Monday, February 28, 2005

Social Security on WNYC

I was a guest, along with Peter Diamond, on The Brian Lehrer Show on WNYC this morning. There is a link to the audio from our segment. Visitors to this blog from the WNYC page can find an archive of all of my Social Security posts here (also on the sidebar to the right).

The segment didn't start out so well, as Brian introduced me as "Alan Samwick." He also slipped a few times when he mentioned my former job with the Bush Administration--the key words (in red) in "chief economist on the staff of the President's Council of Economic Advisers" sometimes were omitted. But I thought Brian was a very good host, and eventually, I settled down and there was a good discussion and a couple of calls.

The show's theme was the relevance of Social Security reform to the Baby Boom generation. I was trying to articulate the material in these two posts on how to reform the system. I had some success, but it seems pretty clear that I need more practice with the talk show format. I particularly need to become better at talking more (taking up more time) and steering the conversation toward the points I want to make, rather than waiting for those points to be the answer to the host's question.

There were two points that I thought were interesting.

1) There was an initial question asking whether the following statement is true, "Personal accounts, at best, are irrelevant to solvency." I agreed, with respect to personal account plans that have been discussed in connection with the outline of the President's plan, that it is not the personal accounts that restore solvency.

Thinking more about it, there are two issues I need to address next time this question is asked. On the positive side for personal accounts, the opportunity to free up, say, 4 percentage points of payroll from the payroll tax to invest in diversified portfolios of stocks and bonds may have value to people who do little discretionary saving for retirement and thus do not benefit from the higher risk/return opportunity on these assets. This added opportunity may make them more willing to accept the features of reform that do restore solvency.

The other issue with this question is to clarfiy what "at best" really means. If one thinks about "solvency" as having zero unfunded obligations, then there is no need for "at best" in this statement, unless the account contributions are subsidized in some way. Otherwise, it is only when solvency is used to connote something like "the number of years before the trust fund is exhausted" that the term "at best" comes in.

2) I have always been frustrated by the way that Commission Model 2, and now it seems the President's plan, focus on switching from wage to price indexing of the benefit formula as the way to restore solvency. I have looked on it primarily as a rhetorical device--why confuse people with the details of the benefit formula when the financial pressure arises from demographic shifts? Why not just boost the retirement ages as a direct way to counter longer lifespans in retirement?

Peter made a good point about another undesirable feature of this way of reducing the growth of future benefits. Suppose that wages grow at an unusually high rate over some period of time. The higher wage growth will improve the system's solvency. However, the higher wage growth will generate larger reductions in benefits relative to the current system. If wage growth is unexpectedly low, then solvency is weakened but benefit reductions are smaller. It would probably make more sense to have a schedule of benefit reductions that are fully specified ahead of time (rather than dependent on how the economy develops), or have benefit reductions that are larger when the system's finances will be weaker.

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1 comment:

Mark Sullivan said...

re: at best are irrelevant to sovency.

The plan is for the personal accounts to be funded by borrowing. The additional borrowing may have no impact on the bond market (at best). What happens to solvency if the additional borrowing pushes up the cost of government debt? Replacing the revenue that went into the personal accounts will certainly become more expensive.

Bond market impact would also worsen the general fund deficits (interest expense is a lot of the budget). Not directly related to social security solvency, but not a pleasant thought.