David R. Henderson  

Social Security and Time Horizons: Reply to Krugman

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As regular readers of my posts know, I'm not someone who dismisses Paul Krugman or who thinks that he has nothing worthwhile to say. Indeed, I think he's one of the smartest bloggers around. So that's why his post yesterday on Social Security has me scratching my head. He discusses the differences and similarities, in thinking about the long run, between doing something now about Social Security spending in the future and doing something now about global warming in the future. Getting into global warming will take me too far afield. Instead, I want to look at his arguments about Social Security.

Krugman writes:

Instead, they're [the people he's criticizing] pushing for things like a gradual rise in the retirement age and a change in the formulas used to compute benefits - things that will cut future rather than present outlays. Or to put it differently, they aren't really trying to cut debt; they're simply trying to lock us in now to the spending cuts they think we'll eventually have to make anyway. And they never, as far as I can tell, really ask why it's important to do this now.

But think about it; use Social Security as the example, although much the same argument applies to other programs. It seems probable if not certain that we will eventually either have to cut SS benefits (relative to current law) or raise additional revenue. So the threat, if you like, is that future benefits will fall short of what people now expect. To avert this threat, the usual suspects insist that we must gradually reduce the program's generosity. That is, in order to guard against cuts in future benefits we must ... cut future benefits. Huh?

OK, there are some arguments you could make; maybe the adjustment would be smoother, with less of a "cliff" when the trust fund runs out, if we set benefits on a downward glide path. But that's a second-order issue, literally: we aren't talking about preserving the overall level of benefits, we're just talking about reducing its variance around a smooth trend. And given how uncertain we are about what the world will look like in 25 years, preemptively cutting right now could mean a gratuitous sacrifice of future benefits that may eventually turn out to have been affordable after all.

First, most of the advocates I know of who are advocating "cuts" in Social Security are not really advocating cuts. In the Social Security benefit formula, as real wages rise, real Social Security benefits rise. So the program could possibly be made sustainable without real cuts and without further tax increases if the formula were changed so that real Social Security benefits remain constant rather than increase.

Second, people can adjust better when they have more time to adjust. If the Social Security formula is altered for the future, people can have longer to save to make up for the higher benefits they would have got but will not get. That's the argument for doing something about it now rather than later. Remember what happened in 1981 when OMB Director David Stockman tried to cut the early retirement benefit by about one third for people retiring only a few years later. That got nowhere. People looking at a one-third reduction in their retirement benefits who are planning to retire in a few years will not look on that kindly. But what if some previous Administration had announced in 1962 a gradual reduction in the early retirement benefit for people retiring in the early 1980s. Those people would have had much more time to plan.

Third and finally, take Krugman's last sentence: "And given how uncertain we are about what the world will look like in 25 years, preemptively cutting right now could mean a gratuitous sacrifice of future benefits that may eventually turn out to have been affordable after all." Yes, we're uncertain about how the world will look 25 years from now, but surely Krugman must have seen some of the CBO projections for budgets in the 2030s. Under one reasonable set of assumptions, government spending as a % of GDP in 2037 would be a whopping 37% of GDP. This is up from its average over the last 60 years of about 20 or 21% of GDP. A whole lot of things would have to have gone right for us not to have the federal government spending a much, much higher percent of GDP. Planning here is asymmetric. If things go so well that in, say, 2037, government spending is only, say, 18 percent of GDP rather than the more-likely 30 percent or more, it will be easy to raise Social Security benefits then. But if it goes to even 25 percent or more, it will be very hard to cut Social Security benefits.

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CATEGORIES: Social Security

COMMENTS (15 to date)
Daublin writes:

Yeah, I'm not clear on why he would object to this. When people plan for their retirement, they need to know what Social Security is going to do.

Even leaving that aside, it seems reasonable to have a halfway reasonable budget on a 25-year horizon. It doesn't have to be detailed, and it is all subject to change. However, it seems somehow irresponsible to not even try to get something roughly sustainable.

happyjuggler0 writes:

First of all I agree that simply from a retirement planning point of view, that the more time you have to plan, the more likely it is that you will meet your goals of retirement timing and retirement funds. He clearly has a blind spot here...perhaps he has so much money he doesn't have to plan and thus forgets that others do have to plan.

Second, simply from a public choice perspective the glide path approach is easier to pass legislatively than a sudden drop in spending. 25 years from now is 2038. Today in 2013 Washington not only can't even agree to cut actual current spending, they can't even agree to cut the projected growth in the next year's budget to a smaller increase! If Washington can't manage to cut 2013 spending in 2013, why does he think it will be easier to cut 2038 spending in the year 2038? Surely it has to be easier for Washington to put us on a glide path for 2038 today than it would be to cut a monster sized chunk of spending all at once when 2038 comes around.

Justin Rietz writes:

Couldn't we flip Krugman's argument on him - make the "cuts" now, and if the future turns out to be better than expected, we can increase benefits at that time?

David R. Henderson writes:

@Justin Rietz,
Yes. That's what I suggested in my second-last sentence.

Justin Rietz writes:

Apologies, missed that.

MingoV writes:
I think he's one of the smartest bloggers around.

Krugman's intelligence isn't the issue. He routinely writes articles with ideas and proposals that contradict his own fine writings from before the mid-1990s. His Nobel prize helps convince people that his current proposals are best for the USA.

In the above example, Krugman essentially says do nothing now about Social Security's obvious financial problems because something magical may eliminate those problems in the future. It's hard to think of a more irresponsible position.

egd writes:

[Comment removed for being ad hominem instead of discussing the substance of the post. Email the webmaster@econlib.org to request restoring your comment privileges. --Econlib Ed.]

Arthur_500 writes:

I think Mr. Krugman's complaint is that someone might want to cut a government program at all. However, we are wasting time on the wrong argument.
Cut Social Security as we know it. In other words, privatize it and get the money out of the hands of government.
Transfer all future collections for individuals into accounts set up by the individual but operated along the guidelines of Social Security. The individual would build a nest egg. Upon their ultimate demise that nest egg could go towards their estate. the government would be a manager of the funds flow but the investments would be private accounts not unlike an IRA.
So we still have to deal with obligations to people like me until people start living off their own accounts. However, we start making government honest and getting the funds out of the hands of politicians.
What about the giveaways with Social Security money? We can then have a discussion if those need to be ended.
Until we get the funds out of the hands of politicans and quit speaking of social security money as though it is part of the federal budget, we can't get rid of the idiocy perpetrated by the likes of Mr. Krugman and his ilk.

Mark writes:

I know you are not addressing Krugman's climate change argument here but even if you agree with him on the science there is a key difference between climate and social security. Addressing social security is entirely within the control of the US. With climate the situation is different. The US is 18% of global CO2 emissions and our share declining. Without going into the math, if the US cut emissions by 50% and the rest of the world continued increasing along current trends, our actions would have NO impact on future temperature (again, using the UN IPCC assumptions). Krugman is comparing something we can control with something we cannot.

Joe Cushing writes:

When I talk about gradual increases to the social security age, I talk about starting them right now. Every year that goes by, the age should be raised by the greater of the increase in life expectancy or 3 months. This should go on to eternity until social security is meaningless. I don't see how this is just cuts in the future. I don't see anyone else talking about making a tiny cut to people who are about to retire this year. If you are about to retire this year, you can wait 3 months or you can just draw savings for three months. Next year, you can wait 6 months or draw. In 2 years, you can wait 9 months and so on.

I've heard but I don't know if it is true that life expectancy goes up by 3 months a year. That's why it's important to include the greater of clause whatever the number is. If researches get it right and they find a way to extend life span (this has never been done before) then social security cannot work anyway. Up to now, medical advances have only found cures for things that would kill you before your body is worn out. Right now, they are working on ways to stop your genes and therefor your body from ever wearing out. This means people could live for 100s of years.

Scott Sumner writes:

Excellent post.

David R. Henderson writes:

Thanks, Scott.

Hopaulius writes:

Krugman loves Keynes's line, "In the long run, we're all dead." This applies, however, only to government debt and entitlement reform. We needn't worry about such faraway things, because we'll all be dead. The projections are likely to be wrong. But when it comes to climate change, different story: Oh no! Think of our descendants! Climate doom is certain! The common denominator? The preservation and growth of government power (and not coincidentally the growth of the influence of economists). On entitlements, we must not reduce the government's continuous growth and the corresponding dependency of the masses. On climate, we must limit liberty even further and promote more government power.

Ben Southwood writes:

*Federal government spending will be around 37% of GDP. Presumably total government spending will be more like 50% of GDP, when including local and state outlays.

Hugh writes:
Instead, they're [the people he's criticizing] pushing for things like a gradual rise in the retirement age and a change in the formulas used to compute benefits - things that will cut future rather than present outlays.

This is what happens when bad accounting is used: Krugman is thinking in cash terms; if he thought in accrual terms he would have a clearer idea of what is happening, and would also see that a gradual rise in the retirement age has an effect on accrued liabilities here - now - today.

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