Wednesday, January 19, 2005

Social Security Stuff

When people write about social security, they often make many mistakes. I certainly did, when I mocked a 50 year projection as being meaningless because 50 years is a long time. Brad DeLong wrote back and housed me, pointing out that the demographic models used in 50 year projections are actually pretty well understood. So i stand corrected. Brad also had a cautionary note on how getting snarky in defense of/attacking certain political segments erodes one's reputation, a principle that Brad threw to the wind deciding that the joys of paddling in Krugman's fever swamps outweighed the fact that he's viewed as yet another partisan hack from Berkeley, but hey, I don't judge.

Winterspeak reader JS wrote in in response to another SS post of mine saying:
So I looked at my case [wrt SS]:
I am 62 and started receiving SS. My wife and I total contribution to SS is $89,080. The company had to pay an equal amount for a total of $178,160. If I had invested this money at the risk free 10 Year Treasury Note. We would have $ 591,547 today. Our life expectancy is age 85 and 88. If we keep this money invested in the long bond at 5.75% and live until 85 and 88; we would receive an average of $24,972 per year. For a total of $749,156 plus have $276,776 left over for a total of $1,025,932. All in 2005 dollars.

Social Security will pay me $16,500/yr (adjusted for inflation) and my wife $7,512/year starting in 2008. If we live until 85 and 88, the total we receive in 2005 dollars is $623,026.

So $1,025,932 vs. $623,026.
If one views SS as a investment (an instrument for accruing capital gains), then the current program is a big time loser, especially for young people now who are not going to see any money come out of it. But I don't think SS should be viewed as an investment, I think it should have 2 components, one of which is compulsory savings scheme and the other is insurance against poverty in old age.

I actually support forced savings because I think people's savings decisions are not rational. I know this is not a very Chicago thing to say, but it's the position I'm taking anyway.

I also think that poor people should have government transfers because they are poor, fully cognizant of both the skewed incentives such transfers create (they reward reckless behavior) and because of the broader soceity-wide economic stagnation that comes with high marginal tax rates.

But I'm not sure why a "help the poor" needs to be in any way seperate from a "help the old", which is what SS advocates (who seem to consist entirely of Bush-hating sore-loser Democrats) seem to stress, even though social security benefits rich people much more than poor people.

Arnold Kling and Max have a celebrity death-match around SS, with Arnold taking the "fix a bad system" approach, and Max taking the "SS is fine/even if it is not fine Bush will make it worse/fix other things first/the Iraq war was wrong/incentives do not effect behavior/Bush=Hitler" position. Am I being uncharitable to Max? Maybe, but you can judge this for yourself:
The prime objective is to ensure retirement with dignity, which means a standard of living that reflects economic progress in general, not one that confines retirees to second-class status. In effect, you describe this as "an extra scoop of ice cream." I would say the incessant yowling of the right for ever more tax cuts to finance obscene levels of crony-capitalist waste and conspicuous consumption deserves the highest condemnation of a humane society. But that's just me.

You finally come around to the topic of transformation to a funded system. But you fail to integrate it with the problem upon which you dwell -- the program shortfall. And indeed you cannot, since it is an irrelevance. If we were starting from scratch, perhaps we would not construct a pay-as-you-go system. But we're not, so all the speculation about pre-funding has no purpose, other than to distract from the Bush administration's desire for Draconian benefit cuts.

I come back to the points I made in my previous post, which you ignored: Social Security is the wrong crisis, in the wrong place, at the wrong time.
I actually think that the Bush=Hitler psychosis that has gripped Democrats should embolden those who want to reform social security. The opposition will be blinded by their own froth.

If you want a very good discussion of the ins and outs of SS, and the impact (negative and positive) that SS has wrt to welfare and economic growth, I recommend this excellent (long) paper from Martin Feldstein on reforming social security. Not frothy at all.


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