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Opportunism Knocks II
To prove that this post on Andrew Olmstead isn't just bad faith, let me once again reiterate that I really do think there are reasonable changes to be made to Social Security and put a few ideas on the table. My basic approach is guided by the belief that, contrary to media myth, there's nothing wrong with "punting" the problem down the road to some degree. This is for two reasons. The first is the inherent uncertainty of the sort of economic forecasts we're dealing with. It's silly to overreact to merely hypothetical problems that can be dealt with later when we know more. The second is that there's something inherently silly in believing that lawmakers in 2005 can actually determine policy in 2045. There will be many elections and new people in office decades from now. The idea of a "permanent fix" is a bit of an illusion. We don't need to entirely close the projected gap. One thing we should constantly be doing is looking for ways to improve economic growth (real tax reform would be a good place to start) which would do a great deal -- or maybe everything -- to solve our problems. But we should look on ways to mitigate them if we can. The priority should be acting quickly on the least-painful solutions.
Thus, the number one change we should make is to truly universalize Social Security by adding to the program the small number of workers (currently mostly employees of state and local governments, unless I'm mistaken) who aren't currently covered. This helps the program's finances and it helps them more the faster it's done. There's no reason for Republicans to object to the change except for the minor fact that they actually want Social Security to go bankrupt, since it provides an excuse for eliminating the program. The next thing is to improve our immigration policy. The president has been hazy on the details here, but he says he wants a program that will increase the number of immigrants who are working in this country legally. The reasons to do something along these lines are legion, and the benefits to Social Security are among them. The current SSA projections are based on the absurd notion that there will be an absolute decline in the number of immigrants to the USA. A better policy would both avoid that consequence and increase the number of immigrants who are actually paying taxes (because they're legal), both of which would improve the financial situation.
For now, I think those two fixes would suffice. They would push the Trust Fund depletion date to over fifty years in the future. That's plenty of time to work on pro-growth reforms to the tax code and the health care system that could ensure Social Security never goes bankrupt. But since the media dogmatically demands "painful" changes be made in the form of tax hikes and benefit cuts, I'll come out in favor of some tax hikes and benefit cuts.
The first piece of "pain" would be uncapping the payroll tax. Since I don't really believe in pain, I would ideally combine with with a small lowering in the FICA rate (such that it would still be revenue-positive) but doomsaying masochists can leave the rate the same if they prefer.
Now for benefit cuts. The most popular solution is raising the retirement age beyond the already scheduled lift to 67. I think this is a mistake. Life expectancy at 65 isn't actually rising all that quickly, and some workers really do need to retire in their sixties. Higher retirement ages are a kind of regressive in a sense that's pretty morally depraved -- altering a retirement program to make it less useful to the people most in need of a retirement program. There is, I think, a better way. Social Security provides an option to retire "early" at a reduce benefit rate. This is useful because, as I say, human needs with regard to their social insurance vary according to life history and occupation. But we have a bit of a problem. Over time, the proportion of people retiring early has been steadily rising, and it's now at 70 percent. That indicates that something's gone wrong with the formula. The reduction in benefits is supposed to be actuarially fair (i.e., you get the same aggregate sum over the course of a lifetime, just spread out longer) but it appears based on the extaordinarily lage number of people retiring "early (in light of the fact that most people retire early, we should say that the others are retiring "late) that it is not.
A commission relatively isolated from political pressures should be established and empowered to revise the early retirement cut formula downward so as to make it actuarially fairer and preserve this fairness in light of whatever demographic trends may occur. Further, this commission should be empowered to eliminate the concept of a "normal" retirement age. They ought to devise an actuarially fair formula by which workers may delay the date at which they begin drawing benefits as far back as they choose. These two changes will both reduce the growth in expenditures, and improve the worker-retiree ratio by eliminating disincentives for people inclined to keep working longer to do so.
Last but by no means least, we should take a good hard look at the issue of age discrimination in the workforce. As we move to a society with an increasingly-large proportion of old people in it, it's important that senior citizens (and younger people in their 50s who are often victims of age discrimination) be empowered to contribute to society commensurately with their abilities. This, too, will improve the worker-retiree ratio and, therefore, Social Security's finances.
Private investment accounts are another matter. Helping more people own equities is a reasonable goal. Boosting the savings rate is also a worthwhile goal, but probably better tackled on the debt-side by reforming the credit card industry and predatory lending. These are things we should look at along with tax reform and health care reform, ideally after my "pain free" reforms and before we start looking at the "painful" ones. Their relationship to Social Security, however, is tangential at best, and better savings policy is not a replacement for better social insurance policy.
February 6, 2005 | Permalink
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Comments
"My basic approach is guided by the belief that, contrary to media myth, there's nothing wrong with "punting" the problem down the road to some degree.... It's silly to overreact to merely hypothetical problems that can be dealt with later when we know more."
My position on global warming, to a "T".
Posted by: Brett Bellmore | Feb 6, 2005 2:27:01 PM
I don't think there's any need to prove you're arguing in good faith, for the record. But these are some interesting ideas, so I do appreciate your posting them. Always a pleasure.
Olmsted. Not Olmstead.
Posted by: Andrew | Feb 6, 2005 2:28:04 PM
Removing the cap on FICA is, of course, all there is to it. It'll bump the revenue by about 20% - more than enough. No other tampering is necessary whatsoever.
Posted by: abb1 | Feb 6, 2005 2:44:19 PM
Abb1: That's not actually right mathematically speaking. It goes a long way to solving the problem, but doesn't quite get there because it also increases outlays (benefits are partially proportional to taxes paid) though by less than it increases revenue. In addition, non-wage income is rising as a share of national income, so that issue remains in place. But eliminating the cap does put you very close to parity, such that slightly better population/economic growth or a very minor benefit tweak would probably leave us in surplus forever. More realistically (politically speaking) the cap could be raised, but not eliminated, which could be a big chunk of a solution.
Posted by: Matthew Yglesias | Feb 6, 2005 2:52:39 PM
Thus, the number one change we should make is to truly universalize Social Security by adding to the program the small number of workers (currently mostly employees of state and local governments, unless I'm mistaken) who aren't currently covered.
I've posted this before but don't remember any responses so I'll try again.
I don't think this is constitutionally permissable. Involuntarily moving state and local government employees into SS would result in the feds taxing the states and localities. The employer share of the payroll tax would come from the state or locality. I don't think the feds can do this. Voluntary contributions are a different matter and some states and cities do have their employees in SS.
Posted by: flory | Feb 6, 2005 2:58:59 PM
We should consider allowing the SSTF itself to be partially invested in instruments other than T-bills. The overheads are lower, the risk is spread across both the population and in time, and to the extent that this does give us a better return on the money in the fund, it makes our SS taxes go farther.
There is the possibility of political pressure, but this fund could be isolated from the rest of the government in much the same way that other government pension funds are (e.g., CalPERS). The downside to this that I see is not the usual one; deprived of its ready pool of cash to offset deficits, the federal government might underinvest in things that really matter to long-term productivity (education, roads, telecommunications, public health).
And also: elect Democrats to the presidency. Better for the stock market, better for unemployment, better for social security. (At least, that's what history tells us, and GWB has thus far done nothing to change this pattern.)
Posted by: dr2chase | Feb 6, 2005 3:09:39 PM
"I don't think this is constitutionally permissable. Involuntarily moving state and local government employees into SS would result in the feds taxing the states and localities"
Ahhh. Thank You, I was wondering about the reasons behind the exception.
Posted by: bob mcmanus | Feb 6, 2005 3:40:52 PM
More realistically (politically speaking) the cap could be raised, but not eliminated, which could be a big chunk of a solution.
Just based on intuition, I don't think raising the cap would help much: you are chasing the L-curve here; a few people with unimaginably high incomes (I understand, much of it is not earned income, but nevertheless). If you raise the cap from $90K to, say, $200K, you aren't going to get much at all; for the real money you have to go up to the stratosphere.
And, of course, FICAing un-earned income shouldn't be, as they say, off the table either.
Posted by: abb1 | Feb 6, 2005 3:55:15 PM
What does real tax reform look like anyway? I don't think I could recognize it if it came up and smacked me in the face with a 1040.
Posted by: MNPundit | Feb 6, 2005 4:06:48 PM
If you're going to uncap FICA and reduce the rate, why not just do away with it and fund out of general revenue? I mean, the mechanics of an income tax are pretty well understood, aren't they?
As I understand it, the early retirement benefit is meant to be actuarially fair (that is, it's meant to be a neutral choice for the system, not for any individual). If people are taking the deal more than we'd expect it could be that the American masses know better than the actuaries, or that the American masses are systematically miscalculating. Or it could even suggest that benefits in the system as a whole are too high.
Why is it that the need for retirement income is something that needs to be insured against? I understand the concept of welfare, and I understand the concept of insurance. But the typical retirement benefit provided by social security provides income replacement for retirement, which is something that can be predicted and planned for without much difficulty. So why is that "social insurance"?
Answering that question may make pre-funding some retirement expenses--income replacement--look more appropriate, and may make the social insurance benefits provided by Medicare more obvious. There's only so much we can do, and priority should given given to true social insurance.
Posted by: Thomas | Feb 6, 2005 4:27:08 PM
I'm no economist, but I'm pretty sure in thirty years or so we'll be on the other side of the hydrogen economy, and by then the bio-tech revolution will have opened up brave new opportunities. Oh no ... our people are starving, because social security will be in the red in 2042. Run for your life. Even though energy costs have gone from a hundred bazillion to practically nothing. And by then, when we supply bio-technology to much of the entire world, our gross national product will be down because the baby boom wave will have passed and there won't be enough workers. Riiight.
Posted by: poputonian | Feb 6, 2005 4:34:12 PM
"Why is it that the need for retirement income is something that needs to be insured against?"
Because, like almost every income transfer program, it's just a way of buying votes. Calling it "insurance" is just rationalization.
Posted by: Brett Bellmore | Feb 6, 2005 4:56:31 PM
1) workers not in the program.
"I don't think this is constitutionally permissable. Involuntarily moving state and local government employees into SS would result in the feds taxing the states and localities"
Obviously, what was unconstitutional 20 years ago isn't really relevant today. If we decide to do it, we'll do it. To me, it's more you're reneging on the deal you originally made with the local governments.
2)"If you're going to uncap FICA and reduce the rate, why not just do away with it and fund out of general revenue? "
Because if you did that, it wouldn't ba an "earned right" and would then have less support. So you nibble away at within the current framework. Matt doesn't believe in the earned right concept, but I don't think he understands how much other people wouldn't believe in the SS program without it.
3) If you've got enough money to retire and want to retire, then you aren't going to worry about a few extra bucks you might make by retiring later. You just go ahead and retire. To actually increase workforce participation, you would have to make it actuarially unfair. But if you want to do that, why not just reduce the growth a benefits just a little like Kevin Drum suggested a while back.
4) I agree with Matt on the retirement age. It shouldn't go above 68.
5) If private accounts don't close the funding gap, then I agree with Matt.
6) The gap in SS needs to be closed because its not fair to younger workers to receive 75 cents on the dollar. We've built up a surplus only since 1983 and younger workers were contributing but none of the surplus will be left for them because benefits or taxes aren't right for the program to be in equilibrium.
7) So how should you decide which should get the ax. I would say it comes down to whether the tax rate needs to be raised or benefits cut. Remember, I assume I want to keep the earned right so that rules out cap increases to me. But I believe in SS, and think those will go towards killing the program. So is the current tax rate too onerous on the poor or benefits more generous than they need to be. I think the 70% early retirement says it all.
Call me dumb if you like.
Posted by: Chad | Feb 6, 2005 5:02:58 PM
"Why is it that the need for retirement income is something that needs to be insured against?"
First, because one's actual lifespan cannot be predicted with certainty; second, because unexpected financial disaster cannot be predicted but can only be insured against. Social Security also insures much more effectively against disability or premature death than do private insurance programs.
Posted by: Judith Gran | Feb 6, 2005 5:09:40 PM
"I don't think this is constitutionally permissable. Involuntarily moving state and local government employees into SS would result in the feds taxing the states and localities"
Only according to the strange interpretation of the Tenth Amendment created by the Rehnquist Court. Again, the solution is to elect a Democratic president.
Posted by: Judith Gran | Feb 6, 2005 5:11:52 PM
Judith, most of that reply is simply irrelevant. I know that there are insurance elements to the program, and you've set them out quite nicely. And there's always the risk of "unexpected financial disaster"--that's what welfare is for. And you've given a good reason for buying an annuity with one's retirement funds. That's insurance against outliving one's retirement savings. But that's quite a bit different from thinking of the need for retirement income as something that needs to be insured against. For most of us--those not currently living through an unexpected financial disaster and not rationally expecting or planning a demise before retirement--retirement is something to be planned for.
Posted by: Thomas | Feb 6, 2005 5:33:06 PM
So, we save money and hand it to financial intermediaries, such as bankers. Are these bankers investing our money so that, when we retire, the economy is set up to produce the particular goods and services we'll want and need in old age? It'll be a bummer if we're all millionaires at retirement but the economy is mostly set up to produce for the young.
Posted by: yesh | Feb 6, 2005 5:46:32 PM
I think that if we were starting with a blank sheet of paper and had to think only about economics and not politics, it would be better to have a retirement safety net funded by general revenue that would provide subsistance benefits only to those retirees who could not or did not provide for themselves. Say at about the level that someone earning near minimum wage would get from the current system (could probably be a little higher without inducing a moral hazard).
The presumptiom would be that middle income and above workers would be expected to provide for their own retirement, but would be no worse off than a low income worker today if they did not. Wether there would be a force savings component in return for the saftey net is debatable.
It seems that the current system, in an effort to be all inclusive and thus politically palitable, ended up with a regressive 12.4% tax that pays benefits to many retirees that don't really need them and starvation benefits to those who really need them.
This may be were the "personal account" strategy eventually leads.
Posted by: Robert Brown | Feb 6, 2005 5:56:38 PM
THere is really no need to do anything until we are about 10-15 years from when the trust fund runs out of assets. At that point we can just tweak benefit levels and the system will be solvent.
The reality is that if we balance the budget for the next 40 years, there will be no social security crisis. That's because by 2042 we will have been paying 6.2% of GDP in Social Security benefits for 12 years---and if we are paying that percentage of GDP while balancing the budget, we'll have a huge surplus from general revenue in 2043 that is just about equal to the shortfall in Social Security.
And that is what this is really all about. We are now paying 4.2% of GDP on Social Security benefits, but starting in 2010 that percentage will be rising by 0.10% each year for 20 years. Bush's "indexing" plan will stop that increase dead in its tracks, and leave a permanent, and every expanding, surplus in the Social Security Trust that will ensure that taxes are not too high on the rich.
Posted by: paul_lukasiak | Feb 6, 2005 6:01:01 PM
yesh,
You may have hear of something called "supply and demand" (it gets mentioned in ecomonic descussions now and then). Trust me, if there are many millionaire retirees, the economy will provide or their every want and then some.
Posted by: Robert Brown | Feb 6, 2005 6:05:27 PM
If people are taking the deal more than we'd expect it could be that the American masses know better than the actuaries, or that the American masses are systematically miscalculating. Or it could even suggest that benefits in the system as a whole are too high.
I suspect greater affluence has simply allowed more people to do without wage income by their early sixties than once upon a time. People quite sensibly value leisure, often more than money.
In addition, there's that pesky critter called risk. If you're going to drop dead at 66, it's better to have enjoyed leisure, and have collected benefits for 4 years, than to have done so for only one. Perhaps the caculations of Americans in this regards are not acturially sound; but none of us possesses a guatanteed life span.
Posted by: P. B. Almeida | Feb 6, 2005 6:16:34 PM
The system was set up as a universal entitlement by Roosevelt et al., rather than as a retirement "safety net" for the indigent, not simply for efficiency of its insurance aspects, but to make it politically difficult to eliminate. Roosevelt and his colleagues didn't trust future politicians to preserve a safety net as opposed to stigmatizing and demogoguing it as welfare and reducing those in need of it to a penurious "subsistence" existence, or worse.
Current events prove this a very canny assessment.
As I've said before: Republicans hate Social Security both because it is Social, and because it provides Security. But most of all, because it works, and gives lie to the notion that we are totally on our own.
Posted by: larry birnbaum | Feb 6, 2005 6:22:51 PM
Remove the FICA salary cap, or at leas tmove it to $150,000 in annual salary. All Social Security problems solved for at least 75 years.
But why the hurry to fix Social Security? There are many governmental progams, such as Medicare, with far bigger problems.
Bush brought this up because he just doens't like Social Security. End of story.
Posted by: Deborah White | Feb 6, 2005 7:18:14 PM
Dear Matt
Please increase the size of the small type. I can not read the print without changing my computer setting. This is really a problem.
Posted by: Randall | Feb 6, 2005 7:18:23 PM
Randall
I sometimes copy the small text to a word processor for viewing. just takes a few key strokes and you can set the font as large as you want in the word precessor.
Posted by: Robert Brown | Feb 6, 2005 7:52:58 PM
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