Arnold Kling  

Unpersuasive Argument Against Reforming Social Security

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Calculated Risk writes,


The debate should be focused on the two major issues: Health Care and the General Fund deficit. Without addressing those issues first, reforming Social Security is irrelevant.

Even if one were to accept the premise that the fiscal problem is larger elsewhere, this is a phony argument. CR is acting like an angry teenager, sticking his fingers in his ears and saying "I'm not listening to you."

But the premise is also wrong. If we allocated a larger share of payroll taxes to Medicare instead of SS, we could argue that Medicare is not a problem but SS is the big issue. We should be looking at the challenge of funding spending as a whole, not looking at the arbitrary allocation of taxes to different programs. In terms of overall spending, Social Security is a gigantic issue.

Finally, it is disingenous to whine that we need to solve the other problems first, without offering a solution. Overall, this stance of "solve X and Y before you tackle Z" comes across to me as mere demagogic rhetoric, the end result of which will be that X, Y, and Z will remain unsolved.


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CATEGORIES: Social Security



TRACKBACKS (2 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/412
The author at Asymmetrical Information in a related article titled Do we have a Social Security problem? writes:
    Calculated Risk says it's not worth bothering about compared to other problems: This chart shows the relative sizes of the three major fiscal challenges over the next 75 years. The NPV for the General Fund deficit is based on deficits equal to 5% of GD... [Tracked on December 16, 2005 10:49 AM]
The author at Students for Saving Social Security in a related article titled Social Security reform should be a top priority writes:
    Arnold Kling, PhD MIT, writes about an unpersuasive argument against reforming Social Security. Check it out!... [Tracked on January 4, 2006 12:24 PM]
COMMENTS (20 to date)
Marc writes:

The problem with the debate on social security, is that most people involved in the debate, and tasked with fixing it, have no vested interest in fixing it.

Politicians and government workers at all levels have their own retirement plans, and don't contribute anything to social security. They could care less what happens. If their plans should become underfunded or in jeopardy, they would find ways to cover the short fall, not change the program.

We don't need to be changing the way the social security fund is managed. We simply need to increase funding, either by raising taxes or by cutting programs and funding the short fall through the general fund.

There is no legitimate reason why politicians and government employees at all level shouldn't contribute to helping to fund social security.

After all, we're paying for their retirements, why shouldn't the politicians and government workers help pay for ours.

Randy writes:

Along the same lines, it seems that the problem is also intergenerational. The older folks want to believe that everything is fine, the baby boomers know it isn't but are hoping that it will last long enough for them to get theirs. The younger people are the ones who will be hurt, but don't have the political power to do anything about it. I think an appropriate solution would be to make up a team with no one over 30 to come up with a solution. And the rest of us would agree to live with whatever they decide.

Lord writes:

CR is right on this one. The difficulty is the solution to the first two will greatly impact the solution to the third, in terms of reasonable assumptions, trade-offs involved, and possible solutions. The solution to the first two can make the solution to the third easier, or undo it entirely. Focusing on the third is most likely a way to avoid the first two.

spencer writes:

If you accept your optimistic view about long term economic growth there is not need to fix social security.

If we have anything apporaching the long term
historic growth of productivity over the next 50 years social security will be fine.

That does not mean that Washington will no longer have a social security surplus to spend, but that is a completely different issue.

Chris Bolts writes:

I've come to the conclusion that until a vast number of lobbying groups form to protect the interests of the 17 and under crowd there will never be any reform to entitlement programs. And since this group can never vote until they're 18, that will never happen.

Chris Bolts writes:
Politicians and government workers at all levels have their own retirement plans, and don't contribute anything to social security.

Also, this is incorrect. Under the 1984 Social Security Reform Act Social Security and Medicare taxation was extended to cover ALL government employees, including politicians.

Barkley Rosser writes:

spencer is right. For more on the basic projections, see my comments below on the "Centrist Social Security Plan."

Regarding Arnold's remarks here, I would simply note that medicare costs are rising much more rapidly than are social security costs. I suppose one could "save medicare now" by undoing the excellent balance sheet of social security. But why should one want to do that unless what one really wants to do is to cut the future social security payments?

BTW, citing what different generations think is a big zero. At JMU a mixed group of profs, including the first PhD ever awarded at George Mason, did a survey in our econ classes last spring, mostly upper level undergrad, about 250 students total in seven classes. They were asked the following:

"Assuming the official forecasts of the SSA are correct, that SSA will start running a deficit in 2017 and will run out of assets in 2041, and that there are no changes in the system in terms of taxes or spending rules, how much in real terms per capita can retirees expect to receive in 2041 compared with what current retirees receive?"

They were then offered the following options: zero, 0-50%, 50-100%, above 100%. One class (game theory) all said "zero." Five out of the six classes, a majority said "0-50%." One class, a majority said "50-100%." Not one student said "100+%." But that is the correct answer. The reason: starting payments are indexed to wages, projected to be 170% of today's in real terms in 2041. The "bankruptcy crisis" would lead to a sudden cut in payments to 72% of then existing payments. That is 71% of 170%. You all can figure it out.

These were students that one would expect to be about as well informed as anybody of their generation (two of those classes were public choice!). Not one of them knew the correct answer. So, when I read or hear about what younger people think, I am really not impressed.

Marc writes:

Chris,

I stand corrected on the fact that our legislators pay into social security. But that doesn't change the fact, they have no vested interest in fixing it. Their pensions are so good, in most cases, the success or failure of social security would mean little to them.

The only incentive to change social security to permit stock market investment, would be to benefit the numerous brokerage houses and financial analysts who stand to reap huge rewards if such a measure would take effect.

angela writes:


First if Bush projections about the benefits of tax cuts are true, there is no problem. Growth will be suffient to cover demands.

Second the point that Republicans have chosen to focus on a problem that might appear in 30 years while ignoring those more pressing is not "whining."

If the Bush Medicare drug law was suspended this alone would save more money than the projected SS deficit.

The budget deficit is a problem and will not be solved by borrowing 2 trillion to pay off SS obligations. Indeed it will be worsened.

Your position is that by focusing on something far away we can ignore present dangers. This is magical thinking or faith based reality.

Movie Guy writes:

Arnold,

You jumped to conclusions that Calculated Risk did not present in his comments at Vox Baby or at CR's own web site.

You fail to acknowledge what CR and the Comptroller General of GAO have acknowledged. The growing fiscal deficits represent the largest financial threat to the future of the United States of America. Simply stated, the projected rise in net interest payments on the U.S. Debt represent the largest and most serious threat. Not Social Security. Not even health care expenditures.

By 2040, the net interest mandatory obligations dwarf the funding need of Social Security or health care, representing approximately 85% of their total funding needs. Thereafter, the net interest obligations continue to grow, representing an even larger share of funding needs vs. revenues under the tax cut extensions model.

Evidence? Yes.

Let's look at the conservative GAO/CBO projected data as portrayed in graphic html presentations, further supported by projected numberical data in pdf.

Composition of Spending as a Share of GDP Under Baseline Extended
Source: GAO's August 2005 analysis
http://www.gao.gov/cghome/whitehousewalker1205/img8.html

Composition of Spending as a Share of GDP Assuming Discretionary Spending Grows with GDP after 2005 and All Expiring Tax Provisions are Extended
Source: GAO's August 2005 analysis
http://www.gao.gov/cghome/whitehousewalker1205/img9.html

Supporting speech and charts text
http://www.gao.gov/cghome/whitehousewalker1205/walker_whitehouse1212.txt

Tabulated Chart Data:

Baseline Extended (for chart one above)
http://www.gao.gov/special.pubs/ ...daugust2005.pdf
*Source: GAO's August 2005 analysis.

Discretionary Spending Grows with GDP and All Expiring Tax Provisions are Extended
(for chart two above)
http://www.gao.gov/special.pubs/longterm/sunset_and_disc_grows_with_gdp.pdf
*Source: GAO's August 2005 analysis.


Now, we're moving forward under the conditions portrayed in the second GAO chart above. In other words, the tax cuts are likely to be extended. And this offers no consideration whatsoever for additional tax cuts.

Clearly, as illustrated by the GAO/CBO, the net interest costs on the U.S. Debt represent the largest future expenditure growth facing the U.S. Government and citizens of the nation.

By 2040, the federal revenues barely cover the full cost of the net interest expenses. Under the GAO's September 2004 analysis, the revenues did not fully cover the net interest expenses, as shown in the following chart presented in a January 2005 presentation:

Composition of Spending as a Share of GDP Assuming Discretionary Spending Grows with GDP after 2004 and All Expiring Tax Provisions are Extended
http://www.gao.gov/cghome/cefrsc/img12.html
Source: GAO's September 2004 analysis


If you have an honest, valid argument, and it's my judgment that you do not, then it is with the GAO and CBO, not Calculated Risk.

If we did not have the projected net interest payment obligations, we would not have any principal problems funding social security fully and funding the majority of health care.

Where is your presentation of evidence to support your arrogant claims against Calculated Risk's position, Arnold?

I see no evidence to support your claims.

Calculated Risk has two fine armies supporting him. They are known as the GAO and CBO. And he has an armored calvary, too. I am proud to be a member of that armored calvary.

OUT.

Movie Guy
Sharpening the Sword of Honor

Randy writes:

Barkley,

You've got a good point. But I think you're underestimating the element of belief. Much of the baby boom generation believes that Social Security will eventually fail, and nearly all of generations x and y. Only the AARP generation still solidly supports it. I don't believe the boomers will become the new AARP generation. The only way that will happen is if there are absolutely no cuts in benefits or increases in taxes. If there are, we will combine with x and y and vote to take the burden off of z.

Barkley Rosser writes:

Randy,

I am a baby boomer with a one year old grandson.
I do not believe that soc. sec. will be cut for
my generation, or at least not for some time. So, it is not a selfish argument that is involved here. Indeed, for me personally, I am definitely over the age cut that the Bush plan would have done nothing to the benefits of.

I think with regard to the AARP people, they are simply paying more attention. They have been told their bennies won't get cut. But once one starts messing with the system, hey, anything can happen, and those folks tend to be ultra-risk averse.

My concern has in fact been for my children and grandchildren. What has been very frustrating has been indeed that while in fact there really is no problem for social security (the Greenspan commission of the early 80s really did fix it), so many people, especially younger people think there is a problem. Without doubt this could end up as a self-fulfilling prophecy, one we almost saw enacted earlier this year. If enough people decide that social security must be cut (perhaps with an add-on personal account system on top of our already existing IRAs) because they believe the system will not pay much 30 years from now, then they will elect and support politicians who will bring about that result.

It is interesting to ask where all this baloney came from. I think that one reason it is so widely believed (the one thing Bush "achieved" in his ludicrous 60 day tour last winter was to increase the percentage of people who believe that social security is "in crisis"), is that this was initially pushed in the late 1990s by Clinton and appointees of his to the SSA. This led all kinds of establishment liberal media types to believe this. It has the patina of bipartisan expertise to it, so that boringly centrist respectable good government types like David Broder buy into it. So these people have palavered over and over about it, never noting that the basic projection making the unpleasant forecasts was patently ridiculous. Indeed, those forecasts involved us already having fallen into a slow growth economy with few immigrants. The projection has been baloney from Day One, but few seem to have noticed.

Constant repetition by establishment figures of different persuasions has unsurprisingly filtered down to a widely held belief among youth. Hey, if you are 25, do you want to look like a naive fool who thinks social security will be around for you after all that repetition that turns it into an obvious "fact"? I am not surprised that a game theory class was the most cynical of all, believing they would get zero.

So, it is very hard to overcome such deeply entrenched bipartisan opinion. My own view is that this may have been one of those public choice deals. If there is a "social security crisis," then this allows a small group of public finance economists to get grants and media attention for their various proposals to fix it (see Orszang, Steuerle, et al). Many of these people are liberals, although of course the Cato Institute has been pushing privatization for a long time on ideological grounds, Martin Feldstein has been pushing it on "increasing the savings rate" grounds for 30 years (and look how much our savings rate went up as a result of the IRAs!), and George Bush has been pushing privatization since he first ran for Congress back in 1978 on grounds that remain mysterious.

Chris writes:

Not that the Constitution even grants congress the power to have SS, Medicare, or any other 'entitlement' program...But I guess that just doesn't matter anymore. Ah, lawlessness, got to love it.

Chris writes:

Professor Rosser-

As a young person who believes in the "baloney" about social security being in danger of financial crisis, I would like to ask a simple question. OK, so my understanding is that there are approximately 3 workers per retiree right now, and that this is projected to go to 2 workers per retiree by 2050 (the exact numbers aren't important, just the idea). So explain to me, then, how exactly we can go from 3-1 to 2-1 without either cutting benefits or raising taxes, both rather substantially?

The way I see it, it's as if three people are picked out of the population to support each retiree. OK, so they each have to contribute $10,000 (I'm just making up that number, but the point remains) to support a retiree. Now there are two workers (in 2050). Explain to me how he can contiue to get $30,000 and each person will only contribute $10000. I just don't get it. Either taxes have to go up 50% so it's 15,000 per person, or benefits have to be cut 33% (so the benefit is 20K) or some combination, right? And aren't those rather substantial? Growth can't get us out of the problem, right, since benefits are indexed to wages.

I'm not trying to be flip here, but I don't see how laundering money through "trust funds", FICA, general revenues, Cayman banks, and what have you changes the basic fact that the money has to come from SOMEWHERE, and there will just plain be fewer people. Why is that incorrect?

Bernard Yomtov writes:

Chris,

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States;

Your example of it taking $15,000 instead of $10,000 per worker to support a retiree in 2050 is, more or less, correct given your assumptions. But you overlook increases in productivity which should increase wages, so the share of the worker's income represented by the $15K will not be more than that represented by $10K today. In fact, it likely will be less. As Barkley points out, the SS doomsaying is based on extremely pessimistic assumptions about productivity growth.

Barkley Rosser writes:

Chris,

Bernard presents the gist of it. For more details on the actual projections, see the second comment under "Centrist Social Security Plan."

However, to address your question more directly, as indeed this story about declining workers per retirees has long been part of the woeful catechism on all this, let me note that right now there are quite a few countries paying old age pensions (equivalent of social security) that have the dreaded two-to-one ratio. None of them are going bankrupt while doing so. Germany is even paying pensions that are nearly twice as high as those in the US. Of course Germans pay higher taxes than we do, and Germany is currently suffering from low economic growth. However, the pensions are being paid, and this is without the much higher levels of productivity that we can expect the US economy to exhibit in 2030 or 2050 or such future times.

Chris writes:

But you overlook increases in productivity which should increase wages, so the share of the worker's income represented by the $15K will not be more than that represented by $10K today. In fact, it likely will be less.

OK, here are some example numbers.

http://home.att.net/~rdavis2/workers.html

In 2005, according to this chart, the number of workers per retiree was 4.70. In 2050, the projection here is 2.65. To achieve the same proportional drop in the ration from some earlier period would imply a worker-retiree ratio 8.33 (8.33/4.70 = 4.70/2.65). Such a ratio isn't on this chart, but it's kinda close to the ratio in 1950.

So can I assume that there was no increase in productivity from 1950 to 2005? Hmm, that doesn't seem right. Oh, but payroll tax rates didn't change? Hmm, well, they were only 3% then. So that doesn't seem right either. . .

What factor am I missing that forced such a massive hike in the payroll tax rates from 1950 to 2000 that was present that is not present now? Did productivity not grow?

progrolib writes:

I'm crying foul on this tirade. #1, CR is right - it is a personal attack. #2 - the payroll tax IS dedicated to Soc. Security benefits. OK, President Bush wanted to give us an Rx benefit without a tax base. Of course, he also involved us in a big DoD spending increase paid for by a tax cut. Lord - can conservatives cry foul where it belongs - with the false promises of this Administration?

Wild Pegasus writes:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States . . . U.S. Const. art. I, sec. 8.

If this were a grant of power to do everything Congress wanted - including giving medical care to old people - why did Article I, Section 8 go on to list other enumerated powers?

It would be clearer if the drafters had written it this way:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, in order to pay the Debts and provide for the common Defence and general Welfare of the United States . . .

That would make it clear that the taxation power could only be used for objects relating to the US and not for private gain.

- Josh

Jay writes:

There's an interesting idea about investing the SocSec 160 billion overpay in mortgages.

Even some semi-intelligent comments.

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