Will aging baby boomers bust the federal budget?[PDF]
Ronald Lee and Jonathan Skinner.
SOCIAL SECURITY PRIVATIZATION: EXPERIENCES ABROAD
State of the Union address
Bill Clinton discusses his plan:
With the number of elderly Americans set to double by 2030, the baby boom will become a “senior boom.” So first and above all, we must save Social Security for the 21st century. (Applause.)1/25
Early in this century, being old meant being poor. When President Roosevelt created Social Security, thousands wrote to thank him for eliminating what one woman called the “stark terror of penniless, helpless old age.” Even today, without Social Security, half our nation's elderly would be forced into poverty.
Today, Social Security is strong. But by 2013, payroll taxes will no longer be sufficient to cover monthly payments. And by 2032, the trust fund will be exhausted, and Social Security will be unable to pay out the full benefits older Americans have been promised.
The best way to keep Social Security a rock-solid guarantee is not to make drastic cuts in benefits; not to raise payroll tax rates; and not to drain resources from Social Security in the name of saving it.
Instead, I propose that we make the historic decision to invest the surplus to save Social Security.
Specifically, I propose that we commit 60 percent of the budget surplus for the next 15 years to Social Security, investing a small portion in the private sector just as any private or state government pension would do. This will earn a higher return and keep Social Security sound for 55 years.
But we must aim higher. We should put Social Security on a sound footing for the next 75 years. We should reduce poverty among elderly women, who are nearly twice as likely to be poor as our other seniors — and we should eliminate the limits on what seniors on Social Security can earn.
Now, these changes will require difficult but fully achievable choices over and above the dedication of the surplus. They must be made on a bipartisan basis. They should be made this year. So let me say to you tonight, I reach out my hand to all of you in both houses and both parties and ask that we join together in saying to the American people: We will save Social Security now.
Now, last year, we wisely reserved all of the surplus until we knew what it would take to save Social Security. Again, I say, we shouldn't spend any of it, not any of it, until after Social Security is truly saved. First things first. Second, once we have saved Social Security, we must fulfill our obligation to save and improve Medicare. Already, we have extended the life of the Medicare trust fund by 10 years — but we should extend it for at least another decade. Tonight I propose that we use one out of every six dollars in the surplus for the next 15 years to guarantee the soundness of Medicare until the year 2020.
But again, we should aim higher. We must be willing to work in a bipartisan way and look at new ideas, including the upcoming report of the bipartisan Medicare commission. If we work together, we can secure Medicare for the next two decades and cover the greatest growing need of seniors — affordable prescription drugs.
Third, we must help all Americans, from their first day on the job, to save, to invest, to create wealth. From its beginning, Americans have supplemented Social Security with private pensions and savings. Yet today, millions of people retire with little to live on other than Social Security. Americans living longer than ever simply must save more than ever.
Therefore, in addition to saving Social Security and Medicare, I propose a new pension initiative for retirement security in the 21st century.
I propose that we use a little over 11 percent of the surplus to establish universal savings accounts — USA accounts — to give all Americans the means to save. With these new accounts, Americans can invest as they choose, and receive funds to match a portion of their savings, with extra help for those least able to save.
USA accounts will help all Americans to share in our nation's wealth, and to enjoy a more secure retirement. I ask you to support them.
Fourth, we must invest in long-term care. I propose — I propose a tax credit of $1,000 for the aged, ailing or disabled and the families who care for them. Long-term care will become a bigger and bigger challenge with the aging of America — and we must do more to help our families deal with it.
I was born in 1946, the first year of the baby boom. I can tell you that one of the greatest concerns of our generation is our absolute determination not to let our growing old place an intolerable burden on our children and their ability to raise our grandchildren. Our economic success and fiscal discipline now give us an opportunity to lift that burden from their shoulders and we should take it.
Saving Social Security and Medicare, creating USA accounts — this is the right way to use the surplus. If we do so — if we do so — we will still have the resources to meet critical needs in education and defense. And I want to point out that this proposal is fiscally sound. Listen to this: If we set aside 60 percent of the surplus for Social Security and 16 percent for Medicare, over the next 15 years that saving will achieve the lowest level of publicly held debt since right before World War I, in 1917.
So With these four measures — saving Social Security, strengthening Medicare, establishing the USA accounts, supporting long-term care — we can begin to meet our generation's historic responsibility to establish true security for 21st century seniors.
Washingtonpost.com: Social Security Special Report
Conservatives Should Stop Complaining and Liberals Should Start
Discussion of the inescapable burdens of funding the retirement of future generations whether there is a Social Security or not.
New Economists' Petition
Economist Max Sawicky posts a petition to the Post-Keynesian Thought discussion list:
Re: New Economists' Petition
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
DEPARTMENT OF ECONOMICS
50 MEMORIAL DRIVE
CAMBRIDGE MASSACHUSETTS 02142-1347
2 February 1999
Dear Fellow Economist:
We would like to invite you to join us in support of President Clinton's proposal to save the projected federal budget surplus. Economists have been arguing for decades that increased national saving is the only way to prepare for the retirement of the baby boom, and we believe that it would be helpful for economists to endorse the President's major saving initiative.
If you are willing to add your name to the list, please sign the attached statement and fax it to Jennifer Cloherty at (617) 552-1750.
The text of the proposed open letter is:
PRESIDENT CLINTON'S PROPOSAL TO SAVE SURPLUSES IS GOOD ECONOMICS
President Clinton has made the correct decision in his budget proposal, namely, to save most of the $4.4 trillion of the net budget surpluses projected by the Administration of the next 15 years. Instead of using this money for tax cuts or unproductive spending, the government will use the bulk of it to buy back government debt, reducing debt in the hands of the public from 44 percent of GDP today to about seven percent in 2014, according to Administrative estimates. This will free up trillions in the hands of private investors who will be able to lend the money to businesses for investment in new plant and equipment.
Saving and investing now is the only real way to prepare for the retirement of the baby boomers. Saving now will increase the ability of the economy to produce food, shelter and clothing in the future. Although no one can predict how large the budget surpluses will turn out to be, we can be sure that saving them by reducing outstanding government debt is an excellent way to ease the burden on future workers of supporting an aging population.
Please add my name to the list of economists supporting the President's initiative to save the projected budget surpluses.
Name (please print)
Signers of Open Letter Regarding President Clinton's Proposal to Save the Budget Surplus as of 11:00 AM Feb. 5, 1999.
Name and Affiliation
Aaron, Henry, The Brookings Institution
*Arrow, Kenneth, Stanford University
Baily, Martin Neil, McKinsey and Co., Inc.
Basu, Susanto, University of Michigan
Blinder, Alan, Princeton University
Bosworth, Barry, The Brookings Institution
Burtless, Gary, The Brookings Institution
De Long, J. Bradford, University of California at Berkeley
Diamond, Peter, Massachusetts Institute of Technology
Dornbusch, Rudiger, Massachusetts Institute of Technology
Duesenberry, James, Harvard University
Froot, Kenneth, Harvard University
Griliches, Zvi, Harvard University
Gruber, Jonathon, Massachusetts Institute of Technology
Haveman, Robert, University of Wisconsin
Ibbotson, Roger, Yale University
Joskow, Paul L., Massachusetts Institute of Technology
*Klein, Lawrence R., University of Pennsylvania
Levy, Frank, Massachusetts Institute of Technology
Munnell, Alicia, Boston College
Perry, George L, The Brookings Institution
Rose-Ackerman, Susan, Yale University
*Samuelson, Paul, Massachusetts Institute of Technology
Shapiro, Matthew, University of Michigan
Shiller, Bob, Yale University
*Solow, Robert, Massachusetts Institute of Technology
Summers, Anita, University of Pennsylvania
Summers, Robert, University of Pennsylvania
*Tobin, James, Yale University
Tyson, Laura D., University of California at Berkeley
Wolfe, Barbara, University of Wisconsin
*Nobel Prize Winner
Paul Davidson, of the JOURNAL OF POST KEYNESIAN ECONOMICS, drafts a response:
One of the most astute students of the Social Security system, Robert Eisner (former President of the American Economic Association) published an article debunking many of the false claims made by those who proclaim themselves to be Saviors of the Social Security System. just a few weeks before he died in the Fall of 1998. In this open letter we take urge you to listen to this intelligent voice that has unfortunately been stilled.
Eisner stated:Social Security faces no crisis now or in the future. It will not "go bankrupt." It will "be there," not only for those of us now enjoying it or looking forward to it in the near future, but for the baby-boomers and the "Generation-X" following them. All this is true as long as those who would nibble away at Social Security or destroy it ... do not have their political way.The proposed nibbling away of Social Security, including that by some of its presumed friends, is disingenuous and misleading. Even some of its defenders seem all too ready to accept "minor" cuts in benefits to achieve prospective fund balance.
The notion that Social Security faces bankruptcy begins with a fundamental misconception, that payment of benefits somehow depends upon the OASDI (Old Age and Survivors and Disability Insurance) trust funds. The trust funds are merely accounting entities.
Social Security payments are an obligation under law of the U.S. Government. Our government and its Treasury will not, indeed cannot go bankrupt. As Federal Reserve Chairman Alan Greenspan has recently put it, "...[A] government cannot become insolvent with respect to obligations in its own currency."
For those concerned, nevertheless, about the "solvency" of the trust funds there are simple, painless remedies for this accounting problem.
The whole problem, though, is trivial. That projected shortage in the trust funds in 34 years--aside from the uncertainty of any such long-run projections--is purely a matter of accounting, with any number of easy accounting solutions.
It was not God but the Congress and the Treasury that determined the interest rate to be credited on the non-negotiable Treasury notes of the fund balances. As Alan Greenspan has pointed out, this would merely change the identity of those who hold government bonds as against stocks, with little or no real effect on the economy. .
If we want Social Security to share in whatever earnings investors are receiving, why not award balances in the Trust funds, instead of the current 5.9 percent interest rate on long-term government bonds, the higher returns that might be earned in equity investment? Barry Anderson, until recently top civil servant in the Office of Management and Budget, has calculated that crediting the balances with a 10.4 percent interest rate, which is close to the long-run return on stocks, would keep the funds in balance indefinitely, on the basis even of those pessimistic "intermediate" projections. This would again be merely a matter of accounting, with no real effect on the measured budget deficit, the Federal debt held by the public or the economy. But it would solve that presumed problem of a future shortage in the Trust funds. Then, if we really cared about the welfare of Social Security contributors, we would increase their benefits to match these higher earnings.
The fears and cynicism regarding Social Security, misguided as they are, though, should be met as fully as possible. Here is a way to do it and truly, in President Clinton's words, "Save Social Security first." It is immediate, effective and painless! And it will entail no cuts in benefits, no new taxes and no use of the developing budget surplus.
1. Convert all of the balances of non-marketable Treasury securities currently in the funds' accounts, now over $600 billion, into marketable Treasury securities, guaranteed like all others by the full faith and credit of the United States Government. Set the interest rate on these securities at 10.4 percent, sufficient to guarantee long-run solvency according to the Intermediate-Cost projections, and not inappropriate in view of past long-run market returns on equity.
2. Have the trust funds make all payments to beneficiaries and receive all revenues currently credited to them. These would include the interest on their existing balances. The funds' assets of marketable securities would continue to grow as long as funds' incomes exceed their outlays.
3. Have the trust funds sell securities to meet any cash shortfall if, or whenever, income becomes less than outgo. According to those Intermediate-Cost projections, this would begin to become necessary in 2019, when the funds' balances would be $2.9 trillion.
The legitimate concerns of millions of Americans that their retirement income may not prove adequate can be met by adding to Social Security, not cutting it or substituting the vagaries and--for most--the confusions and costs of private investment. I have proposed adding to the Social Security system a program of voluntary additional contributions.
Privatizers do have a point though. Average Social Security benefits are too low, coming now to only about $10,000 for a family with a retired worker. Millions of middle-class Americans are concerned that their retirement income will be inadequate.
There is a way to meet their needs and aspirations, a way that would take not one penny from Social Security but would offer all the promised benefits of privatization. I would propose what might be called "publicization."
I would offer all participants in the Social Security system--which I would hope would encompass virtually the entire population, including those who earn their income from capital without working--the chance to make additional, entirely voluntary contributions to Social Security. These would be credited to their individual Social Security accounts. And they would be invested, by choice of the participant, in: a) a passive, indexed stock fund; b) a passive, indexed bond fund; or c) Treasury securities. Contributions could be made not only by the self-employed and employees themselves, but by employers on behalf of their employees; employers might find offering such fringe benefits a cost-effective way of recruiting and retaining workers.
The contributions would be tax-deductible, like current IRAs and 401(k)s but ultimate benefits would be taxable. The contributors' accounts would be credited with the income and capital gains on their investments, whatever they were, both up to retirement and afterward. They would, on retirement, receive actuarially fair annuities with cost-of-living adjustments or, better, adjustments related to changes of wages of those working.
We would then have the best of all worlds. Most important, the retirement benefits of tens of millions of Americans would be increased. We would preserve fully the social insurance of our existing Social Security system. We would encourage private saving and investment.
That burden can be eased, now and in the future, by adding to the total wealth of our nation. It means providing for more workers and making them more productive. It means provision of quality child care, permitting reasonable immigration, maintaining full employment, and investing in research and the human capital of education and health of our people. These measures, and not decimating or destroying Social Security, are the ways to advance our future.
Holly Chair of Excellence in Political Economy
Editor, JOURNAL OF POST KEYNESIAN ECONOMICS [JPKE]
The Real Threat to Social Security
Robert Dreyfuss, in The Nation, on the movement behind privatization and the Clinton administration response.
The Biggest Ponzi Scheme on Earth
Milton Friedman argues there's no better reason to socialize risk for retirement security than for housing or transportation.
Two Cheers for Clinton's Social Security Plan
Risk and Returns of Stock Market Investments Held in Individual Retirement Accounts
Economist Gary Burtless of Brookings Institution testifies before Task Force on Social Security Reform, House Budget Committee, on returns from stocks and their implication for Social Security reform.
Should We Retire Social Security?[PDF]
Henry Aaron and Robert Reischauer in Brookings Review
Shameful Moments in Economics I: The Social Security Debate
Economist Dean Baker witnesses to his own experience in the Social Security debate.
The Changing Economics of Social Security and Retirement Plan Sponsorship
Social Security's historic impact on defined private benefit plans from Watson Wyatt Insider partially based on the book by Sylvester J. Schieber and John B. Shoven, The Real Deal: The History and Future of Social Security.
Subway Tokens and Social Security
An analogy by L. Randall Wray of the Center for Full Employment and Price Stability
Republican Candidates Debate Social Security
Bruce Bartlett defends Steve Forbes from Gary Bauer.