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Sunday, November 14, 2004

Direct Questions that Merit Direct Answers

In the comments on my last post, a commenter asked two very direct questions. Here they are, with my answers:



(1) Do you think that the Bush administration is at all likely to back the kind of proposal that you favor?



I would assign almost a zero probability that the Bush administration (or any elected official) will propose any increases in the normal and early retirement ages, let alone increases of the magnitude that would be sufficient to restore solvency. That is a very hard rhetorical battle to win. I think it is worth trying--as life expectancies increase, we would be well served to have a public debate that the age of dependency (a phrase borrowed from Arnold Kling's blog) should also increase. In the unlikely event that a Senator or Representative did start to win this battle, the Administration might through its support behind him or her. But that is just my speculation.



We should expect something that looks a lot like Commission Model 2--restore solvency through a gradual reduction in future benefits upon retirement for those currently below a certain age, modifications of the benefit formula to better protect survivors and career low-earners, and a voluntary option to divert some amount (e.g., 4% of earnings up to an indexed threshold like $1000) of payroll taxes into personal accounts.



(2) Assuming arguendo that the current reports of the likely Bush proposal - i.e., merely diverting a portion of current social security taxes to private accounts, without other reforms - do you favor such a reform (as opposed to doing nothing for now)? As suggested by the above comment, wouldn't such a proposal just make the short and medium term (2018) problem worse, without making the long term problem (2042) much (if at all) better?



If it is literally diverting some portion of the payroll taxes to personal accounts with no change in the benefit formula (beyond prorating it for the portion of taxes diverted), then I do not favor that, because solvency is not restored simply by that diversion of funds.



Assuming it is Commission Model 2 (as described above) and assuming that it is all debt-financed, then it does meet my main requirement of restoring solvency. We know the $10.4 trillion hole is plugged because, over the 75-year projection period, the annual deficit is reduced to zero and the transition debt is repaid. (This is what Chapter 6 of the Economic Report of the President showed for this reform assuming 100% voluntary participation.) It clearly makes the long-term financial problem smaller. If this is what is proposed, then I do favor it over the status quo.



In fairness to the Commission, its report did not specify that the transition should be debt-financed. They left this as an open question for policy makers to answer. I think they recognized what debt-finance would do to the short- and medium-term unified budget deficits. None of us are sure what would happen to interest rates if an implicit debt (unfunded obligations of an entitlement program) of $10.4 trillion were eliminated but explict debt (Treasury bonds held by the public) were increased by a few trillion before being repaid. And, as we went through before, the Administration hasn't proposed doing exactly that. For example, I have heard suggestions like allowing people to establish personal accounts only if they will contribute some of their money out-of-pocket (e.g., if you contribute an extra 2% of your payroll up to $500, then you can divert 4% up to $1000). I expect a lot of suggestions for how to bring in more revenue to come up in the legislative debate about any reform that the Administration proposes.

7 comments:

Anonymous said...

-as life expectancies increase, we would be well served to have a public debate that the age of dependency (a phrase borrowed from Arnold Kling's blog) should also increase.If we have such a debate, the real issue should be this--what is a reasonable age at which to expect people to retire? Increased lifespans may or may not correlate with an increase in the length of a person's feasible working career. It may be the case that the changing nature of work makes it feasible for most people to work until they are 70 or 75, but it would be hubristic to merely assume that this is the case.

LRose said...

Even when I agree with you, I find the prospects of significant changes in the Social Security program frightening. Think of the Congressional majority with whom we will be dealing:

http://www.nytimes.com/2004/11/14/opinion/14dowd.html?hp

Slapping the Other Cheek
By MAUREEN DOWD

You'd think the one good thing about merging church and state would be that politics would be suffused with glistening Christian sentiments like "love thy neighbor," "turn the other cheek," "good will toward men," "blessed be the peacemakers" and "judge not lest you be judged."

Yet somehow I'm not getting a peace, charity, tolerance and forgiveness vibe from the conservatives and evangelicals who claim to have put their prodigal son back in office.

I'm getting more the feel of a vengeful mob - revved up by rectitude - running around with torches and hatchets after heathens and pagans and infidels.

One fiery Southern senator actually accused a nice Catholic columnist of having horns coming up out of her head!

Bob Jones III, president of the fundamentalist college of the same name, has written a letter to the president telling him that "Christ has allowed you to be his servant" so he could "leave an imprint for righteousness," by appointing conservative judges and approving legislation "defined by biblical norm."

"In your re-election, God has graciously granted America - though she doesn't deserve it - a reprieve from the agenda of paganism," Mr. Jones wrote. "Put your agenda on the front burner and let it boil. You owe the liberals nothing. They despise you because they despise your Christ." Way harsh.

The Christian avengers and inquisitors, hearts hard as marble, are chasing poor 74-year-old Arlen Specter through the Capitol's marble halls, determined to flagellate him and deny him his cherished goal of taking over the Senate Judiciary Committee.

Not only are they irate at his fairly innocuous comment after the election that anti-Roe v. Wade judges would have a hard time getting through the Senate. They are also full of bloodthirsty feelings of revenge against the senator for championing stem cell research and for voting against Robert Bork - who denounces Mr. Specter as "a bit shifty" - 17 years ago.

"He is a problem, and he must be derailed," Dr. James Dobson, founder and chairman of Focus on the Family, told George Stephanopoulos.

Sounding more like the head of a mob family than a ministry, Dr. Dobson told Mr. Stephanopoulos about a warning he issued a White House staffer after the election that the president and Republicans had better deliver on issues like abortion, gay marriage and conservative judges or "I believe they'll pay a price in the next election."

LRose said...

Politics matter, and there is a decided conservative wish to squish squash Social Security. My dad worked from 16 to 70, and deserved every cent of the system that he so believed in and was pleased to pay for through his working years. I'll stay with my dad's belief that the system should be preserved and that the conservative reformers mean quite otherwise. Absent the politics of conservatism, and I would hope for benign changes.

LRose said...

Politics matter, and there is a decided conservative wish to squish squash Social Security. My dad worked from 16 to 70, and deserved every cent of the system that he so believed in and was pleased to pay for through his working years. I'll stay with my dad's belief that the system should be preserved and that the conservative reformers mean quite otherwise. Absent the politics of conservatism, and I would hope for benign changes.

JG said...

"My dad worked from 16 to 70, and deserved every cent of the system that he so believed in and was pleased to pay for through his working years. I'll stay with my dad's belief that the system should be preserved"

Here's the problem: You dad's system is already *gone*.

You dad recieve back from Social Security much *more*
than he put in -- much more than a market rate of return.

Today's young are going to get back *less* than they put in. SS's actuaries say it will return less than the rate on gov't bonds -- and that many people will get back as little as 50% of what they put in. http://www.ssa.gov/OACT/ASKACT/part2.html

And that doesn't count the further reduction in return that must, as a matter of arithmetic, follow from closing the $10 trillion funding gap with tax increases and/or benefit cuts, which are the only options other than private investment.

All this directly contradicts FDR's promise that SS would always provide a fair positive return.

So it's a very different system than your father's *already*.

Would your father have been so happy with Social Security if it made him *poorer* over his life?

Why are you so happy with a system that will make young people poorer?

LRose said...

If the issue is really returns to Social Security participants in future, then examine the possibility of investing a portion of contributions in the Total American Stock Market Index. My sense is Social Security reform means undoing Social Security. Of course, we could set up private accounts and manage them as well as the Teamster's Central States Pension Fund was managed.

LRose said...

Simply investing in long term bonds from 1982 on, the Central States Teamster's Pension Plan would have no trouble meeting retirement obligations. How could pension fund managers made such mistakes? This example is quite sad and quite frightening.