Social Security in the New York Times
David Altig at Macroblog dissects the article in today's New York Times on Social Security, "Bush's Social Security Plan Is Said to Require Vast Borrowing." I commend the whole post to your attention, but here's the concluding paragraph, which is right on the money:
The deficit is, pure and simple, a pretty poor basis on which to evaluate the pros and cons of any fiscal policy. What matters is how much we spend and what we spend on, how we collect the revenues and who we collect them from, over the long haul. Debate about the short-run deficit is a diversion from the important business.All deficits matter, but trying to evaluate a change in an intergenerational transfer program based on the surpluses or deficits that occur during a five- or ten-year window is not particularly constructive. I posted about the inadequacies of the budget framework last week.
The NYT article contains more evidence that the issue is not being framed properly in Washington. Consider this paragraph:
The main Republican players in Congress on the issue say they expect to endorse an increase in borrowing to finance the transition to a new system. But they remain split over whether to back plans that would include larger investment accounts and few painful trade-offs like benefit cuts and tax increases - and therefore require more borrowing - or to limit borrowing and include more steps that would be politically unpopular.
This is almost entirely a false tradeoff. The system has projected obligations that exceed projected revenues by $10.4 trillion in present value. This is the amount of "politically unpopular" measures that must be taken to restore the system to solvency. This figure has nothing to do with the size of the personal accounts that may also be carved out of the system, except insofar as a greater opportunity to make private investments in personal accounts makes the whole reform package easier to pass.
I laid out my reform suggestions for Social Security here and here about a month ago (and offered plenty of criticism of the way Democrats in the Congress and on the campaign were discussing the issue). With the election behind us, my biggest fear in this process is that we will get debt-financed personal accounts without the necessary measures to restore solvency.
2 comments:
[Max Sawicky] Isn't it radically inconsistent to say (cash-flow) deficits matter, but that a long-term in-go (e.g., lower projected Social Security benefit payments) washes out a short-term out-go (a payroll tax diversion to individual accounts, replaced by additional borrowing)? Haven't we heard in the past that some current added borrowing will pay for itself with some gain in the future? If you think that, for instance, the returns to pre-natal care are subject to dispute, what about the two-thirds of the Social Security Trust Fund shortfall derived from years beyond the next 75, lo unto eternity?
cheers.
It seems to me it would be (politically) easier to take measures to restore solvency if they weren't tied to establishing personal accounts. Particularly because the Administration has proposed voluntary personal accounts I see only two options for restoring solvency:
1) There is an across-the-board benefit cut (or revenue increase, but that seems extremely unlikely politically from a Republican administration) as part of the plan. I see this as politically vulnerable - Democrats can say (with some justification) that the plan cuts SS benefits to establish private accounts.
2) The switch to private accounts is unfair to the switchers (i.e. the value of the money diverted to a private account is less than the present value of the SS benefits it replaces). This might work (though I have concerns about the percentage of switchers and the drop in present value required to retore solvency), but it seems dangerous (and cynical) to bet on enough Americans hiring bad financial planners.
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