Wednesday, February 02, 2005

Real Social Security Reform

If both Arnold Kling and J Bradford Delong agree, then it must be a good idea! And what do the ex-academic classical economist and deep-in-the-Krugman/Berkeley-fever swamp professor agree on?
1. Shift responsibility for maintaining actuarial balance off of the Congress and onto the Social Security Administration--have it gradually raise (and lower) the retirement age or the benefit-rule bend points in order to keep the system in projected balance.
2. Uncap FICA and apply it to all wage income in order to top-off private add-on accounts for the poor and boost benefits for widows.
3. Make enrollment in private accounts automatic (it's done automatically on your 1040) but voluntary (you can fill in an extra form to get the money the IRS earmarks for your account back as part of your refund).
4. Use the government's existing Thrift Savings Plan as a vehicle for managing private add-on accounts--and keep its choices restricted: churning and extra administrative costs caused by asset shuffling are not your friend.
5. Mandate that in fifteen years a commission consider and recommend whether or not two percentage points of FICA should be diverted and added to the add-on accounts as a forced savings program.
Any social security reform must do some combination of cutting benefits and raising taxes. This one does it by raising the retirement age (very sensible) and raising the payroll FICA tax (quite sensible). Actually, it does not raise the retirement age, it merely moves that decision to a body able to act without Congress' 2 year re-election time horizon, and is unnaccountable to the general public. I don't think much of Congress, nor do I think much of unaccountability, so it's not clear that this will actually result in a benefit cut. Maybe I should downgrade that to "quite sensible" from "very sensible".

The plan also has other good features, including automatic enrollment with opt-out (a nice acknowledgement of Libertarian Paternalism) and severely restricts what individuals can invest their money in (acknowledging both Chicago School Efficient markets and Behavioral Economics). Not too sucky.

Brad would have a commission decide, in 15 years, whether FICA could be diverted to the new personal account, while Arnold says 15 years experience is enough for Regular Joes to make up their own mind. But Brad likes committees and Arnold doesn't.

I don't think this is a terrible plan. I anticipate getting zilch from SS myself (being under 35) so this is an improvement from the current state of affairs.

This should serve me right for going to Brad's website. A later entry has him calling Luskin an idiot because he gets some SS math wrong. I don't know if Luskin actually got the math wrong but it's quite likely. I know for sure Luskin is a fool because anyone who makes a fetish out of bashing Krugman is a fool--not because Krugman isn't ridiculous, but making a fetish out of bashing anything is just foolish. (Whatever, go to Luskin's site and make up your own mind).

At the core of Krugman's argument (and Brad's support) is that if the economy grows fast enough to make privitization work, it will grow fast enough to keep social security solvent. And by "work" Krugman means throws off enough cash to cover the current gap between benefits promised and taxes collected. (This gap is sometimes called the "transition cost" of moving from pay-as-you-go to personal-savings, but in fact there is no transition cost, there is just the gap between benefits promised and taxes collected.) Krugman does not point out that transitioning to private accounts will speed up economic growth because they would lower marginal taxes. FICA is a tax, while saving for yourself is not, it's just defered consumption. To take the position that growth will be equally high under a high-tax and low-tax regime is to say that people do not respond to incentives, which is to repudiate the core of Economics. So I don't know what to call Krugman (and by extension, DeLong). Certainly not "Economist".


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