know what Social Security is let alone expect anything of it. If we reform the system now the five-year-olds to whom benefits have been promised will have the correct expectations.

Edge writes:

I found it interesting that Bill Thomas has introduced a portion of Kotilkoff's plan, switching to a VAT tax to finance SS benefits to the mix.

That's an idea that I've considered as a possible means of supplementing or replacing a portion of the payroll tax. I don't know the numbers well enough to say I endorse a VAT of any stripe, and there are certainly stripes that I disagree with.

Presumably, Thomas doesn't overlap with Kotilkoff's view much beyond the possibility of using a VAT, and Thomas would prefer to substitute VAT for a portion of income taxes.

I'm intrigued with Thomas's observation that the USA's tax code is misaligned with most other nations and that's contributing both to the US current account deficit as well as a part of our fiscal imbalance. It seems self-evident that VAT allows you to subsidize your export industries and tax your imports, and that the US might be better off taxing our trade imbalance rather than devaluing our currency and juggling our corporate tax code to fit into WTO; but I haven't noticed much in the popular press analyzing the international aspects of VAT and where the US fits into the international picture.

spencer writes:

Whatever form it takes -- social secutity, individual investments, etc.-- if retired people are consuming X% of GDP it is a transfer payment from the output of the current generation of
workers to the currently retired.

I do not see how having any non-working members of a society consuming can be anything but a transfer payment. What is the difference between someone living off of a trust fund, social security, or welfare? They are all consuming without producing, especially if the trust fund is invested in govt securities.

Boonton writes:
How about a 93% increase in income taxes??

The SS Trustees say that the general revenue demands of SS and Medicare will increase by 7.94 points of GDP by 2050.

Total federal income taxes today are 8.5% of GDP -- of which 7.94 is 93%.

Jim is misreading the report. The link he cites shows an estimated revenue shortfall of 1.68% of GDP. For reasons explained on the previous SS thread, Medicare is too different from Social Security to be honestly lumped into the debate. The numbers don't even add up to 7.94 points.

The very report he uses to sprout this nonsense states quite clearly that all of SS's projected problems go away with a 15% increase in the payroll tax (taking it from about 12% to about 14%) or a 13% cut in benefits (removing the wage index results in a much steeper decrease in benefits).

spencer

Whatever form it takes -- social secutity, individual investments, etc.-- if retired people are consuming X% of GDP it is a transfer payment from the output of the current generation of
workers to the currently retired.

I do not see how having any non-working members of a society consuming can be anything but a transfer payment. What is the difference between someone living off of a trust fund, social security, or welfare? They are all consuming without producing, especially if the trust fund is invested in govt securities.

Randy writes:

Leave social security alone - don't fix or revise it. But never pay out more than is taken in. If this means that benefits will be gradually reduced over time, so be it - this simply indicates that the current level of benefits is either too generous or misappropriated or both. As compensation for reduced benefits, increase the contribution limits on IRAs, 401ks, etc. This will provide personal accounts on a voluntary basis for those who can afford it, while leaving the safety net intact for those who cannot. And, of course, it requires no politician to risk his or her career.

P.S. The idea of additional optional personal accounts is close, but not quite right. There is simply no need for this to be a new government controlled plan. The investment vehicles already exist.

Lawrance George Lux writes:

My views on SS reform are known, check my Blog if uninformed. There are three main factors which must be addressed, but are not:

1) How is the General Revenue Budget going to finance the Debt owed to the SS Trust Fund?
2) When are We going to put a Cap on yearly Medicare benefits, to get the program to conform to regular Health insurance?
3) How are We going to raise the revenue to meet Shortfalls bound to occur because of present improper funding?

Few will or can make the argument that Private Accounts will provide the added funding. There is already a massive balloon in Financial Paper, only to be made worse by addition to current Tax advantages to Paper investment. Medicare and Worker Health insurance needs to move to a basic expense-coverage medical policy covering only normal health care costs, with advanced medical service provided only by private purchase of catastrophic care insurance. The only alternative to general Tax increases to pay the General Revenue Budget remains a rise in FICA taxes, or aggregation of further Federal debt. Current implementation of a FICA tax increase now, means a smaller increase than one imposed at later date.

My idea of Employers paying 1.8:1 of Employee contributions to FICA taxes makes the greatest sense. Employers can Labor expense the effective 5% percent Pay increase to Workers. It has the additional benefit of long delaying payment of the General Revenue Budget liability to the SS Trust Fund. lgl

Paul Zrimsek writes:

One of the side effects of the SS reform debate has apparently been to make the world safe for vulgar Marxism. How else do we get not one but two otherwise fairly reasonable people mistaking capital's share of the joint product of labor and capital for a transfer payment?

Scot Johnson writes:

The question "Should Social Security continue to be an intergenerational transfer?", is an interesting one. If one wants to make Social Security a true social insurance scheme, then quite possibly the best approach I've seen is advanced by Robert J. Schiller in his book _The New Financial Order_. If I recall correctly, Schiller proposes a mechanism by which if the young do better relative to the elderly the transfer runs to the elderly, and vice versa. I personally find this idea quite appealing. Therefore, the short answer is yes Social Security should remain an intergenerational transfer scheme but the transfer could run in either direction.

Jim Glass writes:

Geeze, Boonton, what couldn't you understand, the simple sentence I wrote, the simple table I linked to, or the arithmetic involved?

The sentence:

"The SS Trustees say that the general revenue demands of SS and Medicare will increase by 7.94 points of GDP by 2050."

The table:

OASDI + HI + SMI, % of GDP

2004: -0.56 + 0.02 + 0.90 = 0.36
2050: +1.68 + 2.29 + 4.33 = 8.3 = 7.94 increase.

Feel free to use your calculator to check the arithmetic.

Jim is misreading the report. The link he cites shows an estimated revenue shortfall of 1.68% of GDP. For reasons explained on the previous SS thread, Medicare is too different from Social Security to be honestly lumped into the debate

Translation:

"Jim reads the table exactly correctly.

"He also quite accurately relates the Trustees' concern as they say while giving these numbers:

"'It is also evident from Chart E that currently projected benefit costs for Medicare and Social Security pose a far more serious long-term financing problem than is generally understood...'

"But I don't want to deal with the implications even of that 0.56 of general revenue we're losing to the SS trust fund ... much less the coming general revenue cost ofthe HI trust fund that's also been funded with payroll taxes, just like the OASDI fund ... much less SMI!

"So I'll just deny them all by saying Jim can't read, and can't count either."

Well, OK -- but that's not going to get you out of paying those taxes when the bill arrives!

Jim Glass writes:
Whatever form it takes -- social secutity, individual investments, etc.-- if retired people are consuming X% of GDP it is a transfer payment from the output of the current generation of workers to the currently retired.

I do not see how having any non-working members of a society consuming can be anything but a transfer payment

Savings are deferred consumption.

A.) With a savings system everybody's lifetime consumption equals their lifetime income.

E.g.: During working years one earns income of 100, consumes 50, saves 50. During subsequent retirement years one earns 0 and consumes 50 (the savings).

Total Income = 100 = Total Consumption = 100.

Everybody's lifetime cosumption equals their income (adjusted by the interest rate on savings).

B.) With an intergenerational transfer system with no savings some get to consumer more than their lifetime income and others must consume less -- and that's the transfer.

Generation 1 earns 100 of income, saves 0, receives a payment of 50 from generation 2, and gets to consume 150 on an income of 100.

Generation 2 earns 100 of income, saves 0, pays 50 to generation 1, and so can consume only 50 on a lifetime income of 100.

Very clearly there is a transfer of consumption from Generation 2 to Generation 1.

If Generation 2 doesn't get a transfer of at least equal size from Generation 3 (and under SS today and going forward it doesn't) it loses outright. The power to consume has been transferred from it to Generation 1.

Such a transfer of lifetime consumption power doesn't occur in a savings system.

Jim Glass writes:
"If I recall correctly, Schiller proposes a mechanism by which if the young do better relative to the elderly the transfer runs to the elderly, and vice versa. I personally find this idea quite appealing. Therefore, the short answer is yes Social Security should remain an intergenerational transfer scheme but the transfer could run in either direction."

Cool idea. All one would have needed to make it work in the 1983 reform was some mechanism to give people who were too young to vote enough lobbying power to match the AARP.

Jim Glass writes:
" There are three main factors which must be addressed, but are not:

"1) How is the General Revenue Budget going to finance the Debt owed to the SS Trust Fund"

By raising income taxes. How else?
Kotlikoff suggest a VAT instead, that's OK too.

We could raise admission fees to national parks.
Franchise Yellowstone to Great Adventure for a percentage of gross admissions. Whatever.

Or we could reduce benefits so we don't have to pay off the bonds so quickly. Mean-test Bill Gates out of the system, and let those bonds in the trust fund roll over intead. Like they are doing now. Keep 'em rolling!

"2) When are We going to put a Cap on yearly Medicare benefits, to get the program to conform to regular Health insurance?"
When the rising tax cost of the program reaches the point when the majority of voters decide they want to restrain it, and give that message to Congress. Then and not before.
"3) How are We going to raise the revenue to meet Shortfalls bound to occur because of present improper funding?"

See answer to #1.

Piling atop Jim and Paul's point about capital's contribution; suppose instead of investing in liquid assets such as stocks and bonds, people bought forklifts, backhoes, bulldozers, jackhammers, hammers, screwdrivers....

Then rented the above items to young people to use in productive economic activity. Would the rental fees be considered 'transfer payments'?

Boonton writes:
"But I don't want to deal with the implications even of that 0.56 of general revenue we're losing to the SS trust fund ... much less the coming general revenue cost ofthe HI trust fund that's also been funded with payroll taxes, just like the OASDI fund ... much less SMI!

Yawn, notice Jim's arithmatic lumps Medicare and Social Security together again. Look at just Social Security:

2004: -0.56
2050: 1.68

That's an increase of 2.24% of GDP. The problem is Medicare but Jim and other reformers insist on pretending Social Security is the same thing as Medicare. Here's a thought experiment: Take any proposed SS reform from the libertarian abolishment to Bush's 2% privitization. How would that alter Medicare's numbers? It wouldn't! So why is Medicare constantly getting lumped together with SS if not to distort the true picture?????

Generation 1 earns 100 of income, saves 0, receives a payment of 50 from generation 2, and gets to consume 150 on an income of 100.

Generation 2 earns 100 of income, saves 0, pays 50 to generation 1, and so can consume only 50 on a lifetime income of 100.

What's missing here is that Generation 1 also paid 50 yielding a lifetime consumption of 100. Also generation 3 paid 50 to generation 2 yielding lifetime consumption for 2 of 100. This model assumes 0 economic growth. Notice the results are identical whether the savings is done thru a 'Social Security' type system or thru individuals socking money into their mattress.

randy writes:

There are two basic forms of economic activity, creation and confiscation. Social Security is confiscation. I cannot in good conscience accept social security payments. The fact that my parents steal from me is not justification for me to steal from my children. Therefore, I will deposit the checks into my childrens accounts - returning the wealth to those who created it.

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