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Atrios Does Policy

In a rare bit of policy analysis, Atrios notes the utter vacuity of the case for partial privatization of social security. I couldn't agree more. Insofar as you think the payroll tax is too onerous and that individuals should be given more freedom to do what they want with their money, the natural thing to do is to cut payroll taxes and cut benefits commensurately. Insofar as you're simply troubled by the long term imbalance between payroll tax receipts and Social Security benefits, the natural thing to do is to increase payroll taxes to cover the gap. Or if you think that higher payroll taxes are egregiously wrong, you should cut benefits (probably through switching from "wage indexing" of benefits to "price indexing") to cover the gap. Lastly, if what you think is just that we should be trying to take advantage of the fact that stocks have higher returns than bonds (due to the risk premium) then we should have the government hold stocks rather than bonds.

September 25, 2004 | Permalink

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Comments

Amen.

The fact that this idea still has legs means that nobody has really thought about it, and that's probably because nobody ever thought somebody would be stupid enough and try and actually push through such a policy. Now we get the clown show currently in charge and all bets are off.

What should be most telling is that most folks who work in the market think this idea is crazy.

All of the individuals who fuck up their personal savings would just end up living on the public dime in one form or another anyway. Back to square one.

Posted by: Waffle | Sep 25, 2004 4:25:37 PM

Social Security should be reformed, but not privatized BushCo style. A suggestion I am partial to is setting up individual accounts and requiring contribution amounts based on sound actuarial policy. The accounts should be invested in T-bills and they should be locked up. People should be allowed to invest an additional percentage of their income in them if they wish.

Posted by: HAWKSEYE | Sep 25, 2004 5:09:40 PM

"Or if you think that higher payroll taxes are egregiously wrong, you should cut benefits..."

Or you could make payroll taxes progressive instead of regressive (as they currently are), and so raise more money from rich folk instead of from the working poor...

Posted by: Petey | Sep 25, 2004 5:33:47 PM

A ridiculous idea.

A. The government cannot project accurately that far into the future, and

B. Americans for generations have been raised with the expectation that the government will always be there to bail them out. W would get a lot less mileage out this if he were to describe it as "Win big or lose big, it'll be yours and yours alone".

Posted by: Fred Arnold | Sep 25, 2004 5:37:22 PM

A suggestion I am partial to is setting up individual accounts and requiring contribution amounts based on sound actuarial policy.

I don't understand these individual accounts.

When I'm 65 - do I get to cash my account and fly to Vegas? Then what do I eat when I get back?

Or do I have to be required to buy an annuity contract? But that's not much different from social security - well, except that insurance companies will take a cut. Those inflation-adjusted annuities are very expensive. And what if my insurance company goes under?

Posted by: abb1 | Sep 25, 2004 6:04:45 PM

What if the government goes bankrupt?

There is no sure thing. And historically, you can do much better with just about any investment other than SS, especially under current projections.

Allowing people to invest their payroll deductions is sound policy, and will also help eliminate the effectively racist policy that means most blacks never collect. If an African-American workers dies, his account goes to his descendants.

Posted by: Adam Herman | Sep 25, 2004 6:13:29 PM

the federal government cannot "go bankrupt." It always has the power to print money. Not that doing that is particularly sound policy, but you should never think about the feds "going bankrupt."

Posted by: Atrios | Sep 25, 2004 6:20:16 PM

If the Federal Government went bankrupt it would not really matter where you had your dollars invested. They would all be worthless, as a medium of exchange anyway. Specie, such as gold or silver may hold some value, as could any other property that could be easily exchanged for another commodity or service.

That said, the idea of the Gov investing SS money in stock is a REALLY bad idea. The political implications of investment decisions would destroy the objectivity of management as well as skew the entire political spectrum towards subsidies, protectionism, and other nefarious political scourges on free markets.

Posted by: ken | Sep 25, 2004 6:52:32 PM

The US is also much more immune to the effects of (though not necessarily the event of) a collapsing dollar, as our debt is all dominated, fortunately, in dollars. Even if they're "worthless," that's all our creditors are going to get.

Posted by: Atrios | Sep 25, 2004 7:09:23 PM

Shouldn't that be 'denominated', Atrios?

Warren Buffett's move into the Euro looks smarter every day.

On question, since there appears to be a few economists here: am I right in thinking that there's a benefit to buying the debt of countries that you trade with, as opposed to some other currency? That's to say, if China started shipping more of its stuff to Europe than the US, would it be worth switching its bond holdings to Euros?

Anyway, on the SocSec point: no, the gubmint should not be made to behave like a fund manager, for many reasons. Not least the distorting effect upon the market.

Posted by: ahem | Sep 25, 2004 7:38:53 PM

This whole topic is confused.

Social security should be thought of as a kind of insurance, not a kind of annuity. As an annutiy, it sucks. As insurance, it works.

Yes, SS must be reformed. The age of eligibility must be adjusted for logevity data. SS needs to be means-tested, and SS benefits should remain subsistence. We shouldn't reward the short-sighted who don't plan for their retirement (thereby punishing the farsighted). But in a great nation, nobody should be put on the street because they are too old (or infirm) to work.

Posted by: Joel | Sep 25, 2004 8:54:41 PM

The basic problem with raising taxes to cover the gap that will appear around 2040 or so is that we would have raise all sorts of taxes to absurd degrees - say, 75% - to just cover what we have now.

Price-indexing would largely eliminate much of the problem. This is basically what Britain did. Pete Peterson wrote a book about this called "Running on Empty," which is where I learned it. He talked about another solution to a problem that came along with price-indexing, but I can't remember what it is.

Neither candidate will ever admit this, but it's basically true that whether or not we privatize Social Security, benefits will probably need to be cut and/or taxes will probably need to be increased.

I have done some research on this issue. There's a recent paper by Peter Orszag of Brookings and Peter Diamond of MIT. I haven't read all of it, but the argument is that we don't have to gut the entire system to try and preserve some form of it. I like that idea. But I also like the idea of private accounts - on top of a nice guaranteed benefit. In other words, everyone gets the ice cream, but they only get the opporunity to have some toppings.

Everyone should do a lot of reading on this. It's necessary to understand exactly what sort of hole we are probably going to be in when the Baby Boomers start to retire. I'm trying my best.

Posted by: Brian | Sep 25, 2004 8:56:22 PM

yes, denominated, of course.


The point is, overall, SS as it exists is *not* a big problem. It may be a big problem if we wait too long, but it's a teensy weensy problem now.

Medicare is another story, but that's for another discussion. People who conlfate the two do so for a reason.

Posted by: Atrios | Sep 26, 2004 12:22:50 AM

To evaluate the true policies of the current regime, one must ignore what they say, and watch what they do. On this basis, it is clear that GWBCo. wish to:

1. Destroy public education at the primary and secondary levels. That will be the effect of No Child Left Behind. Ted Kennedy got totally snookered on this one: he thought he was trading some meaningless ideological mumbo-jumbo for a bunch of cash for schools. He didn't get the cash, and the mumbo-jumbo will do real damage unless stopped.

2. Destroy the social safety net. The rhetoric is 'ownership society'; the effect is 'devil take the hindmost'.

3. Destroy the federal government. This is the obvious effect of current fiscal policy; it isn't accidental. I've come to believe that rewarding the wealthy with taxcuts is merely the happy byproduct destroying the government. A less obvious but equally effective tactic is the appointment of ideological firebrands at every level possible. We are funding the paychecks of people who see their jobs as wrecking the functions they are supposed to perform.

Posted by: John Casey | Sep 26, 2004 11:30:32 AM

"Everyone should do a lot of reading on this."

Yes and an excellent place to start would actually be to download and read The Annual Report of the Board of Trustees of the Federal Old-Age and Surivors Insurance and Disability Insurance Trust Funds, otherwise know as the Annual Report of Social Security. It is available in PDF or HTML, or they will mail you a paper copy (throwing in the Medicare Report) and pick up the $10 in first class postage. I have endulged in this valuable exercise every year since 1996, but am apparently alone, because nobody ever seems to poke at the numbers.
http://www.ssa.gov/OACT/pubs.html

Do you believe that the most likely estimate of US productivity growth over the long range is 1.6%? (2004 p.88). Do you think that an immediate increase in payroll tax of 1.89 percentage points would be crippling? (p.3) Because if you do then you will conclude that Social Security is in crisis. But if you sit back and say "Shoot, I am betting that productivity is going to come in at about 3% longterm, and jeez 1.89% of payroll income under $70,000 just gets me back to Clinton era tax rates, and I don't recall starving" then you will conclude this whole topic is bogus.

According to our own government a 1.9% average annual increase in productivity in the out years solves the Social Security gap. Completely. With no changes in payroll tax, benefits or retirement age. And this from a Report that assumed that the most optimistic number for 2004 productivity growth was 2.8%. (2004 p.88) Well folks we beat that number already. And as the Report indicates changes in the early years have an outsized impact in the out years.

Did it bother anyone but me that a system that was publically predicted ten years ago to run dry in 2026 is now predicted to run dry in 2042 (Trustees) or 2052 (CBO) and yet nobody has bothered to raise the possibility that maybe this was a problem that was solving itself at the rate of a year and a half for every year that passes?

Yes Brian, do read. The source documents. And then present any realistic economic projection that does not have Social Security totally solvent over the 75 year projection.

Posted by: Bruce Webb | Sep 26, 2004 11:37:12 AM

"Everyone should do a lot of reading on this."

Yes and an excellent place to start would actually be to download and read The Annual Report of the Board of Trustees of the Federal Old-Age and Surivors Insurance and Disability Insurance Trust Funds, otherwise know as the Annual Report of Social Security. It is available in PDF or HTML, or they will mail you a paper copy (throwing in the Medicare Report) and pick up the $10 in first class postage. I have endulged in this valuable exercise every year since 1996, but am apparently alone, because nobody ever seems to poke at the numbers.
http://www.ssa.gov/OACT/pubs.html

Do you believe that the most likely estimate of US productivity growth over the long range is 1.6%? (2004 p.88). Do you think that an immediate increase in payroll tax of 1.89 percentage points would be crippling? (p.3) Because if you do then you will conclude that Social Security is in crisis. But if you sit back and say "Shoot, I am betting that productivity is going to come in at about 3% longterm, and jeez 1.89% of payroll income under $70,000 just gets me back to Clinton era tax rates, and I don't recall starving" then you will conclude this whole topic is bogus.

According to our own government a 1.9% average annual increase in productivity in the out years solves the Social Security gap. Completely. With no changes in payroll tax, benefits or retirement age. And this from a Report that assumed that the most optimistic number for 2004 productivity growth was 2.8%. (2004 p.88) Well folks we beat that number already. And as the Report indicates changes in the early years have an outsized impact in the out years.

Did it bother anyone but me that a system that was publically predicted ten years ago to run dry in 2026 is now predicted to run dry in 2042 (Trustees) or 2052 (CBO) and yet nobody has bothered to raise the possibility that maybe this was a problem that was solving itself at the rate of a year and a half for every year that passes?

Yes Brian, do read. The source documents. And then present any realistic economic projection that does not have Social Security totally solvent over the 75 year projection.

Posted by: Bruce Webb | Sep 26, 2004 12:03:52 PM

Sorry for the double. Too many windows open.

Posted by: Bruce Webb | Sep 26, 2004 12:04:45 PM

The implicit debt of the SS system is (last time I looked) about 14 trillion dollars, or about twice as large as the explicit debt of the federal gov't. This debt is growing, since the SS system is accumulating liabilities (promises of future benefits) faster than it is accumulating assets (trust funds + expected future revenue). To say, as Atrios did, that SS as it exists now is not a big problem would be equivalent to saying that our current national debt (and all those irresponsible deficits Bush is running) are not a big problem, and I don't think anyone wants to say that, do they?

The long run solution to SS's problems has to find a way to decrease the rate of growth of the liabilities and increase the rate of growth of the assets. Increasing the retirment age, moving from wage-indexing to price-indexing, and raising taxe rates or increasing the tax base are all probably part of the eventual solution. Equity investment via the fund as a whole has various troubling effects on the both the behavior of the markets and the behavior of the gov't (would the gov't be suing the tobacco companies if it owned 20% of them? What would gov't ownership of a chunk of corporations imply for balancing the interests of labor vs. capital? For capital vs. the enviroment?). It also imposes a uniform increase in risk on either SS recipients or the taxpayers (depending on who benefits/suffers when equity returns deviate from expectations).

A partial private account system would have several benefits, especially if assume that the private accounts are a supplement to some minimum benefit guaranteed to all. First, it would allow people to take on equity-risk or not, as their personal preferences and existing risk-exposure dictates. Second, if the private accounts work something like an IRA, whereby at age 65 (or whatever), much flexibility is gained.

There is a lot of evidence that middle class and poor elderly people in the US are over-annuitized (that is, the current system leaves them with too much in the way of periodic payments -- SS, Medicare, and the annuity-like stream of housing services from owner-occupied housing) and would benefit from having more of their lifeteam wealth in a more liquid form. For example, with a higher portion of liquid wealth, consumers are more able to afford large lumpy expenditures (e.g. medical bills) instead of going into debt and slowly paying them off (with interest) with their SS checks. Most would also benefit from having more of their personal wealth in higher-risk, higher return assets.

As things stand currently, those unlucky enough to have a low life expectancy upon retirement (an earlier poster mentioned the black population, but some black people live a long time, and many white people die soon, so this isn't a racial issue per se, I would argue) are forced to consume at a low rate to insure those who are lucky enough to have a long life expectancy on retirement. The fairness or justice of this is debateable. There is also the issue of bequests in case of early death. Not only might this increase the expected utility of the retiree, it could be an important factor in capital accumulation among the less wealthy.

Much of your view on these matters will depend on your estimate of the necessity of paternalism, obviously. It is coherent and consistent to say that private accounts undermine the historical rationale of the SS system (people can't/won't provide for their own retirement) while simultaneously saying that private accounts do not undermine the purpose (to provide a decent retirement income) of the SS system.

Posted by: Dubious | Sep 26, 2004 12:34:30 PM

I think Matt misunderstands the way SS works right now. It holds funds in neither stocks nor bonds, because there is no trust fund to invest. Instead current retirees are paid from current taxes, and the surplus goes into the general government fund. This is what Al Gore's legendary "lockbox" was about, he wanted to force SS to retain and invest its surplus. So that's one substantial reform that's necessary - and I have not heard much talk about lockboxes from the Kerry campaign thus far.

But, as I'm sure Bush calculates, if you're going to spend the political capital on a major SS reform, why stop there?

From an individual's standpoint, the biggest problem with SS is that the benefits are not guaranteed, or in any way tied to the balance on some account with your name on it. Rather, they can change dramatically according to the calculations of current political leadership. I can see that this is great from a politician's point of view, allowing them to "wave the bloody shirt" during elections and receive votes from those fearful of benefit cuts, but I can't see how it's to the benefit of any retiree.


Maybe said differently, there are a lot of regulations on the 401K and IRA accounts that a huge percentage of working Americans own. But workers still own those assets. Any accountant will include them in a calcualtion of net worth. If you want to buy a home, your mortgage lender will include them in their assessment of your financial situation. None of those things are true of your SS benefits, because they could change at time or even vanish entirely.

Even if SS could be made solvent with something less than privatization, it still seems like private regulated pension accounts are a much sounder strategy of providing for retirement. As an earlier poster suggests, there would still be a role for a government-provided insurance, but not entitlement, program to make sure that the poorest retirees are not starving.

Posted by: drank | Sep 26, 2004 1:06:54 PM

"This debt is growing, since the SS system is accumulating liabilities (promises of future benefits) faster than it is accumulating assets (trust funds + expected future revenue)."

And you are backing this up with exactly what? An Op-Ed somewhere? I am pulling real numbers from the real report and they say that long-term productivity growth of an average 1.9% sends Social Security over the event horizon with a 500% (i.e. 5 year reserve) Trust Fund Ratio. (2004 report p. 15 Figure II.D7). And exactly nobody is predicting long-term growth at that rate or anywhere below.

And you are responding with a bunch of zero-sourced (and turgidly worded) assertions. Dubious, I don't care that you represent Conventional Wisdom. Show me the money.

My argument is that just about everybody has gotten this thing wrong because just about everybody had been too bone lazy to actually read and analyze the numbers in the Annual Reports, while everyone has totally relied on the surface conclusions.

Every data point you have ever run across on Social Security comes right out of these reports. Yeah I know it is hard. Everybody knows Social Security is in crisis because everybody has been reading out of the same hymn book. Drop the hymn book and pick up the book with the actual numbers and projections. I don't need lectures, I need numbers showing me I am offbase here.

Posted by: Bruce Webb | Sep 26, 2004 1:10:14 PM

I think Matt misunderstands the way SS works right now. It holds funds in neither stocks nor bonds, because there is no trust fund to invest. Instead current retirees are paid from current taxes, and the surplus goes into the general government fund.

Nonsense. There certainly is the trust fund and the surplus is invested in t-bills.

Posted by: abb1 | Sep 26, 2004 1:23:30 PM

Having read Atrios' post, I now understand why he doesn't "do" policy more often. Thankfully.

Posted by: Abadaba | Sep 26, 2004 3:30:33 PM

abb1:

SS on paper has a trust fund, but this is more of an accounting treatment, rather than a description of reality. You might read, for example, this 2002 Congressional Budget Office report describing the accounting practices around Social Security. Income is spent in the current year and the "surplus" is turned into US Governement debt.

But SS is most emphatically not a trust fund, as the term would be understood in other financial contexts. It is not like a big bank account where your FICA taxes are deposited, accrue interest over many years, and then are paid out an income stream against the appreciated assets when you retire.

Posted by: drank | Sep 26, 2004 3:37:58 PM

Accounting practices of the federal government have nothing to do with legal status of the SS trust fund.

It's not a big bank account, it's safebox where you pile you t-bills. Interest is re-invested into t-bills as well. Once you don't have enough income you'll start cashing those t-bills (they are special notes that can be cashed at any time) and use the proceeds to supplement your income.

The only way the congress can prevent the trust fund from cashing their notes is cutting the benefits - so that there is no need in additional funds to finance the program. I suspect that's what they'll do.

Posted by: abb1 | Sep 26, 2004 4:07:10 PM

abb1:

I appreciate the thoughtful response. I still think you're making the analytical mistake described in the CBO article. To quote:

Few people can understand how Social Security can be off-budget and part of the budget at the same time. To reflect it as off-budget is to suggest that it is an independent financial entity, which it is not. The money received for and dispensed by the program flows to and from the federal Treasury, as it does for all other federal programs.

That is, it's very misleading to think of SS as having a balance sheet separate from that of the federal government. The "trust fund" is really government debt by another name.

We're probably not so far apart in our views of the consequences, though. As you say, this debt could be dealt with by Congress reducing benefits. It could also be dealt with by changes to the SS authorizing legislation (means testing, raising retirement age, etc.), or by an inflationary monetary policy that reduces the real value of the government's obligations.

But all this is peripheral to my main point: why would you want your pension to depend on the government doing any of those things? When I put money into my IRA, I don't have to worry about Congress eliminating that money with the stroke of a pen! I *do* have to worry about making poor investment choices, but with a multi-decade time horizon even low-risk investments yield a substantial return.

Posted by: drank | Sep 26, 2004 5:25:34 PM

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