Sunday, December 19, 2004

Rational Solutions for Social Security

For readers of Nick's previous blog, I apologize as I am about to repeat myself here. However, this is exactly the sort of material that we had envisioned having in this blog, and thus it is only fitting for me to re-post it here for a wider audience.

So, last week Nick commented that he didn't believe Social Security was facing a crisis. The following is my response:

Really, a very good person to craft a cogent response to your dismissal of the Social Security predictions would be my older brother as he was an Economics major in addition to being a Computer Science major. He also took a class called Current Issues in Economics which was taught by a high-ranking economist at the Congressional Budget Office. As someone at the CBO, this man has spent his entire career dealing with these issues, and thus I believe he has a great deal of credibility considering he is also a professor of Economics.

So, I feel strongly about this mostly from my conversations with my brother, and he's probably far too busy right now for me to ask him to write something up. So, I've got to go off of my memory which at the moment is a bit shoddy (although I did attend one of his classes when I was visiting UMD and so if you're interested I could easily get into why Medicare/Medicaid is going to be a big crisis as well)

Okay, so there are a couple of major issues that the Social Security system will face. First and foremost, rapidly increasing life expectency coupled with the retirement of the Baby-Boom generation will provide such a great shock to the system that it won't be able to finance benefits. As life expectency increases, the amount of benefits paid out per capita increases dramatically, but payments into the system don't change. For the much of Social Security's lifetime, a much larger population of working people have been financing the retirees. However, the system currently functions by requiring about 8 people paying into the system for each current retiree. This balance actually works out okay right now, but once the baby-boomers start retiring in droves the balance will shift.

There's also been a big increase in earnings inequality. As more and more people accumulate vast amounts of wealth, there is less of the money supply that is available for Social Security taxation (the cutoff right now is about $87,000: any earnings above that are not eligible to be taxed for Social Security.

There's also the big issue of "Legacy Debt" as its referred to. Essentially, earlier (and some current) beneficiaries receieved far more in benefits than they ever could have contributed into the system even accounting for a market rate return of interest on their contributions. This debt has to be financed either by a reduction in benefits or an increase in taxation.

And, perhaps at a later date I can write something up about why privatization-- especially the plans hinted at by the Bush administration is a totally fiscally irresponsible solution. It require a significant long term increase in the debt which could in turn precipitously weaken the dollar. Not to mention the fact that it doesn't actually adress the problem of the program's long term solvency. (NOTE: They did not and still have not proposed a specific privatization plan because they know that as soon as they do they will be reamed out for it being a bad solution. By avoiding specifics, they can avoid the necessary critisicm that would follow)

So, Nick, in a way you are correct that it is silly to propose immediate, radical changes if you are referring to the radical changes of privatization. However, changes do need to be made, and the sooner we start addressing the problem, the less painful it will be to fix. And there will be pain: we have to have some combination of higher taxes and lower benefits. We can make it gradual if we start planning for it now: we can increase the age of receiving benefits to corollate with life expectency, we can add more workers to the Social Security tax system (State employees are exempt for example) and have moderate, gradual increases in taxation rates to keep the system solvent if people agree that that would be preferable to having drastic cuts in benefits.

Peter Diamond, an MIT Economics Professor and Peter Orzag, a senior fellow at the Brookings Institution co-authored a book on saving Social Security. They propose a "legacy tax" on the earnings above the current maximum taxable earnings base in order to help finance the legacy debt, a gradual reduction in benefits (no change for current 55 year olds, 1% benefits reduction for current 45 year olds, 5% for 35 year olds -- all percentages assuming average income), and a very gradual increase in taxes from 12.4% in 2005 and 13.7% in 2045 (according to them an extra $37 a month in combined employer-employee contributions even if the increase took place today).

As the Center on Budget and Policy Priorities recently argued, "Given the sorry state of the federal budget, a truly notable accomplishment would be to develop a plan that restores long-term Social Security solvency without any general revenue transfers." Well, their plan accomplishes just that.

However, let me clarify that I agree with the rest of the liberal blogosphere here that we should be very careful when talking about Social Security in crisis. In actuality, it is not a "crisis." A crisis consists of an immediate and drastic problem, but we have time to fix this--and rationally. By referring to the current situation as a "crisis" we may mistakenly endorse privatizing it. Of course, such a "solution" will do little to stop the crisis and do a lot to cut a few more holes in the net.

1 Comments:

At 7:14 PM, Blogger Jesse said...

"NOTE: They did not and still have not proposed a specific privatization plan because they know that as soon as they do they will be reamed out for it being a bad solution. By avoiding specifics, they can avoid the necessary critisicm that would follow"

Actually, I'm surprised you pointed that out, because I was noticing the same thing (if not as coherently) as I listened to Bush's press conference today. He dodged, clouded, and out-and-out refused to answer two specific questions about his social security plan, saying that he wasn't going to "negotiate with himself in public," that it was "congress' job". When the second reporter asked how he would convince skeptical people of his plan, he called it a "sneaky way to get him to show his cards." I thought instantly of the MAD TV character who calls everyone 'sneaky sneaky snakes.' Again... it would be funny if this weren't our president.

 

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