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Transition Costs!

They must not teach math very well at Hillsdale College ("educating for liberty since 1844") since 2003 graduate Keith Miller seems to think that 1 minus 1 equals 3. The fact that I've seen this precise op-ed published about 1 billion times makes me seriously question what's going on in America's conservative think tanks. It's obvious -- obvious! -- that whatever merits Social Security privatization may have, the one thing it really won't do is allow us to maintain the current benefit structure for oldish people past 2018 without raising taxes. Indeed, it would do the reverse.

The honest case here -- obviously, again -- is to say that in exchange for a one-time expenditure of tax revenues to float the system during the transitional period you could more-or-less permanently solve the problem. On the other hand, it's really not clear that there even is a problem here, as the Social Security trustees are using what seems to be an improbably low projection of future productivity growth in their models. But if a problem does arise, it would be easy enough to cut the rate of benefit growth down to something less than the rate of wage growth but still higher than the rate of consumer price growth, or do any of half a dozen other things.

June 30, 2004 | Permalink

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"But if a problem does arise, it would be easy enough to cut the rate of benefit growth down to something less than the rate of wage growth but still higher than the rate of consumer price growth, or do any of half a dozen other things."

Yup. EXACTLY as easy as it would be to ballance the federal budget, using HONEST accounting.

Posted by: Brett Bellmore | Jun 30, 2004 1:50:33 PM

Brett,
The federal budget was balanced last time we had an administration that concerned itself with honest accounting. All it took was a serious approach to policy.

Posted by: theCoach | Jun 30, 2004 1:58:52 PM

The fact that I've seen this precise op-ed published about 1 billion times makes me seriously question what's going on in America's conservative think tanks.

This is still a matter that's in question?

To paraphrase the old saying about art, conservative think tanks (and "news" media) view themselves not as a mirror to reflect reality, but as a hammer with which to shape it.

Posted by: Swopa | Jun 30, 2004 2:18:28 PM

Ya know, many of the adult right-wingers will, every so often, acknowledge that they are in the propaganda business, but the youthful right-wingers honestly seem to believe all this blather....

Posted by: howard | Jun 30, 2004 2:23:04 PM

BTW, i suppose we should note that social security is not the problem, short or long term: as Matthew says, there are many solutions to whatever degree of shortfall exists somewhere decades down the road.

The real long-term problem is medicare, and i don't have the faintest idea of what to do about that (but neither do right-wingers).

Posted by: howard | Jun 30, 2004 2:24:59 PM

Howard,
How about doing away with Medicare and replacing it with a system similar to the French system?

Posted by: theCoach | Jun 30, 2004 4:01:23 PM

what about borrowing to finance the transition from today's PAYGO system to tomorrow's personal account systems? Jack Kemp had an op-ed in Investors Business Daily not long ago on the very topic...yes, borrowing would mean debt of about $4 trillion, but not reforming Social Security and letting it sit until 2042 will cost us about $40 trillion, or something equally absurd. It's really our choice...pay a little now or pay a lot later.

Posted by: oddly enough | Jun 30, 2004 4:05:54 PM

The one thing that gets me in all these discussions about social security is that they seem to focus 100% on the retirement aspect. Yes, this is the biggest part of social security, but it actually does more than that, providing disability insurance, survivor benefits, etc.

Does anyone have the stats for how large of a part of overall Scoial Security these are? I'm curious how much of this the government would need to take on if we went to private retirement accounts. And also how much of the gap in returns between private investment and the returns from Soc. Security can be explained by the fact that Social Security is doing a bunch of stuff beyond just paying stipends to retirees.

Posted by: Doug Turnbull | Jun 30, 2004 4:42:58 PM

>Howard,
>How about doing away with Medicare and
>replacing it with a system similar to the
>French system?

The "French system" is about to do its own long walk off of a short pier. We need to watch Europe - they will be hitting the same pension/health care problems we will, only about 10 years earlier.

Posted by: rvman | Jun 30, 2004 5:08:16 PM

oddly enough, of course our choices aren't limited to doing "nothing;" there are any number of valid choices (and i'm not enough of a finance guy to know the present value of trillions of dollars fifty years from now, but it's rather less than the nominal value).

thecoach, rvman, this is why i hazard no opinions about what to do about medicare; it really takes much more specialist knowledge than i have. Unlike social security, which really is only about demographic trends, medicare is about guessing breakthroughs in medical technology and what they will cost....

Posted by: howard | Jun 30, 2004 5:49:50 PM

rvman,
Is there something about the French system other than their worse demographics, that makes it more troublesome than our own?
I really do not know much about their system, and would like to be informed on its weaknesses (structurally - I really do not care for the arguments that sound more like, "but your doctors and nurses will be speaking FRENCH! and you will have to wait in French lines! ,rather than arguments about the healthcare results).
Which system currently out there do you think comes closest to being the best? (I do not know enough, but would disqualify our own because we have so many without regular health care.)

Posted by: theCoach | Jul 1, 2004 10:19:51 AM

"But if a problem does arise, it would be easy enough to cut the rate of benefit growth down to something less than the rate of wage growth but still higher than the rate of consumer price growth"

This is easy, of course, if we assume that the rate of consumer price growth is lower than the rate of wage growth. Otherwise the math become very difficult indeed.

Posted by: Grimmstail | Jul 1, 2004 10:21:52 AM

Ya know, many of the adult right-wingers will, every so often, acknowledge that they are in the propaganda business, but the youthful right-wingers honestly seem to believe all this blather....
You type that the week the mainstream left embraces a propaganda laden film and it's nutball director?

Posted by: Ricky | Jul 1, 2004 1:46:52 PM

BTW, every dollar that doesn't go into ss due to privatization is one less dollar that must be spent later.

The "transition costs" (which goes up a billion every time I see it mentioned....gotta love theorists who pretend to know mathematics) are really a deluge of outlays needed up front when a huge drop of outlays will be present later.

And this is doubly interesting since Matt's long called for a payroll tax cut....which would do precisely what he's bashing privatization over.

Posted by: Ricky | Jul 1, 2004 1:49:28 PM

Social Security privatization is one of those ideas that sounds plausible, but actually makes no sense whatsoever.

Here's my future history of Social Security privatization:

If people divert a sizable portion of their social security contribution to private accounts, then deficit spending (or tax increases) will be needed to fulfill obligations to current retirees and those who are close enough to retirement to save enough for retirement. So the near-term result is bad.

Let's look longer-term, then. After privatization has been accomplished, what then do we do about those who still fail, even with the miracle of booming stock markets, to save enough for retirement? Well, we need to introduce Social Security Plus, which covers the gap between retirement savings and what a retiree needs to live on. How is Social Security Plus paid for? Well, either out of general revenues, or out of a special payroll tax. In either case, if it is means-tested, taxpayers will complain: "You mean, I've been paying for Social Security Plus my entire working life, and now, because I've been prudent enough to save a little for my retirement, I'm ineligible to receive it? You mean, I'm being *punished* for my foresight and frugality?"

So, lawmakers feel pressure to eliminate the means-testing, and so they allow everyone to receive Social Security Plus benefits when they retire. That makes the program enormously more expensive, requiring a huge boost in payroll taxes or income taxes (however it is paid for). Now, taxpayers complain: "Look at what a pitiful return I'm getting on my Social Security Plus payments! I'd be better off putting my Social Security Plus payments in the stock market."

So there is a move to privatize Social Security Plus...

Posted by: Daryl McCullough | Jul 1, 2004 3:55:05 PM

Daryl, no current idea being floated has allocated anything more than 2% (of around 12%) towards privatization.

The scenario you present isn't really plausible.

Posted by: Ricky | Jul 1, 2004 4:57:28 PM

The disconnect here, of course, is that the trustees base their gloom-and-doom scenarios of SS on an economic growth rate (1.6% annually) that was about half that seen during the Great Depression. Yet, privatization quislings base their projections on growth projections of 10, 12, 15% and higher.

And who can forget Larry Lindsay's SS privatization scheme?

Posted by: Jadegold | Jul 1, 2004 5:22:30 PM

Ricky,

My point is that privatization is nonsensical. If you want to put away money for your own private retirement fund, nobody is stopping you. I put away around 10% of my salary for this purpose. So it's just nonsensical to talk about private accounts as an *alternative* to Social Security. If it's a private account then it *isn't* Social Security, it's a 401K.

An honest argument about Social Security might be to suggest that we reduce both the benefits of Social Security and the amount each citizen is expected to pay for Social Security. Then people can use the money they save on a private retirement account, if they want. But a retirement account is not a *replacement* for social security, it's a different thing altogether.

Posted by: Daryl McCullough | Jul 2, 2004 1:26:36 PM

Dear Matthew,

I just found your blog via your article entitled "Think Again: Spinning Social Security" on www.thecenterforamericanprogress.com.

In that article and again here on this blogpost, you seem to be downplaying the difficulty of fixing the social security shortfall, and you suggest here that " it would be easy enough to cut the rate of benefit growth down to something less than the rate of wage growth..., or do any of half a dozen other things"

and also in the article that "Faced with an honest choice, the American people would prefer a restoration of the pre-Bush tax code" - which suggests that that's all it would take to solve the problem. But wasn't this a huge issue in the 2000 campaign - even before the tax cuts, and at the height of the surplus budget?

It is, in my opinion, a direct result of you and others downplaying of the situation, that many democrats believe that we could actually afford some kind of national healthcare plan or any other new spending initiative - when we should be doing all we can to save what we already have.

I'm curious if you've read Larry Kotlokoff's "The Coming Generational Storm" or Krugman's NYT article "The tax cut con"?

Posted by: BobK | Jul 2, 2004 8:14:23 PM

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