Sunday, November 14, 2004

Direct Questions that Merit Direct Answers

In the comments on my last post, a commenter asked two very direct questions. Here they are, with my answers:

(1) Do you think that the Bush administration is at all likely to back the kind of proposal that you favor?

I would assign almost a zero probability that the Bush administration (or any elected official) will propose any increases in the normal and early retirement ages, let alone increases of the magnitude that would be sufficient to restore solvency. That is a very hard rhetorical battle to win. I think it is worth trying--as life expectancies increase, we would be well served to have a public debate that the age of dependency (a phrase borrowed from Arnold Kling's blog) should also increase. In the unlikely event that a Senator or Representative did start to win this battle, the Administration might through its support behind him or her. But that is just my speculation.

We should expect something that looks a lot like Commission Model 2--restore solvency through a gradual reduction in future benefits upon retirement for those currently below a certain age, modifications of the benefit formula to better protect survivors and career low-earners, and a voluntary option to divert some amount (e.g., 4% of earnings up to an indexed threshold like $1000) of payroll taxes into personal accounts.

(2) Assuming arguendo that the current reports of the likely Bush proposal - i.e., merely diverting a portion of current social security taxes to private accounts, without other reforms - do you favor such a reform (as opposed to doing nothing for now)? As suggested by the above comment, wouldn't such a proposal just make the short and medium term (2018) problem worse, without making the long term problem (2042) much (if at all) better?

If it is literally diverting some portion of the payroll taxes to personal accounts with no change in the benefit formula (beyond prorating it for the portion of taxes diverted), then I do not favor that, because solvency is not restored simply by that diversion of funds.

Assuming it is Commission Model 2 (as described above) and assuming that it is all debt-financed, then it does meet my main requirement of restoring solvency. We know the $10.4 trillion hole is plugged because, over the 75-year projection period, the annual deficit is reduced to zero and the transition debt is repaid. (This is what Chapter 6 of the Economic Report of the President showed for this reform assuming 100% voluntary participation.) It clearly makes the long-term financial problem smaller. If this is what is proposed, then I do favor it over the status quo.

In fairness to the Commission, its report did not specify that the transition should be debt-financed. They left this as an open question for policy makers to answer. I think they recognized what debt-finance would do to the short- and medium-term unified budget deficits. None of us are sure what would happen to interest rates if an implicit debt (unfunded obligations of an entitlement program) of $10.4 trillion were eliminated but explict debt (Treasury bonds held by the public) were increased by a few trillion before being repaid. And, as we went through before, the Administration hasn't proposed doing exactly that. For example, I have heard suggestions like allowing people to establish personal accounts only if they will contribute some of their money out-of-pocket (e.g., if you contribute an extra 2% of your payroll up to $500, then you can divert 4% up to $1000). I expect a lot of suggestions for how to bring in more revenue to come up in the legislative debate about any reform that the Administration proposes.

2 comments:

Anonymous said...

-as life expectancies increase, we would be well served to have a public debate that the age of dependency (a phrase borrowed from Arnold Kling's blog) should also increase.If we have such a debate, the real issue should be this--what is a reasonable age at which to expect people to retire? Increased lifespans may or may not correlate with an increase in the length of a person's feasible working career. It may be the case that the changing nature of work makes it feasible for most people to work until they are 70 or 75, but it would be hubristic to merely assume that this is the case.

JG said...

"My dad worked from 16 to 70, and deserved every cent of the system that he so believed in and was pleased to pay for through his working years. I'll stay with my dad's belief that the system should be preserved"

Here's the problem: You dad's system is already *gone*.

You dad recieve back from Social Security much *more*
than he put in -- much more than a market rate of return.

Today's young are going to get back *less* than they put in. SS's actuaries say it will return less than the rate on gov't bonds -- and that many people will get back as little as 50% of what they put in. http://www.ssa.gov/OACT/ASKACT/part2.html

And that doesn't count the further reduction in return that must, as a matter of arithmetic, follow from closing the $10 trillion funding gap with tax increases and/or benefit cuts, which are the only options other than private investment.

All this directly contradicts FDR's promise that SS would always provide a fair positive return.

So it's a very different system than your father's *already*.

Would your father have been so happy with Social Security if it made him *poorer* over his life?

Why are you so happy with a system that will make young people poorer?