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February 23, 2005
How not to reform Social Security
Via the Club for Growth:
U.S. Rep. Martin Sabo (D-MN) announced this week that he will introduce a bill in Congress that he says will "guarantee Social Security solvency through 2080" by increasing the interest rate on Treasury bonds in the Social Security trust fund.
PGL at Angry Bear responds first. I'm going to take a different approach though. Rather than make this another post about what I think the trust fund is or is not (I've been pretty clear about that in the last few weeks), I'm just going to explain why I think this idea is not a good one.
My complaint is simple. Even if we keep the current Social Security system, I would just ask that the system's income and outgo be balanced in the long run. Right now, that's where the infamous 2018 and 2042 dates come into play. The plus side of the ledger wins until 2018, then the negative side of the ledger wins for many years into the future--hitting a zero balance in 2042. PGL often comments that the Republicans want to raid the trust fund or that Reagan lied in 1983. I respond as follows. If we raise taxes (or borrow less!) from 2018 to 2042 to pay back the bonds in the trust fund, then David Ricardo, for one, would not call Reagan a liar.
(The fact that many people reading this will find the previous sentence unrealistic is a political issue, not an economic one.)
The problem is that the world does not end in 2042. Beyond that year, the system goes negative and would probably stay negative for a long time, forcing the general fund to subsidize Social Security, perhaps indefinitely (unless there is another baby boom). I think we can all agree that the pay-as-you-go system is not in long run balance when the long run is taken to be past 2042. That would bother me. At that point, I would want us to raise the retirement age, raise payroll taxes, or cut benefits. Of course, I really would prefer that we never get to that point in the first place. That's why I support doing something now, while there is a lot of time to do something gradually.
Anyway, back to Rep. Sabo's plan. His plan would simply shift the financing from the pay-as-you-go Social Security system to the general fund... until (at least) 2080. He's talking about doing exactly what I would try to avoid... for 40 years. This is more than just a counterpoint to the "raiding the trust fund" argument. This would institutionalize a long run imbalance in the pay-as-you-go Social Security system--a long period of deficit without a corresponding surplus. In my rank ordering of approaches to the Social Security issue, this ranks right below doing nothing.
Posted by William Polley at February 23, 2005 7:35 PM
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Comments
The Congressman's plan would make the General Fund deficit MUCH worse. Then again, it's the market that sets interest rates - not what this fellow wants.
Posted by: pgl at February 23, 2005 9:17 PM
Well, if we do nothing, the general fund deficit will get very large too. I don't think Sabo's plan would make the deficit worse than doing nothing. I think it would just have us relabel the flows of funds.
And you can set the interest rates to be whatever you want as long as you don't allow arbitrage! Talk about accounting fiction!
Posted by: William Polley at February 23, 2005 9:36 PM