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April 29, 2005
Random thoughts on Social Security
It was a pretty interesting week for Social Security blogging. See Angry Bear (pgl), macroblog (David Altig), and Economist's View (Mark Thoma) just to name a few. I figured I'd put down some thoughts--sort of in the form of an interview with myself. Some of it is retrospective. Let's start with the basic question.
Question #1: Is Social Security in crisis? No crisis, but we could do better.Here's what I said in January.
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.
No change in my opinion there.
Question #2: Are the bonds in the trust fund worthless IOUs? No. However, I do not have a claim to those bonds other than through my participation in the Social Security system. The payout I will receive when I retire will be determined by the SSA's formula rather than by the return on those bonds. The bonds represent the government's commitment to fund our retirement based on that formula.
I don't like photo-ops with file cabinets, and I'm not crazy about comments like this from President Bush's press conference:
Now, it's very important for our fellow citizens to understand there is not a bank account here in Washington, D.C., where we take your payroll taxes and hold it for you and then give it back to you when you retire. Our system here is called pay-as-you-go. You pay into the system through your payroll taxes, and the government spends it. It spends the money on the current retirees, and with the money left over, it funds other government programs. And all that's left behind is file cabinets full of IOUs.
The reason I don't like that rhetoric is that it downplays the government's commitment to funding the retirement of the next generation. Some would say that it's tantamount to threatening default. You be the judge of that. I'm pretty sure Bush is not actually threatening default (he'll be long out of office by the time it would happen anyway). It's just not the way I would say it. The political and moral commitment cannot be understated. But a political and moral commitment is not a claim to a specific quantity of bonds.
And here's what I said about it once before. (Feb. 21)
We need to be careful about what we mean when we discuss (or imply the possibility of) default lest we fall into rhetorical traps. The "worthless IOU" argument is itself worthless. There are undoubtedly other cases where it has been used to get the attention of the reader and then been cast aside when it has served its purpose.
That characterizes my current sentiment as well. So far so good.
Question #3: Would privatization solve the solvency problem? Nope. Might privatization make a marginal contribution towards achieving solvency? This depends crucially on the assumptions one makes concerning growth of the stock market and how much the traditional defined-benefits can be reduced as a result. Assume a high enough growth in the stock market and it does contribute towards solvency. I don't buy the upper range of those claims. With reasonable assumptions, the contribution is likely to be small.
However, I don't think that this is a reason to reject partial privatization out of hand. If you want to reject privatization, do so on the merits. Judge privatization by what it would do, not by what it would not do.
Question #4: What about wage vs. price indexing? I can only find one post where I addressed this directly. I am cautiously in favor of the switch, as I was when I wrote that post. My biggest concern is that expectations matter, and I wouldn't want to change the indexing for people who are close to retirement. Maybe for younger workers who have time to plan (and save more--with or without privatization).
Pozen's plan, which the President has embraced, is worth discussing.
Under the current system, the benefits set at retirement are supposed to grow, on average, at the same pace as wages, so that the comparative living standards of retirees, while generally lower than working Americans, do not erode below today's levels.
Mr. Pozen's plan would maintain that schedule only for the bottom 30 percent of the work force - those with average annual earnings up to $25,000.
At the top, those earning more than the taxable limit - expected to be about $113,000 in 2012 when the plan would start, would have future benefits uncoupled from wages and linked instead to inflation, which tends to grow at a pace about 1.1 percentage points slower than wages. In the middle, benefits would be indexed by a mix of prices and wages.
2012 is a little soon for me unless it is phased in slowly, but it's a starting point for negotiation.
I'll continue this in the next post.
Posted by William Polley at April 29, 2005 11:49 PM
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Comments
On Q3 - you left off one critical assumption. If we returned to households their SS contributions, how would they allocate these funds? The Barro, Becker, and PGL claim is that they would rationally put all of them into bonds. No changes in overall asset allocation = no increase in expected return.
Posted by: pgl at April 30, 2005 9:50 AM
PGL,
I address this elsewhere. It's only indirectly related to solvency insofar as it allows more benefit cuts. In this question I am trying to separate the two.
Posted by: William Polley at April 30, 2005 10:23 PM