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January 12, 2005
Social Security: is it really broken?
Yes and no. Consider these two claims:
Could the right sort of adjustment/modification/reform of Social Security in the next few years make future retired persons better off? Almost without question, yes.
Is Social Security on the verge of becoming the nation's biggest fiscal problem if it's not fixed in this presidential term of office? Definitely no.
Even the AARP might agree with my first claim, although the latest out of the White House sounds like they might take issue with my second claim. In any case, these two claims are fairly well accepted by economists, policymakers, and pundits on both sides of the debate. So what should be done?
Let's get one thing straight. I would not be in favor of any reform that would mean a reduction of benefits for today's retirees. I don't think anyone would favor that. Hence, it won't happen. Today's retirees need not fear. Whatever reform takes place, it will (possibly) help future retirees (today's kids and those not yet born--I fear that I may even be too old to benefit, more on that later).
I also would leave the disabilty and SSI benefits pretty much the way they are. What we are talking about here is the basic retirement aspect of Social Security.
I tend to agree with macroblog on this one:
I fully concede that you cannot take any old private-account scheme off the shelf and claim that it dominates the current system. But I think it should also be conceded that it is conceivable that a privatized system might dominate, if properly constructed.
And then he recalls some research that he and Jagadeesh Gokhale did on the issue.
If we allowed people below some critical age the opportunity to shift to private accounts, while at the same time taxing them to pay promised liabilities to those who remain in the system, would it be in their interest to do so? Our answer: yeah, maybe.
I've been a supporter of their (Altig and Gokhale's) idea since before there was a macroblog. I read their research from the Cleveland Fed when it first appeared in the mid 1990s. Read here for one of their articles much like the Cato piece referenced above. Read here for one by Gokhale and Lansing from about the same time. The latter has nice historical graphs, but it is getting a little dated.
Articles like these convinced me about 9 years ago that Social Security could be fixed if we really wanted to. We just haven't wanted to. In 1996, Altig and Gokhale reckoned that transitioning everyone under the age of 43 to a privatized system could potentially be Pareto improving. In the 1997 Cato piece, they put the cutoff at age 32. At the end of the summary of that piece, they say if we wait until 2011, only those under the age of 20 could move to the new system. We're halfway there. As I suggested above, I think it's too late for me.
The reason why the window is closing on this type of reform is that in the next few years the Social Security surplus will begin to shrink. Because Social Security contributions have been added to the government's general fund for some time, the disappearance of these funds will be noticed. In order to support the benefits of retirees and those near retirement (all those baby boomers), we will need to draw on more of the current contributions (from younger and younger workers). Once the Social Security surplus is gone (2018, by their own estimate), the transition becomes more difficult and costly. I don't see how anyone can look at the figures and the charts and fail to see that the time do something that would be Pareto improving is sooner rather than later.
Good solid economic growth with some fiscal responsibility will extend the life of the system for decades even if we do nothing. We don't have to do anything (except maybe raise the retirement age by one year every decade or something similar if life expectancies keep rising). But if it is possible to do something Pareto improving, I think we should do something.
But I also concede that you can't just take any old privatization scheme off the shelf and say that it will be a Pareto improvement.
Posted by William Polley at January 12, 2005 12:09 AM
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