Well, At Least He's Engaging
Alex Tabarrok at Marginal Revolution tries to give Senator Lieberman an assist:
Brad DeLong and Paul Krugman are taking Joe Lieberman and others to task for asserting that the cost of fixing the social security problem increases at $600 billion a year. I agree that Lieberman is confusing an increase in the nominal present value of the debt with an increase in the cost of fixing social security but in correcting Lieberman both DeLong and Krugman meander towards the opposite error - that the costs of fixing social security is not increasing.
But almost inevitably a fix to social security will involve tax increases and the longer we wait the larger the costs of those increases will be. The technical explanation is that deadweight loss increases more than proportionately with an increase in taxes. The common sense explanation is that you don't want to take all your hits at once - instead, if you must take a hit, it's best to spread it out over time. Thus, the sooner we deal with the problem the lower the total costs will be. Lieberman's message is
correct, even if the details are wrong.
Yes, the $600 billion number is not the right number. For the right number and the right argument, I conjure my first post on Social Security from last October:
At present, the Social Security actuaries project an unfunded obligation of $10.4 trillion in the Old-Age, Survivors, and Disability Insurance (OASDI) program. This number comes directly from the 2004 Trustees Report released in March. (See Section IV.B.5 and Tables IV.B.7 and IV.B.8 in particular.) This is the present value of the projected payments less the present value of projected revenues for the system over the infinite horizon. It is the most comprehensive way to measure the hole in the system's finances.The $10.4 trillion is about 90 percent of current GDP. In a later post, I made a rough calculation that if we waited until 2042 (the projected date of trust fund exhaustion), the implicit debt would grow (at the 3 percent real interest rate), to about $32 trillion, which would be about 141 percent of that year's (much larger GDP). So even if taxable payroll didn't fall as a share of GDP, the surtax applied in perpetuity would have to increase by a factor of 141/90, or from 3.5 to 5.5 percentage points.
Note that this is the unfunded part of the obligations--it is over and above all of the payroll taxes (12.4 percent of taxable payroll) and income taxes on benefits that go to support the program under current law. If this gap were to be closed through payroll taxes, it would require them to be raised by 3.5 percentage points, immediately and permanently, with the additional surpluses over the next few decades saved (in Treasury bonds) to finance annual deficits that are projected to grow to about 6 percentage points of payroll over the next 75 years.
This $10.4 trillion unfunded obligation is sometimes referred to as implicit debt, to distinguish it from the federal government's explicit debt issued in the form of Treasury bills, notes, and bonds held by the public. At present, implicit debt from Social Security and Medicare is several times larger than the government's explicit debt. Is having so much implicit debt a problem? I think so, and the reason is that, just like explicit debt, we accrue interest on implicit debt.
[...]
So if we have an implicit debt of $10.4 trillion, and the real interest rate is 3 percent, then next year, the implicit debt will grow by 0.03*10.4 trillion = $312 billion, up to $10.7 trillion, if the assumptions underlying the projection stay the same. Why does this matter? Primarily, it matters because both the President and Senator Kerry have repeatedly stated (see the two speeches in Pennsylvania linked above) that they will not cut benefits for those at or near retirement age. (The Senator's statement may be even more encompassing, including benefits at any time in the future. I cannot tell for sure from his public statements.) This, in turn, means that each year that elapses without reform causes the burden of financing the unfunded obligations to be shifted away from one more birth cohort that crosses the threshold of being "at or near retirement." The more we wait, the larger the burden on future
generations, and the higher that 3.5 percentage point surtax would have to climb.
The issue that Alex is pointing out is tax smoothing: for efficiency reasons, it is better to have a surtax rate that is steady at 3.5 percent rather than one that is 0 for 38 years and then jumps to 5.5 percent. The issue is, for me, less about tax smoothing and more about the intergenerational fairness of consigning future generations to pay higher payroll tax rates. We shouldn't be doing that--in Social Security, the General Fund, or Medicare.
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6 comments:
There is a serious problem even with your analysis when one thinks about how Bush has restricted what he calls reform. This relates to that odd Bruce Willis tale Paul cooked up. Bush has ruled out any new payroll contributions so the PV of inflows will not go up regardless of when we pass and implement his proposals. His proposals rule out anyone retiring in the next 10 years losing benefits. So if we pass now or we pass something in 2014 that applies to all born after 1950, there is NO difference AT ALL. This is a simple point so I would hope smart and honest conservatives would acknowledge it.
franco - very well said. The only way waiting increases the alleged shortfall is that the 55 year old plus crowd does not sacrifice a thing. This 49-year old is willing to sacrifice a few future benefits - and at least I know none of my benefits will be paid to me until circa 2020. So the point of Joe Lieberman's letter to the NYTimes was what - to prove Joe "stock options are not an expense" Lieberman flunked Finance 101? We already knew that!
Given that we've got the real, indisputable, current gross federal debt growing by nearly $600 Billion a year, and that debt is going to leave the on-budget portion of the tax code in need of a large tax increase within the next 15 or so years, and the size of THAT tax increase will presumably have a deadweight loss that is more than proportionate with the increase in taxes.
And this coincides with expressions that the Social Security trust fund holds only meaningless IOUs.
The only logical solvency reform in the short to medium term is to resolve the fiscal gap in the rest of government.
That would minimize debt service later, when real interest rates are likely to be rising because much of the trust fund debt will have to be rolled over to the public.
Presumably, we'd be better off running a more or less balanced budget starting within the next couple years, rather than needing to make much larger adjustments at a higher cost later.
If we increase the current Social Security surplusses now, it seems likely congress will simply spend the money coming in, creating a bigger hole to dig out of later.
An appropriate glide path for any necessary benefit cuts or payroll tax increases to deal with Social Security's infinite timeline seems to be about 15 to 25 years from now. This gives at least a couple more President's a shot at those reforms if President Bush fails, presuming Bush doesn't also fail with his primary current responsibility of managing the short term budget.
PGL:
Your statement is correct:
So if we pass now or we pass something in 2014 that applies to all born after 1950, there is NO difference AT ALL.
But I don't think it is realistic to posit that benefits can be cut as much or that taxes can be raised as much on this cohort if we wait 10 years to do it.
I think discussion in these terms is irrelevant. What is relevant is the way Robt. Samuelson is talking about it:
"In 1935 Americans 65 and older were 6 percent of the population. They're now 12 percent and by 2030 are projected to be 20 percent.
"....the real issue is not Social Security's 'solvency'. It is the total cost to the government of baby boomers' retirement, including Social Security, Medicare and Medicaid (which covers much nursing home care).
"The real issue is preventing those costs from becoming economically oppressive and politically poisonous. Even if the Social Security trust fund is made permanently 'solvent' -- in the sense that taxes cover benefits -- the costs of all federal retirement programs may still become undesirably high. In 2004 Social Security, Medicare and Medicaid were 8 percent of national income. Left alone, they'll reach 14.5 percent by 2030...."
It seems unrealistic to expect future generations of workers will acquiesce to paying that much of their income to take care of complete strangers. Even if productivity increases enough to allow them to have much higher real incomes.
DanW, you're forgetting two things:
a) Moral Hazard. If we all invest in 401(k)s, I'll bet you dollars to donuts that SOME of us will fare very poorly -- SOMEBODY is going to end up two sigmas down in the distribution of returns by pure bad luck, and SOMEBODY is going to get Enron-ized. What are we going to do about them? Let them starve? SS is the insurance system, the safety net that catches people who either never earn above the poverty line (and thus CAN'T invest in any meaningful way) or whose investments go sour. Do you expect your homeowner's insurance to have a positive expected return? It may, but only if you, say, burn down your house. You're actually better off if it never returns you a dime. SS is actually slightly friendlier to the average and above-average earner than that type of insurance -- it has an expected return that maps to a very slight positive, though well below available investments. It has about a 3% expected return if you're a median earner.
b) Your 401(k) won't help you at all if you're a 35 year old with two kids who gets smacked by a bus, lingers in expensive intensive care for five years, and then leaves behind the wife and kids as surivors.
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