Social Security Meta-Archive: February 2005
Basic Facts on Social Security and Proposed
Dean Baker and David Rosnick.
Social Security, revisited
Doug Henwood in the Left Business Observer.
Be Not Afraid: Personal Accounts Are No Radical Idea
Stephen Moore and AEI friends...
The Importance of Raising National Saving
"Speech by [Federal Reserve] Governor Edward M. Gramlich At the Benjamin Rush Lecture, Dickinson College, Pennsylvania"
While there are as yet not a great number of feasible ideas for significantly reducing the cost of Medicare, there are a number of proposals to reform Social Security. The President is touting a proposal, and ten years ago as chair of another Presidential advisory council on Social Security, I devised a proposal of my own.6 This is not the place to get into a full discussion of Social Security reform proposals, but one aspect of Social Security reform is important. Given the low national saving rates, and the fact that many American households do not save enough to avoid a big cut in their standard of living in retirement, it would seem desirable to have Social Security reforms that also raise national saving. One obvious and immediate way to do that would be to raise payroll taxes; another obvious, and perhaps less painful, way to do that would be to have individual accounts on top of Social Security. If these "add-on" individual accounts were to be mandated, as I proposed, those households who already save amply could reduce their other individual accounts while those who do no private saving for retirement would be forced to do more. Hence national saving would be increased, and increased for just those households who presently do little saving.The Hassle Factor
Other types of Social Security reform seem less promising from a national saving point of view. If, for example, the individual accounts were to be "carved out" of present payroll tax payments, as President Bush has recently proposed, household saving would go up but government saving, in the first instance, would go down by the same amount, meaning that the initial impact on overall national saving would be nil. But carve-out individual accounts might eventually reduce saving because households getting individual accounts who are already saving for retirement might cut back on their pre-existing saving. Hence carve-out individual accounts seem more likely to reduce than increase national saving. This is not the only criterion for judging between add-on and carve-out individual accounts, but I think it is an important one.
There may also be some way to compromise between mandatory add-on individual accounts that raise national saving but could be a tough sell politically, and carve-out individual accounts that are not likely to raise national saving. Some have suggested raising employee pension contribution rates by automatic default options for employer defined-contribution account. Under such a plan employees would be automatically enrolled in the employer's plan and would have to "opt out" to reject participation. Moreover, firms could be forced to carry employer defined-contribution accounts, as is done in Ireland.
Thomas Geoghegan in Slate on the aversion to personal management of private accounts.
Social Security, Generational Justice, and Long-Term Deficits[PDF]
Faculty paper by Neil H. Buchanan of the Rutgers School of Law
*Sigh* Greg Mankiw
DeLong on Mankiw and privatization's possible effects on national savings.
Bruce Webb in comment:
Obviously we are getting to these guys. But time to hold their feet to the fire. It is one thing to claim that stocks can return historic rates even given flat productivity, it is quite another to simply accept that flat productivity. The real point of the "No economist left behind" challenge, at least in my eyes, is that no one is actually predicting that the economy will slow down at the drastic rate implied by Intermediate Cost or making the case that growth at 3 and 4 percent a year won't have the clear results suggested by Low Cost. Mankiw and others are trying to win this battle on points. It won't work.Economic Debate
Because their fundamental battle is not with some theoretical model of the economy, it is with the actual economic results reported in the business pages. The real question is not the spread of economic models that can produce 6.5% returns, but the specific economic outcome you invisage over the next two to five years and its impact on Social Security solvency.
The "No economist left behind" challenge is proving useful in flushing out intellectual dishonesty and willingness to sell integrity for political gain, but ultimately it is a sideshow. In the end this battle is not going to be won by economists, it is going to be won by accountants and honest spreadsheets.
Arnold Kling at EconLog joins in, triggering extended comment.
Savings and Social Security
The blog Dead Parrot Society tries to track the argument and assess "liberal" and "conservative" positions on privatization's impact on national savings.
Copied ‘kissing’ photo ignites furor
The Portland Tribune finds one of its pictures swiped to make an ad attacking the AARP as pro-gay and anti-family as a result of its anti-privatization stance.
National Savings and Social Security
DeLong responds to Dead Parrot, discussing Greenspan's latest intervention.
The Crisis Last Time: Social Security Reform
Paul C. Light of Brookings on the 1983 reform.
Is the Social Security System in need of reform?
University of Oregon economist Mark Thoma commenting in his blog, Economist's View.
Robert's Stochastic thoughts
Robert Waldmann responds on the comparative effects of different types of forced savings.
Robert Waldmann's Thoughts on Social Security and National Saving
DeLong responds on assumptions of political behavior with regard to deficits.
Looks Like Bafflegab To Me
JustOneMinute weighs in on asset returns.
National Savings and Social Security, Part Deux
The Dead Parrot continues...
When Congress Killed Private Accounts
The 1930s proposal of voluntary annuities killed by the insurance industry.
WH admits it has no idea what W is talking about
A Daily Kos diary on the White House's flip-flops on add-ons and carve-outs.
George W. Bush: Liar or Fool?
Brad DeLong links to an AP story on Bush's bogus "75-year fix" talking point, Mark Thoma discusses the poverty annuity.
President's social security plan will worsen situation
Former Secretary of Labor Robert Reich.
The Perfect World >> Politics >> The Battle over Social Security
"pseudoerasmus" in an online forum:
An ideal social security reform would leave current benefits unchanged without raising payroll taxes. This would require, amongst other things, that individuals receive zero net gains from private accounts, because what ever returns are realised in private accounts (whether 5% or 7% or 15%), the government would reduce traditional benefits proportionately. In other words, there is an improvement in social security's cost basis (because payroll taxes are invested under privatisation), but no one's retirement finances are improved (except insofar as they won't be paying higher taxes to fund an unreformed social security). There can still be other benefits from privatisation, if the economy grows faster as a result of it.3/12
The above is another way of saying that the government is lowering the costs of social security by transferring the risks associated with retirement saving from society as a whole to individuals.
Talking Points Memo
Josh Marshall responds to Mankiw on the Democrats approach to Social Security.
Mankiw 0, Liberals 3
Mankiw on Privatization
I'll Stop Calling This Crew "Orwellian" When They Stop Using 1984 as an Operations Manual
Delong follows up Yglesias, focusing on James Glassman and Kevin Hassett
Whichever Way We Go, Some Get Left Behind
Eugene Steuerle, writing in the Washington Post.
Brad DeLong comment thread
Joe "Let Me Endorse Some Phony Republican Numbers" Lieberman
DeLong on Krugman's attack of Joe Lieberman's use of Republican numbers; Sam Williamson questions another Bush talking point.
The Conservative Welfare State
Social Security decried as right-wing socialism at libertarian LewRockwell.com
'Above All, Try Something'
John Fund of OpinionJournal.com contrasts his take on the 1930s debate over "private accounts" with that of "supporters of Social Security."
Jonathon Chait, writing in The New Republic, on political and principled reasons for Democrats to oppose Bush's privatization.
Collision course:The Bush budget and Social Security
Analysis by Max Sawicky.
Public Finance and Public Policy
Alex Tabarrok at the blog Marginal Revolution discusses a textbook by Jonathan Gruber:
Gruber is especially good at discussing empirical research. What is the effect, for example, of social security on private savings, on the living standards of the elderly, on the incentive to retire? What do we learn from the international evidence?3/17
(Quick answers: Social security crowds out about 35 cents of private savings for every social security dollar. As a result, social security has reduced the eldery poverty rate although not quite as much as naive trends would suggest. Social security does reduce the labor force participation rates of the elderly but less so in the United States than in most European countries where there are huge disincentives for working beyond the normal retirement age. (Get the book or this powerpoint presentation for more details - note you need to view the PP in SlideShow mode to get the full effect.)
Social Security - Obstruction's Defender
A conservative response to Chait from the blog Logical Meme.
A Positive Program for Social Security
A draft of a plan by DeLong, with extended discussion.
Heads in the Sand or a Winning Hand?
Economist Mark Thoma at Economist's View:
There are, perhaps, small to moderate issues to address as time passes and we should take corrective action if needed, but I do not see the evidence needed to support radical reform. If people have an ideological reason for wanting privatization they should be honest about that and not hide behind concocted evidence of potential system catastrophe.3/18
Social Security - Obstructionism’s Opponent
Logically, the blog Logical Meme follows up its attack on Chait with a defense of Mankiw.
The Life-Cycle Personal Accounts Proposal for Social Security: An Evaluation
Robert Shiller's paper on asset returns.
Retirement Accounts Questioned
Jonathan Weisman's Washington Post coverage of Shiller's paper:
A new paper by Yale University economist Robert J. Shiller found that under Bush's default "life-cycle accounts," which shift assets from stocks to bonds over a worker's lifetime, nearly a third of workers would bring in less in benefits than if they remained in the traditional system. That analysis is based on historical rates of return in the United States. Using global rates of return, which Shiller says more closely track future conditions, life-cycle portfolios could be expected to fall short of the traditional system's returns 71 percent of the time.Yes, Bush Private Accounts Are a Bad Deal
Both the White House and the Social Security Administration have relied on historical returns in estimating the earnings of proposed personal investment accounts. Shiller used 91 computer simulations to analyze the past performance of stocks and bonds in a variety of portfolios. He measured the returns in 44-year increments, beginning in 1871, to approximate a worker's lifetime contributions to personal accounts.
The results "showed a disappointing outlook for investors in the personal accounts relative to the rhetoric of their promoters," concluded Shiller, a leading researcher in stock market volatility who gained fame in the late 1990s for his warnings of a stock market bubble.
The 3% real interest rate on the clawback of contributions to private accounts is too high to make them a good deal. Shiller's right.Shiller: Private Accounts a Bad Deal
DeLong samples from Shiller's paper:
Using historical returns, the life-cycle portfolio loses money 32% of the time (i.e., 32% of the time the internal rate of return is less than the 3% real return required to break even in the proposal). The median rate of return is 3.4% annually.
Using more realistic adjusted returns, the life-cycle portfolio loses money 71% of the time and has a median rate of return of 2.6%.
Discussion: These rates of return are considerably below the 4.6% that the Social Security actuaries have assumed for. In addition there is considerably more risk than one would generally associate with previous discussions of “lifecycle portfolios.” The most important reason this happens is that the life-cycle portfolio is invested in higher-yielding assets in early years and lower-yielding assets in later years. Because contributions are made annually, the returns in later years matter much more (i.e., the return in the first year only affects the first contribution but the return in the last year affects all 44 years of contributions). This effect is heightened because the typical worker reaches peak earnings in his or her fifties.
The optimal portfolio for a worker choosing the personal account as a replacement for much of the guaranteed Social Security benefit is considerably different from the optimal portfolio for a worker investing a 401(k) in addition to Social Security. If you have a Social Security benefit that is not subject to market risk, then you can invest your additional savings in a higher return/risk portfolio. But in the President’s proposal, the investments are replacing a large fraction of the existing Social Security benefit. Thus you would not want to invest them in as risky a portfolio.
A worker that has the correct balanced portfolio of stocks and bonds should not even participate in the accounts. Conditional on participating, he or she should invest entirely in bonds in order to avoid changing their current portfolio. Other psychologically constrained workers might benefit from shifting their portfolios more into equities. Social Security design has to take seriously psychological barriers to enlightened saving and investing; workers not subject to these barriers are very different from workers who already do things right. Overall, any proposals to encourage savings and investment should be designed with a variety of different types of workers clearly in mind.
Paul Krugman on the "$600 Billion a Year" Number
DeLong links to an argument on the opportunity cost of not changing Social Security at a particular point in time.
April Fool's Day Comes Early This Year!
My scheduled once-every-three-months surf over to Donald Luskin's website was supposed to happen on April 1...3/23
DOING THE MATH
Matthew Yglesias, in TAPPED, on the Trustees' assumptions over recent years and the implications for productivity and immigration.
The 2005 OASDI Trustees Report
...Or, the 2005 Annual Report.
HOW FUNDED ARE THY OBLIGATIONS
Yglesias, in TAPPED, after the release of the report:
...Now the 2005 report is out and once again past projections were too low. The actual 2004 number was 3.3 percent, and the '05 projection has been boosted to 2.0 percent.Social Security Trustees Report
Nevertheless, the long-term projection is unchanged. Why? Because the method used to generate the long-term projection deliberately excludes all this new data. Instead, they come up with 1.6 percent because "The annual increase in total productivity averaged 1.6 percent over the last four complete economic cycles (measured from peak to peak), covering the 34-year period from 1966 to 2000. The annual increase in total productivity averaged 2.2, 1.2, 1.3, and 1.6 percent over the business cycles 1966-73, 1973-78, 1978-89, 1989-2000, respectively." So far, productivity growth in the current cycle has been much higher than 1.6 percent. As a result, there's every reason to believe that, as long as the methodology is held constant, the long-term number will shoot up once we reach the next economic peak. The productivity figure, meanwhile, is absolutely crucial to the entire enterprise, which means that the program's fiscal health will look far better once the current expansion comes to an end.
Blogger Ezra Klein:
What's really amazing here is that, even with the tweaked assumptions and the "see no, hear no, speak no" approach to productivity gains, the long-term balance of the program has actually improved from last year to this year. Despite fiddling with some numbers so the president can yell "Crisis!", Social Security is actually healthier down the road than it was last year. Go look at the graph Brad's got, it's all there.The 2005 Social Security Trustees Report
Despite all this, the LA Times' headline blares "Social Security going broke in 2041". Sigh. The article, interestingly, shows that Social Security is not the problem, it's Medicare that matters. Medicare, after all, started paying out more than it's taking in last year (as opposed to Social Security's date of 2017), and total bankruptcy for the program is projected for 2020. Spending so much time worrying about Social Security is like a doctor worrying about early signs of Parkinson's while his patient has a heart attack on the table. Not so bright. Weird note -- the article calls 2041 the date Social Security goes "broke", but 2020 is when Medicare faces "insolvency". Same meaning, but the sense of urgency is drastically different.
So bottom line, things aren't too bad. Politically, the report helps Bush, but the slight changes should blunt its effectiveness. Moreover, Bush himself has begun admitting that private accounts don't do anything for the program's solvency, and since the report is dealing with Social Security's fiscal condition, it shouldn't give any momentum to privatization. Oh, and Medicare is going to kill us all.
DeLong on the improvement on the outlook despite Bush administration assumptions:
...That's six thumbs on the scales, and still the long-run deficit shrinks.The Social Security Trustees Explain Their Productivity Assumptions
One would think that the fact that productivity growth has averaged 3.0% per year in the four years since 2000 would be worth a mention. One would expect some reason for completely throwing away the last four years' worth of data on productivity.With subsequent commentary by Paul Krugman.
But it isn't there.
Social Security fund may run out sooner
Asset Returns and Economic Growth: Full Draft
Delong on his paper with Baker and Krugman.
Four Reporters, Four Different Stories
Columbia Journalism Review coverage of the coverage.
The White House Thinks About the Clawback
DeLong links to WSJ coverage and comments:
It really does look as if they chose 3%, and then never ran the numbers--never ran the numbers at all to see what the distribution of private account returns would be.Fire Insurance is not Welfare and Neither is Social Security
One underlying problem, of course, is that private accounts shift risk onto beneficiaries, and that beneficiaries are more averse to risk than the government. Thus it is genuinely hard to make private accounts both attractive to those non-rich beneficiaries who are most averse to risk and also fiscally neutral.
Justifications for the Long-Run Productivity Growth Forecasts in the Trustees' Reports
Memo from DeLong to Baker and Krugman.
Insuring Against the Inevitable
Will Wilkinson at CATO says Social Security should be thought of as an unfairly implemented retirement supplement.
Why Oh Why Can't We Have a Better Press Corps? (Insurance-Ain't-Welfare Department)
DeLong links to a Mark Thoma rebuttal of Robert Samuelson, with subsequent comment by Lee A. Arnold:
Fire insurance is insurance in case of fire. Retirement insurance is insurance in case of retirement.And Bruce Webb:
Some systematic thinking is in order:
Social Security gives a small payout to EVERYBODY, thereby helping-out the neediest in an incidental, and discreet, way.
By including everybody, we keep it simple, keep management and transactions costs low, and minimize gaming the system. The fact that you once paid into it, gives you a right and an expectation, like a social agreement. Since it is paid out late in the summer of life, moral hazard is at a minimum.
Indeed Social Security is enjoyed and relied-upon by many conservatives who obsess fetishistically about other welfare costs and psychologies.
Without Social Security, about 50% of retirees would be below the poverty line. They would not be in better shape if they'd gambled the money in the markets. Go ask them.
It's hard to think of a better system. If the President succeeds in ruining it, we will have to reinvent it.
The fundamental difference between Social Security and European Welfare State systems is funding. Social Security always has been, and given current numbers always will be, 100% funded by Workers. Welfare is paid through taxes levied across the whole society/nation, heirs to great wealth who know to a certainly that they will never be standing in line at the welfare office still have to pay in. Social Security is different, if you emerge from college with a big trust fund that allows you to leverage that inheritence into billions (the Trump model - he started with a substantial real estate stake from his father) then great. You never pay a penny in to Social Security, you never take a nickel out.3/27
And that really is the issue here. Capital's only moral claim to control the outcome of Social Security was the almost universal belief that it would be called to bail out Social Security at some point in the future. Well as it turns out Workers don't need Capital on this one, the Trust Fund is not going to run out and privatizers can get the hell of our lawn.
It's not welfare and it isn't broke.
The 2005 Report
The Bruce Web on the implications of the report.
Why Oh Why Can't We Have a Better Press Corps? (Richard Stevenson Takes Another Dive Edition)
DeLong expands upon the commentary of Matthew Yglesias, followed by an extended thread on clawback.
Why Oh Why Are We Ruled By These Liars? (Assistant Secretary Rob Nichols, This Is Your Life! Department)
DeLong links to Josh Marshall readers' reactions to a Bush official's talking points and reacts:
"They hadn't run the numbers" for what happens in the second decade of Bush private accounts? Do they really think the press corps and the people are dumb enough to believe that? And why do they think it's to their advantage to set out such transparent lies? Would anyone support a long-run plan proposed by people who haven't "run the numbers" beyond the first ten years?Asset Returns and Economic Growth
DeLong ruminates over economic models.
John Snow Is Genuinely Embarrassing...
DeLong links to Pandagon's coverage of Snow's job of defending Bush's proposal and responds.
Another Snow Job on Privatization
A fisking by Mark Thoma.
Ed Andrews Writes About Asset Returns and Economic Growth
DeLong links to New York Times coverage and comments.
GUNFIGHT AT THE BROOKINGS CORRAL
Baker and Krugman present their paper, Mankiw responds, Sawicky witnesses.
Social Security Meta-Archive: April 2005