Friday, January 14, 2005

Social Security Reform

Yesterday morning I woke up uncharacteristically early to attend the Brookings Institution's symposium on reforming Social Security with Kyle. As the name suggests, the event was organized around the presentation of different proposals for dealing with Social Security's coming fiscal woes. The panel of speakers consisted of Jeff Brown, a professor of finance at Urbana-Champaign and advocate of personal accounts; Peter Orszag, a Brookings fellow and staunch opponent of personal accounts; John Rother, representing the AARP; and lastly Robert Pozen, a veteran of the finance industry and creator of his own plan for closing Social Security's budget gap. I don't think I could summarize the entire event (and in any case, the transcript should be posted by Brookings fairly soon), so I'll just write about those points which I found particularly informative.

•Brown identified one of the biggest arguments for personal accounts (the status quo alternative here being a government-run trust fund) as a means for saving up money in times of Social Security surplus. The argument? Congress can't raid personal accounts. Al Gore and his much-parodied "lockbox" proposals aside, you'd be hard-pressed to find a politician of the past two decades who's lifted a finger to stop Congressional looting of the Social Security trust fund. Essentially, Congress uses Social Security's current surpluses to finance higher levels of spending than would otherwise be possible, the downside being that Social Security assets aren't actually accumulating anywhere in preparation for 2018, when Social Security begins to run deficits. Even though we have a "trust fund" in place to deal with that eventuality, all that fund actually consists of is trillions of dollars worth of Treasury securities - I.O.U.s written by the US government. When 2018 rolls around, decades of negligence will mean that the federal government is going to have to find some way to raise the money to make good on those securities. For all its problems, a partially privatized plan - and specifically, its personal accounts - would be much more difficult for future Congresses to access.

•One item Orszag hit on quite a bit was his proposal for raising the American rate of savings. Orszag supports federal regulation mandating that employers, by default, opt their employees into voluntary 401(k) plans (as opposed to the status quo, where most but not all opt their employees out). Since these are voluntary saving plans, employees would retain the right to opt out upon request. Although this proposal at first struck me as the mother of all technicalities, Orszag backed it up with research indicating that switching to his system of automatic enrollment could heighten nationwide participation in 401(k) plans from the status quo, where about half of all households do not keep a significant amount of savings in retirement investment, to a point where 85%-95% of all workers contribute a meaningful amount to retirement accounts. In effect, he's harnessing the power of human laziness (well, he calls it "inertia") to incentivize saving.

•Raising the retirement age beyond a certain point will undermine a basic goal of Social Security - providing retirement security to the lower income brackets in society. So says Robert Pozen, and I'm inclined to agree. Whereas white-collar workers (journalists, managers, think-tankers) are theoretically at least able to keep working up until the point when they are seriously incapacitated by disease or senescence, the blue-collar workers who make up the lower-income segments of society have a very real limit on their ability to keep working. Manual labor-intensive jobs just don't exist for, say, 65-year olds, and retirement policy should take this fact into account.

Sorry for the excessively long post; a lot got said yesterday, most of it worth repeating.

6 Comments:

At 5:24 PM, Anonymous Anonymous said...

Nick, the site you give to support Jeff Brown's first argument actually seems to contradict it. From the website: (http://www.ssa.gov/OACT/ProgData/fundFAQ.html#n7)

"Far from being "worthless IOUs," the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.

Many options are being considered to restore long-range trust fund solvency. These options are being considered now, over 35 years in advance of the year the funds are likely to be exhausted. It is thus likely that legislation will be enacted to restore long-term solvency, making it unlikely that the trust funds' securities will need to be redeemed on a large scale prior to maturity."

 
At 5:25 PM, Anonymous Anonymous said...

That last comment was posted by me, Josh.

 
At 5:40 PM, Anonymous Anonymous said...

Another thing, really just an anecdote that doesn't support or refute anything, but relates to Brown's talk of Congress "looting" the SS trust fund.

A few days ago I spoke with my Rabbi, who is from Canada. I asked him what the biggest difference is between Canada and the States. He (admittedly, with his liberal bias) said: By far it's the attitude that the citizens have to the government. Most Canadians see government as a tool that, if used properly, can affect enormous good. Americans tend to view the government as the devil.

-Josh

 
At 5:43 PM, Anonymous Anonymous said...

Uhh sorry, change "affect" to "effect" -Josh

 
At 6:05 PM, Blogger Nick said...

Josh, in response to your comments: - Brown didn't state that the trust fund consists of "worthless I.O.U.s" - and the SSA is right to remind us that "the investments held by the trust funds are held by the full faith and credit of the US government." I don't think anyone's worried that the US Treasury department will declare a default and fail to repay the securities it's issued. The bigger issue here is how exactly the Treasury department pays back those securities. It's good that "many options are being considered...over 35 years in advance of when the funds are likely to be exhausted." It will be great if steps are taken right now, 35 years in advance of trust fund depletion (and a mere 13 years ahead of when the trust fund starts helping to pay for our seniors' social security checks), to convert the securities into payable assets. But it would have been a lot better if those steps had been taken 20 years ago, back when the trust fund was set up, so that whatever form of taxation is used to redeem those securities could have been spaced out over a longer period of time, easing the shock to our economy and to our budget. I don't think private accounts are necessarily good policy, but to their credit they get rid of this problem with trust funds.

 
At 6:27 PM, Blogger Chris said...

Josh-

Affect is actually the transitive verb, and effect is the noun.

i.e. The fact that my mother is a writer has affected my ability to see grammar mistakes.

or

This comment will probably have little to no effect on the proper use of these words on anyone else.

 

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