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Tyler Cowen Is Making Sense

Tyler Cowen takes what I would think would be the natural libertarian position on Social Security that the thing to do is cut benefits and, therefore, expenditures. The benefit cuts should, naturally enough, be focused on the least-defensible aspect of the program -- transfer payments to well-off old people. The answer, then, is means-testing. I don't know that I think that's such a great idea, but it's not a terrible idea (I could live with it), and it seems clear to me that that's the correct small government answer. But instead, libertarians tend to favor so-called "privatization" measures that would entail a short-term tax increase and the long-term imposition of a program of forced, regulated savings on workers. It doesn't sound like a very pro-freedom idea. What's going on here? Someone could probably give you a high-minded answer, but the vulgar Marxist answer is that privatization would be very good for the bottom line at certain financial services companies and those companies have essentially paid off the Cato Institute and other institutions to argue in favor of privatization rather than cutting expenditures by means-testing, a switch from wage-indexing to price-indexing, or some combination of the two.

October 19, 2004 | Permalink

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Comments

Correct.

Posted by: praktike | Oct 19, 2004 2:53:29 PM

The problem with means testing is that it is a de facto admission that Social Security is an unworkable ponzi scheme.

In its inception, Social Security is not a tax paid to ensure the welfare of elderly Americans. It is supposed to a government mandated retirement system whereby indivuals recoup their own money invested in the system.

If there are those workers who are just being taxed to support other elderly individuals who did not contribute as much through means testing then by all means there should be privatization plans to allow individuals to protect their own assets from governemt capture.

Or just cancel the whole system create an "old and poor people" tax on all incomes and then means test indivdual retirees and give the poor ones a monthly stipend just for being old.

Posted by: A man on the Hill | Oct 19, 2004 2:55:31 PM

The vulgar Marxist answer would be right.

Posted by: Carlos | Oct 19, 2004 2:55:35 PM

One expenditure I would like to see means tested is spousal death benefits. Because I am queer as a three dollar bill, I find the note the SocSec Admin sends me every spring listing the money they won't give my partner unless I marry her (but wait, I can't marry her) enraging. If I weren't such a decent Christian I'd call for banning spousal death benefits. But then I'd be wanting to screw someone just because I'm being screwed. And that would be wrong.

Posted by: Pudentilla | Oct 19, 2004 2:58:19 PM

I know this is not the main point of the post, but isn't at least part of the trouble with means-testing that de-universalizing Social Security will likely make it less widely supported, and particularly less supported among the wealthy and powerful? So that regardless of the direct effects of means-testing on the program itself, indirectly it would potentially have politically disastrous effects that would rebound against the program? Doesn't that make it a terrible idea?

Posted by: Jeff L. | Oct 19, 2004 2:58:39 PM

Of course, if we do absolutely nothing, Social Security is good for more than 30 years.

And if we raise the bizarrely regressive income cap on the payroll tax, Social Security will be good as long as the eye can see.

The right continually hypes the nature of the Social Security problem to build support for privitization. Folks doing research into the facts are their enemy.

Posted by: Petey | Oct 19, 2004 3:02:19 PM

The problem with means-testing is that there aren't enough 'well-off old people' to make even the smallest dent in the expenditures. Simple as that.

Posted by: abb1 | Oct 19, 2004 3:04:34 PM

The vulgar Marxist answer would run such a serious chronology problem as to be transparently silly.

It would have required pretty significant foresight for the then-microcosmic and fringy Cato of the late 70s/ early 80s to adopt privatization as a major theme, in the hope that twenty years later the financial institutions would discover it to be to their financial advantage *and* would decide that funding Cato was a likely way to get privatization adopted.

Peter Ferrara's first Cato book calling for privatization was published in 1979, when Cato was still in SF, allied with the LP, safely free of any suspicion on the part of serious businesses that its advocacy of a position would have any conceivable bearing on the position's eventual adoption-- and therefore safely free of any funding with such a motivation, or indeed almost any corporate funding at all.

Posted by: Jacob T. Levy | Oct 19, 2004 3:08:05 PM

that would entail a short-term tax increase and the long-term imposition of a program of forced, regulated savings on workers


Huh? It would entail a short term debt increase, not tax increase. And we already have a long-term imposed program of forced, regulated savings on workers, so it is no less libertarian (and, since it allows workers to choose where to invest, it is actually much MORE libertarian) than the present system.

Next!

Posted by: Al | Oct 19, 2004 3:14:04 PM

Oh, and re Jacob Levy's comment, ouch.

Posted by: Al | Oct 19, 2004 3:14:40 PM

Social Security is not an unworkable ponzi scheme. The Problem with SS is that it's under attack from Republicans and Wall Street hacks that want to get their hands on it. Our payroll taxes more than take care of SS outlays. Our income taxes and other revenues don't even come close to covering the rest of the budget. We have a Military Spending problem, a Federal Payroll problem, a farm subsity problem and a zillion other like problems but we don't have a Social Security problem. I, personally, wouldn't mind giving up my future benefits (and that future isn't that far off) to stop the regressive payroll tax. It's working people that pay the bulk of SS and the Bush administration takes their money and turns it over to the rich in income tax reductions. The system currently in place is a theft of the working class. If we ended SS and the regressive tax it might force the government to face the rest of the budget more realistically. The price we would pay is having a bunch of destitute seventy-year-olds which is why we came up with SS in the first place.

Conservatives are more dishonest on this topic than any other and that's saying alot.

Posted by: LowLife | Oct 19, 2004 3:14:42 PM

Jacob T's point is valid to an extent, but the current conception of Cato is a bit of a chicken and an egg problem.
In 1979, Cato's influence was probably similar to the LP. Money, and policy wonks that were influenced by money helped to create the Cato that we know, and know about, today.
That is not to say that Cato is as embarassingly tainted as TCS.

Posted by: theCoach | Oct 19, 2004 3:18:22 PM

The problem with means testing is that it is a de facto admission that Social Security is an unworkable ponzi scheme.

No, its an admission that it is just like every government program.

Posted by: cmdicely | Oct 19, 2004 3:21:32 PM

It would entail a short term debt increase, not tax increase.

Well, no, not that either.

It would entail a short term expenditure increase. That would be paid for either by a short term tax increase, or by a debt increase which would be paid for later by a bigger, or longer term, tax increase.

Posted by: cmdicely | Oct 19, 2004 3:22:54 PM

I know this is not the main point of the post, but isn't at least part of the trouble with means-testing that de-universalizing Social Security will likely make it less widely supported, and particularly less supported among the wealthy and powerful? So that regardless of the direct effects of means-testing on the program itself, indirectly it would potentially have politically disastrous effects that would rebound against the program? Doesn't that make it a terrible idea?

No, it just creates a sales job that needs done to sell it.

Posted by: cmdicely | Oct 19, 2004 3:25:37 PM

The fatal flaw in Matt's logic is that he assumes libertarians are more interested in limited government than they are in cold, hard cash.

Posted by: Violet | Oct 19, 2004 3:46:03 PM

Matt's 110% correct.

Also, the "universality" argument against means-tesing (namely that if it's not universal, SS won't remain sufficiently popular) is bunk. For one thing, elibility to receive benefits need not be contingent upon income. Instead, the level of generosity of benefits could be made contigent upon income. In other words, the program could remain universal (like it is today) so that everyone (even the ultra-rich) who pays into SS gets something, but benefits would simply be reduced (but not eliminated) to those who truly don't need them.

If I'm not mistaken we've already traveled down this road a bit. At one time SS benefits were exempt from federal income tax, but this is no longer the case. So, one's income already comes into play under current rules to determine the level of benefits one actually receives from Social Security.

A "maximum" percentage benefits reduction (say, 90% for the truly rich, and 0% for anybody with less than $70K in income) would be put in place so that even Warren Buffet would still get a check. But, come tax time, the IRS would increase his tax bill by the reduction triggered by his billionaire status. I think this would be far more workable than getting the SS administration into the complicated business of benefits/income balancing -- i.e., let the IRS handle it via the simple method of pre-published tables.

Such measures, combined with modest rejigging of the COLA and a very gradual increase in the retirement age, should take care of our demographic challenges without even requiring us to raise taxes (COLA and retirement age adjustments may alone be sufficent, but, policy-making is about priorities and making choices, and complete exchewing of means-testing seems to me to unfairly put the burden on those who can least ably bear it; furthermore, tackling the reform of SS solely via increasing payroll taxes seems to me mighty unwise -- I don't know about you, but, I'm very reluctant to see the USA enact any measures that make it more expensive to hire and employ people).

I have seen, by the way, the argument that means-testing can reduce savings (Kevin Drum, prominently, makes this argument and cites the example of Britain); while this may be true, the savings rate in the U.S. is already too low. IMO fixing that problem is going to require major tax code overhaul. In other words, wasting billions of dollars on rich retirees is hardly justified because it supposedly props up our decidedly inadequate savings rate.

Of course, none of this might be necessary if money grew on trees, or if we could sell the rest of the world increasing quantities of IOU's indefinitely, or if we didn't face such expensive challenges as national security and the increasingly terrifying financial outlook for Medicare. But we do.

Posted by: P.B. Almeida | Oct 19, 2004 3:55:09 PM

I am a life long Republican, voting for Bush, but I think the idea of "privatizing" SS or anything that approaches that is looney tunes. Social Security was meant to alleviate a serious social problem, poverty among the elderly. It has done a fairly good job of that. Double (at least) the wage base (now 80 some odd thousand dollars), increase the portion of Social Security subjec to taxation to 100%, and the funding problems go away.

Posted by: Dan | Oct 19, 2004 4:00:49 PM

Once you accept the reality that none of us old codgers collecting SS benefits is getting back just what we put in over the years, but is getting a pension paid for by current workers, then it should be obvious that all income should be subject to payroll taxes, and not just the first $80,000 or so. Once that single change is made there is no funding problem for SS in the foreseeable future. But, then all of that beautiful money doesn't generate commissions and management fees for financial institutions either, and that can never be overlooked by the Republicans.

Posted by: Vaughn Hopkins | Oct 19, 2004 5:03:30 PM

SS is a regressive tax because it is capped after $88,000(?). Those who claim it is an "account" or "trust fund" and believe that they make "contributions" are simply delusional. Let's end that charade. I agree with those who advocate lifting the cap on this tax, especially if the increased income would allow the payroll deductions and employer match (7.5%?) to be reduced. This would reduce the cost of employment for most small businesses and increase the takehome pay for most workers, allowing them to save more on their own. Wouldn't it?

Posted by: Just Karl | Oct 19, 2004 5:08:38 PM

Also, the "universality" argument against means-tesing (namely that if it's not universal, SS won't remain sufficiently popular) is bunk. For one thing, elibility to receive benefits need not be contingent upon income. Instead, the level of generosity of benefits could be made contigent upon income. In other words, the program could remain universal (like it is today) so that everyone (even the ultra-rich) who pays into SS gets something, but benefits would simply be reduced (but not eliminated) to those who truly don't need them.

Heck, if you stay on the personal contribution model, you could even have the benefits that are "mandatorily deferred" because of means-testing treated as additional contribution, and so could increase the benefits for which the contributor was later eligible.

Another thing to do is replace the payroll tax with a flat income tax at a similar percentage to (both halves) of the payroll tax. This would hit people whose income is from capital instead of wage labor, and by increasing the number of people paying the tax, either decrease the required burden of the tax, or add to the solvency of the system. Uncapping the top-end contribution would also help here.

Posted by: cmdicely | Oct 19, 2004 5:40:30 PM

I agree with those who advocate lifting the cap on this tax, especially if the increased income would allow the payroll deductions and employer match (7.5%?) to be reduced. This would reduce the cost of employment for most small businesses and increase the takehome pay for most workers, allowing them to save more on their own. Wouldn't it?

Yes, I believe you're logic is sound about this idea, to the extent that most small businesses don't pay workers $90k+.

For the record, although I'm not keen on the idea of lifting the SS tax income cap, I wouldn't oppose it if such an increase were revenue-neutral, because of a lowering of the rate. Such a move would obviously reduce the regressive nature of the tax.

But if the rate is not reduced, and we merely raise or eliminate the income cap on the SS payroll tax, we're simply going to make it even more expensive to hire and employ workers in this country. We'd frankly be better off eliminating the payroll tax altogether and funding SS via general revenue.

Yes, theoretically, removing the cap would only make it more expensive to employee people making over $88k a year -- but do we really want to do that? I mean, that's not exactly huge money by today's standards, especially if you're trying to employ someone in, say, Manhattan, or Silicon Valley.

Posted by: P.B. Almeida | Oct 19, 2004 5:41:48 PM

If you means-test Social Security, you cut against the grain of the program. Social Security is insurance. Insurance does not means test. If you pay in and you meet the requirements for a payout, you get it.

Non-economist libertarians are in general in favor of privatization out of ignorance. Economist libertarians are in favor of privatization as part of a long-term plan to do away with Social Security through artificial insolvencies. Conservatives are in favor of privatization because of the enormous opportunities for crony capitalism.

Posted by: Kimmitt | Oct 19, 2004 5:46:45 PM

Social Security is insurance. Insurance does not means test. If you pay in and you meet the requirements for a payout, you get it.

Kimmit: it's not insurance. Insurance companies take your money and invest it. Social Security is a transfer program. It's simple, pure, unadulterated welfare spending. And, as has already been pointed out, we do a sort of back door means testing currently, via the tax code (the higher one's overall income, the greater a percentage of one's Social Security benefits are subject to federal income tax). Anyway, even if NY Life doesn't means-test, that doesn't mean Washington shouldn't.

Posted by: P.B. Almeida | Oct 19, 2004 5:53:44 PM

I'm with Jeff L. above. I like the idea of means testing in theory, but have always worried that it would irreparably damage Social Security politically. The contrast between AFDC and Medicaid is instructive: Medicaid has avoided the massive overhaul/cut that AFDC got because Medicaid doesn't only serve poor people, it also pays for nursing home expenses for people whose families are middle class/well-off. It therefore has a constituency to protect it that AFDC never had. Of course, the reality is that Social Security doesn't need fixing (it's Medicare that does!), and all the privatization talk is either (1) Wall Street wanting to get its paws on a huge chunk of money, and/or (2) people who hate Social Security on ideological grounds looking for a plausible-sounding way to get rid of it. Period.

Posted by: Rebecca Allen, PhD | Oct 19, 2004 5:57:06 PM

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