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Gokhale on Social Security

The Ugly Side of Financial Ref... Another Look at Higher Educati...

As I mentioned, I have been reading Social Security, by Jagadeesh Gokhale. He has developed a forecasting model for Social Security that is more fine-grained than the one used by the system's own actuaries. Some excerpts below.

p. 29:

Future growth of aggregate "effective labor inputs" will be diminished significantly because of declining labor quality...The projected decline in effective labor inputs results from the interactions of demographic and economic forces over time.

Like Goldin and Katz, Gokhale sees a slowdown in the growth of educational attainment. However, Gokhale sees this as coming not from a policy failure but from the nature of demographic change.
p. 51:

although education rates for all population groups may increase over time, changes in the population weights of different population groups will also determine the population's average educational attainment in future years.

In a sense, he is suggesting that the U.S. will suffer from a Gregory Clark effect in reverse. Clark argued that prior to the onset of the industrial revolution, British upper classes reproduced at a higher rate than lower classes. Gokhale uses careful wording, but what I see him suggesting is that Social Security's outlook will be affected by the higher rates of reproduction of the relatively less-educated portion of our population.

The Social Security Administration does not undertake such fine-tuned demographic analysis. As a result, their forecast for Social Security's finances, while sobering, is not as pessimistic as Gokhale's. On p. 124, Gokhale presents a table with the comparison. For a 75-year time horizon, SSA projects a Social Security deficit of 1.7 percent of payrolls, meaning that it would take a 1.7 percentage point increase in payroll taxes, starting now (actually, starting three years ago) and continuing indefinitely, to close the deficit. Gokhale, in his baseline forecast, sees a deficit of 3.35 percent of payrolls, meaning that it is twice as large.

p. 144:

It now appears more appropriate to treat and evaluate Social Security as a public retirement savings program rather than as a purely social insurance program.

The point here is that when the age of eligibility for benefits was not far from average longevity, Social Security acted like a program to insure people against the risk that they would outlive their savings. Today, however, with an age of eligibility well below the age of longevity, Social Security acts more like a government-run retirement savings system.

There is much more in the book, including evaluations of different Social Security reform proposals. From now on, I would suggest that any pundit who makes pronouncements about Social Security deserves no credence unless he or she has read Gokhale's book.

Comments and Sharing

COMMENTS (4 to date)
david writes:

Seems like a good time to link to this! Or that.

Judge relevance at your own leisure.

Randy writes:

"Future growth of aggregate "effective labor inputs" will be diminished significantly because of declining labor quality..."

Maybe. E.g., while "average educational attainment" may decline I think that "educational attainment" is today more of an entitlement than a factor in labor quality. As that entitlement (and many other entitlements) decline (and they must necessarily decline), I would expect to see an incline in individual motivation, drive, etc., which could very well outperform the current entitlement system in regards to "labor quality".

JPIrving writes:

I see some tentative signs that the productivity of the population group with the 'declining weight' (skilled people) might be headed up, Ray Kurzweil style.

This fancy bloomberg presentation

shows that technology investment, previously cointegrated with employment, is now acting more like a substitute than a complement to new employment.

This is probably just confirmation bias, and no one should bank of technology bailing us out of the SS nightmare, but we can hope..?

Stan in Sugar Land writes:

Re the reverse Gregory Clark effect, in my opinion we are already experiencing this, while a greater percentage of the native US population may be exposed to the college experience (even at the so called elite schools), many who graduate are equipped, at best, to flip burgers at the local DQ and to struggle with their education debt. For a number of reasons we now import a large percentage of technically trained people, engineers, math majors, etc (educated in the US and they remain here because of the historical economic incentive). The economic incentive for these folks to stay in the US is diminishing rapidly and the home country at least in the case of China and India now offer significant opportunity and attraction (My across the street neighbor, Chinese, Doctorate Computer Science, wife MS, math, are considering returning home after 20+ years in the US, the question is will the attraction of their children keep them here?). The other negative re SS, the increasing number of government employees.

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