First, I don't know if "Jane Galt" read my post on Social Security as insurance, but she comes to a similar conclusion.
What's the best solution, then? I'd say we're converging on it: a system of minimal government insurance for those who have been unlucky, in life or investments, combined with a regulated forced savings plan to make sure that those who aren't unlucky aren't tempted to free-ride on society, and incentives to employers to encourage additional savings among employees. This won't make anyone ideologically happy. But it seems like the least intrusive, most fair, most economically sound possibility.
Your ideological happiness (or lack thereof), I'd say, rides on how minimal the insurance. Hence, Mark Thoma writes in a comment to my post:
I agree entirely and have noted before that the question of whether a person views the current system as just insurance or insurance plus savings depends upon their (normative) view of the level of support that ought to be insured, the minimum acceptable level of societal support. Much of the argument you hear is needless because it is really an argument over this difference and there is no right answer.
Yup.
So now, Winterspeak asks (also in my comments section):
So what risk are we left with -- the risk that the retiree has not saved enough before he retired? I don't see how this is a risk. The retiree 1) chose when to retire and 2) saved throughout his life. This is not a risk, this is a bad choice.
Not to mention the bad choice of leaving all your retirement in the stock market too long.
I am supportive of (and understand) forced savings so ppl don't make the bad choice I've detailed above. But I cannot see the insurance aspect so social security. I don't understand why insurance against unexpected poverty should be limited to old people.
One crucial reason for a different sort of program to insure against old age poverty is that most of us are of a sensibility that makes us uncomfortable making senior citizens work to pull themselves out of poverty. For younger people, we have unemployment insurance and TANF, both of which have limits which induce young people to get back into the workforce. I think there is good reason for something different for those over a pre-defined, socially acceptable age.
As for the distinction between risk and a bad choice, I'd offer the following. Too much risk is sometimes the result of a "bad choice." In a free society, some people will make what I would consider to be bad choices and take on too much risk. Some will lose. Yet, I am uncomfortable watching them be reduced to poverty (when they have less of an opportunity to pull themselves out). So I like the idea of a safety net. But I also understand moral hazard, so I know that a safety net that is too generous will just encourage folks to make bad choices (take on too much risk, let it ride on the stock market too long, etc.).
Hence, the problem simply boils down to how generous we want that safety net to be. That is an appropriate question for society to consider through the political system. (And a question on which economists can and should offer sound theory and evidence.) Or, as Mark says (in a comment to my post),
You can argue anywhere from an absolute bare subsistence level to a fairly generous level of support, but there is no correct answer as to what is fair that we will all agree upon other than that a floor exists. And I suspect there are a few who would even argue against a minimal level of support.
And while we're at it, let's consider another source of risk that could bite a lot of people in the next few decades--the demise of the corporate pension system. I would be remiss if I didn't mention this:
Unions Threaten to Strike After Pension Default at United
This is the tip of the iceberg. There is also the more subtle pension shaving due to reductions in health benefits for retirees in a number of companies. Did the workers in these situations make a bad decision? The fact is, corporations may no longer be the appropriate vehicle for bearing this sort of risk.
The defined benefit corporate pension plan has been, for a long time, the holy grail of liberals. It was lavish and safe. It is also dying. Not that it was ever that prevalent in the first place, mind you; liberals who lionize the Golden Days of the fifties and sixties seem to believe that everyone worked for either IBM or GM, when in fact most jobs, just like today, were with small businesses.
But the corporate pension was certainly *more* prevalent. Unfortunately, time has revealed its cracks; companies aren't very good vehicles for managing this sort of risk. Time is the biggest one; pensions require companies to plan over time horizons that span 30 or 40 years. That was fine in the cozy, protected, and highly regulated environment of the 50s and 60s, but when the market changed, the pension promises couldn't. This is what (among other things) is dragging down the major airlines; I expect that within the next decade we will also see Ford and GM default on their pension promises.
She goes on to say that there are problems with having the government provide this insurance as well (which I take it is why she argues for "minimal" government insurance). All of this leading up to her conclusion I quoted at the top of this post.
If we could get broad agreement on a coherent system that provides incentives for saving, together with an open and honest debate about the appropriate level of social insurance, that would be ideal.
Ah, good. I was wondering if I was just going to be going back, much belatedly, to an old thread.
Let's pretend to live in the real world, where people do not, pace Winterspeak, get a "choice" of when to retire. Mandatory retirement, dismissal for performance-impairment issues (one need not be definitionally disabled to be unable to perform a job function--e.g., how many 60-year-old working miners have you met?), and other "unofficial"/"private company" policies lead people to "retire" from the free market--and Jane Galt would have it no other way.
Let's also acknowledge, as Bruce Webb has more than adequately demonstrated, that the current OASDI rate is higher than it needs to be. (And let us concede that the Greenspan Commission effectively was tasked with setting out a higher rate than absolutely necessary, due to the uncertainty of projections.)
And let's be nice to Jane and pretend that a company cannot plan over a 30 or 40 year time horizon, but that an individual whose employment, and therefore income flows, depends on that company or similar ones can.
What would the basic framework of social insurance look like in such a scenario?
(1) It would likely still leave some portion of the population with poverty-level income, dependent on the kindness of strangers, family, etc.
(2) It would ensure that those who were unable to work through severe physical or mental disability would be provided for.
(3) It would protect the freedom of a family to elect to provide for children at the expense of the income of one or both spouses for some period of time, but it would neither compensate that family completed for not working nor would it benefit those relationships that are not enduring.
(4) It would be paid into through the entire working lifetime, to reduce the amount of the contribution required overall and prevent, as much as possible, the possibility of both adverse selection and cherry-picking (which is adverse selection from the system's pov). (My xx-year-old body cannot be insured for as little per month as yours, or yours as a 20-year-old's, all else being equal--but we want to minimize administrative costs here, both to facilitate compliance and to keep overall costs as low as possible [again, avoiding cherry-picking].)
With some minor quibbles (the spouse of a childless "starter marriage" lasting 10 years and three months is treated preferentially to the spouse of a 30-year-until-death-does-us-part second marriage with children--again, it keeps the costs down) and a bit of haggling about the price, it would look a lot like the current SocSec system, which still leaves around 10% of its recipients living at or below the poverty-level (but appears, on a marginal basis, to have kept 70% of the people who would have been below the poverty level without the programme, which is probably a reasonable target).
Most especially, it would adjust benefits over the working lifetime by the actual change in the standard of living, after which (i.e., when one retires) it would be increased by the cost of living.
The current SocSec program, which provides for the unfortunate but not those who are unemployable (or perpetually underemployed)through no fault but their own (as opposed, as noted, to those with societally-valid reasons not to be in the workforce), appears to match fairly well with Jane Galt's ideal of "minimal government insurance."
Unless, of course, one is arguing that the poverty rate of the aged should be higher, that we do not have a societal obligation to provide for those who are legitimately unable to provide for themselves, or that only paid work--as opposed to child care--should be considered valuable, or some combination of the above.
So we are left with (1) CATO's 2.5% for Survivor/Disability and (2) some figure--certainly below 10%, but not likely much less than 9.25% (compare with historic SocSec contribution rates, productivity gains, and outlays)--as being needed to provide that de minimus level on a risk-free basis.
Facilitating people diverting that 40-75bp--which is something around $160-300/year for the roughly $40K average income, and would max out at $675 for the current $90K SocSec cap--would probably raise administrative costs prohibitively without increasing savings (op. cit. Hal Varian's declaration that, effectively, those who are not SteadyMax don't save anyway).
So increase, say, the exclusion of taxable interest on savings accounts and emphasize that "value of compound interest" that Mr. Bush keeps noting in respect to savings and ignoring with respect to increased deficits. Or give a tax break--on the 1040 or 1040-EZ--to those who start "mini-Roths" that balance out the fees that would otherwise eat up the entire value of such an account.
Ken,
Let me make sure I hear you correctly. Are you essentially arguing that the FICA tax could be lowered a little along with adding some tax incentives for saving?
I would not dismiss such a proposal out of hand.
Just so you know, I'm not advocating "minimal" insurance. "Jane" is. I merely suggested that her conclusion of Social Security as insurance plus pension is pretty much what I said earlier about the right kind of debate to have.
And as good as the current system is, I do not think it's optimal.
So my starting point for discussion of Social Security is that 1) I don't think the current system is optimal, 2) social insurance against poverty among the elderly is a good thing, 3) the political system makes it difficult to design a really good government pension system, 4) personal ownership of your retirement savings is, on balance, a good thing, and 5) if all we're worried about is solvency, that's not that big of a problem if we tackle it now.
Also, I favor privatization done right, but fear privatization done wrong (see number 3 above), which would be bad. I remain convinced that it is possible to do privatization the right way, but am becoming convinced that it won't happen in this political cycle.
And that's about where I stand.
I certainly agree that the current Greenspan system isn't optimal--nor was it designed to be--but all of the changes I can see that s/h/o/u/l/d/ might work are either (1) minor or (2) return to vestiges of the old system.
Where we have an actual disagreement is with the last five words of your (5), which I would restate as "If all we're worried about is solvency, that's not that big of a problem."
To be explicit: if <2.1% average real growth is the actual expectation for the U.S. economy for the next 75 years and/or to infinity (and beyond?), then nothing is going to "save" the system. If the US is going to be run the way most of the airlines have been, we can give up right now.
At 2.1% real growth, the system is fully funded at 6.2%/$90K-adjusting. (Unless, of course, you do things such as assume administrative costs go up 11.1% during a period when--by all of the theory and research I've ever seen--the cost of government should be going down.)
Since growth has been running substantially more than 2.1%, and we should be able to assume that will continue, the system is clearly being overfunded (compared to an optimal level).
I'll readily concede that some of that overfunding is probably necessary due to the "noise" in the assumptions.
But one of the things that got lost over the past 22 years is that the widening of income distribution artificially lowered the cap on SocSec, which has traditionally been at 90% of income (i.e., if you are among the top 10% of earners, you don't pay the full percentage, but otherwise you do). Adjusting the cap back to the 90% level would bring in a sizable amount of money that would--in any reasonable scenario--be seen as excess. (Full disclosure: it would cost me more in SocSec taxes.)
With that flow, then there is probably enough of a surplus that we could either (1) afford to fund private accounts out of the 12.4% or (2) reduce the SocSec tax rate and either (a) set up some tax incentive that would allow lower-income people to fund a retirement account that would not be eaten up by fees (since the rest of us can already fund Roth IRAs) or (b) exercise a variation of the Clinton plan in which the SocSec TF invests the surplus in the capital markets, and the excess return goes back into benefits.
In that latter case, you and I adjust our non-SocSec portfolios (which also allows the rate of return of the market not to decrease due to excess cash).
Granted, raising the level of the cap or removing the cap is always greeted by the claim that it will "impede growth." (As I've noted elsewhere, if we look at what the elimination of the cap on the Medicare/aid tax in 1993 did, I would love to see growth impeded again.)
The problem--as Hal Varian noted (and, yes, I made fun of his comment for good reason, but that doesn't make it inaccurate)--is that talking about "increasing national savings" has become code for "stop providing benefits." If a person making $30K a year saves an additional 2%, national savings increases by $600--and no one notices, except that s/t/a/r/f/i/s/h/ person.
If our income distribution and employment policies are such that the only way to increase national savings right now is for the SteadyMax/coupon-clipping crowd to save more, then let's just admit we're not doing our part and address that with, say, a luxury-only consumption tax. (Talk about politically dead in the water...) But if the dual premises are (1) we need to increase national savings and (2) the contribution of the sub-SteadyMax crowd to the national savings rate is negligible, then I don't see how one revisions to one will have anything directly to do with the other, except as a matter of increasing income disparity.