Monday, March 14, 2005

Responding to John

I disagree with a lot of the points raised in a comment on my last post, by a reader named John. I think it is worth addressing each of them in a new post.

The Democratic plan should be...Social Security.

This is a reasonable position. If so, then I think that senior elected Democrats should be able to specify a plan to restore it to solvency.

There's a good chance it will be fine if left entirely alone.

Based on the simulations in the 2004 Trustees Report, there is virtually no chance that it will be solvent if left entirely alone. Please see this chart. It shows that over the 75-year projection period, there is less than a 2.5 percent chance that the cost rate will be below the income rate at the end of the period. So I don't know what "it will be fine" means here.

If a few tweaks are found to be needed, ...

This is written as if Social Security's long-term solvency is still an open question. The discussion of Social Security's long-term solvency problems and what to do about them has been going on for over a decade. Consider the 1994-6 Social Security Advisory Council's Report as a starting point if you like.

... then raising the payroll cap on upper-income taxpayers (the same ones who've benefitted from unfunded, irresponsible tax cuts) will more than suffice.

I don't see how we get "more than suffice," based on current projections. To see why, suppose the cap on taxable payroll were removed entirely, as with the Medicare payroll tax, and that no additional benefits are accrued based on the additional taxes paid. Also assume (heroically) that an additional 12.4 percentage point tax on this payroll causes no reduction in hours of work. This would expand the Social Security taxable payroll base by about 20 percent. (In 2003, Medicare collected $149.2 billion of payroll tax revenue with a 2.9 percent tax. See this table. This implies a base of about $5.14 trillion. In 2003, the Social Security taxable payroll tax base was $4.34 trillion. See this table.) So even in this scenario, uncapping the payroll tax base would be equivalent to about 0.2*12.4 = 2.5 percentage points of payroll. This compares to an unfunded obligation that is 1.89 percentage points of payroll when measured over the next 75 years and 3.5 percentage points of payroll when measured over an infinite horizon (see this table.) This is more than a tweak, and it doesn't really suffice.

Any plan that includes carving out private accounts undermines the Social Security system--Boxer was exactly correct in saying so.

If Hagel's plan is adopted, then the system is solvent for the next 75 years, the normal retirement age is higher starting in about two decades, and workers have the option of voluntarily establishing a personal account. It is not apparent to me how this "undermines" the system, let alone "destroys" it, which is what would have to be true in order for Boxer to have been "exactly correct" in what she said.

More on comments in the next post.

Other blogs commenting on this post

3 comments:

John said...

At the risk of sounding tendentious:

Me: The Democratic plan should be...Social Security.

You: This is a reasonable position. If so, then I think that senior elected Democrats should be able to specify a plan to restore it to solvency.

Me: In fact, the Democrats have a proposal that’s every bit as substantive as Bush’s: put aside privatization, and come to the bargaining table to hash out a 1983-style fix mixing benefit cuts and tax hikes. Senate Democrats actually called a press conference to announce this position. It’s Republicans who are inveighing against this kind of non-ideological solution. --from Jonathan Chait

me: There's a good chance it will be fine if left entirely alone.

You: Based on the simulations in the 2004 Trustees Report, there is virtually no chance that it will be solvent if left entirely alone. Please see this chart. It shows that over the 75-year projection period, there is less than a 2.5 percent chance that the cost rate will be below the income rate at the end of the period. So I don't know what "it will be fine" means here.

me: http://www.washingtonmonthly.com/blogphotos/Blog_SS_Bankruptcy_2.gif
As this graph shows, the trustees' predictions have been laughably conservative. In fact, their yearly reports contain three predictions; a conservative, a middle (the one that gets all the press attention), and an optimistic one.
The optimistic one is the one that has historically been on target. The mainstream one, shown above, is consistently too pessimistic, while the conservative one simply needs to be scrapped.

John said...

You: So even in this scenario, uncapping the payroll tax base would be equivalent to about 0.2*12.4 = 2.5 percentage points of payroll. This compares to an unfunded obligation that is 1.89 percentage points of payroll when measured over the next 75 years and 3.5 percentage points of payroll when measured over an infinite horizon (see this table.) This is more than a tweak, and it doesn't really suffice.

Using your numbers entirely, it *more than suffices* for the next 75 years. Any measurements beyond that, as in "over the infinite horizon" are Alice in Wonderland numbers.

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