Monday, December 27, 2004

The Sawicky Dialogues

In a recent post, Max Sawicky casts some arguments against fixing Social Security's projected shortfalls in the form of dialogues between deluded people and readers of his blog (MR below). In the third, he auditions a Vox Baby reader for the role of deluded person. Very poor form. The whole thing:

Third Deluded Person: You're all too optimistic. The program is ten trillion in debt, and every year it gets worse. I read it on Vox, Baby.

MR: Actually, the present-value to perpetuity calculation is designed precisely to be time invariant. By construction of the concept, the "problem" cannot "get worse," unless there is some policy change (analogous to the new Medicare drug benefit). No more than $1.03 next year, at a three percent discount rate, is "worse" than $1.00 this year. The number gets larger each year, but each such number is just the future value of ten trillion in 2004.

TDP: O.K., but the gap is still there, and it's big.

MR: When the sociologist was asked, "How's your wife?" he responded, "Compared to what?" The gap does not have to be closed at any particular point in time. What does need to be financed is the gap between program costs and revenues. On an annual basis, it's roughly two percent of GDP, less than the revenue loss from the Bush tax cuts, and of the same order of magnitude as the increase in defense spending since 2000.

TDP: Well the program gap keeps growing after 2080.

MR: Tell it to Captain Kirk.
When I read this, I thought, "How can it be that Max is correcting me for confusing the word 'worse' with the word 'bigger?'" So I searched my blog for the word "worse" and I discover the following paragraphs in a previous response to Max:

Max Sawicky kindly (and constructively!) responds to my recent post about whether we need to reform Social Security today. His original statement began:

There is absolutely no reason at present to make changes in Social Security, except out of political fear of the Right.

As I noted, first in "Why is Social Security a Campaign Issue?" and then again in the post to which Max is responding, my reason is that we make the problem about $300 billion worse every year that we delay. This is roughly the interest that we accrue on the unfunded obligation of $10.4 trillion in a year when the real interest rate is 3 percent, as in the 2004 Trustees Report's long-term assumptions.
So, yes, I do use the word "worse" where the precise word is "bigger." But if Max were to follow the link in that last paragraph, he would discover the full context:

So if we have an implicit debt of $10.4 trillion, and the real interest rate is 3 percent, then next year, the implicit debt will grow by 0.03*10.4 trillion = $312 billion, up to $10.7 trillion, if the assumptions underlying the projection stay the same. Why does this matter? Primarily, it matters because both the President and Senator Kerry have repeatedly stated (see the two speeches in Pennsylvania linked above) that they will not cut benefits for those at or near retirement age. (The Senator's statement may be even more encompassing, including benefits at any time in the future. I cannot tell for sure from his public statements.) This, in turn, means that each year that elapses without reform causes the burden of financing the unfunded obligations to be shifted away from one more birth cohort that crosses the threshold of being "at or near retirement." The more we wait, the larger the burden on future

generations, and the higher that 3.5 percentage point surtax would have to climb.
So a better dialogue between readers of the two blogs would have done three things. First, it would have acknowledged that we've done the math already at Vox Baby and that we understand that it is the current value getting bigger over time (and bigger relative to projected GDP). Second, it would have accurately characterized the "problem" according to Vox Baby as the increase in the burden of fixing this shortfall on future generations of workers that results when the fix is delayed and more cohorts of retirees are held harmless. Third, it would have had MR explain exactly why shifting this burden is a desirable policy to pursue.

As a casting director, I say that TDP is no reader of Vox Baby.

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1 comment:

Anonymous said...

[Max Sawicky] I responded to this at length on my site. I appreciate Andrew's elaboration and regret any impression I may have created that "Third Deluded Person" reflected Andrew's views, as opposed to a naive reader of his blog.