Tag: Social Insecurity

If George W. Bush’s/John McCain’s views on Social Security of a couple of years ago had been national policy, your retirement could have shared in this meltdown. What’s in your 401K/IRAs?

McCain’s Social Security positions are historically quite labile, and currently incomprehensible. He recognizes that demographically the working/retired population ratio is shrinking, asserts that the taxes needed to maintain a pay-as-you-go system as this progresses would cripple the economy, won’t mess with currently expected SS benefits, and then says private accounts can save it.

Either retirees can consume a given share of the economy’s production without creating any of it and without damaging the economy “too much”,or they can’t. Even if we could arrange it safely, transferring those resources to the elderly through private accounts is not importantly different from using the government to do so: the constraint is in the ratio of the total value created by workers to the value we think retirees should be entitled to consume (and hence deny to workers).

The discussion of rebuilding New Orleans, either where it is or in some better location, may be a special case of a problem that deserves more study. It happens occasionally that a largish region loses its economic raison d’être, something that can happen because of technological change, depletion of an extractive resource, or the rise of a more efficient competitor.

Atlantic Canada used to live on fishing, lumbering, and coal; all these are failing industries. The northern Great Plains used to be agricultural; it still is, but technology has made it possible to grow enormous quantities of grains and soybeans with hardly any labor, so Nebraska is full of dying and ghost towns. Small towns across the South used to live by making textiles; now we get that from China and the towns are dying.

If we accept that hurricanes are a regular thing, the coasts of Louisiana, Mississipi, and Alabama south of Mobile may simply not be sound business propositions for settlement, certainly not at the densities that just got scraped away by Katrina…and lots of other coastal regions maybe should be unsettled by man before nature takes a hand.

What, if anything, should be done about this? On an individual basis, I suppose bus tickets make sense—some sort of relocation subsidy. But most people (and the locals) point out that a region is not just a bunch of families, but a culture that almost certainly can’t be maintained anywhere else. It also has a patrimony of physical infrastructure with cultural value. Furthermore, the bus tickets tend to be used selectively by the young on the way to college or a big city, fracturing the families and leaving behind an aging population and a sad ambience.

The usual policy response is some combination of direct welfare from the national government, attempts to develop tourism based on the traditional culture and natural endowments if any, and industrial development subsidies that have a very poor record. Tourism creates a lot of jobs making beds and serving food, but not much real prosperity. Obviously a population can be sustained anywhere by permanent welfare, but this doesn’t seem to be treating the locals like grownups, more like hired museum exhibits, and it’s probably bad for character to know that one is consuming value without creating any in return.

Is there a way for a national government to help a region to shrink in population gracefully? Do four or fourteen generations in the same mill town give the current one some sort of claim to be enabled to remain when the mill dies? Is a local and irreplaceable accumulation of culture and tradition a resource the larger society should have an interest in preserving, and if so, how?

A village of fishermen not fishing and instead cashing welfare checks doesn’t seem to achieve this, though, and a villlage of descendants of fishermen working in a computer factory, while it might be a good outcome on other grounds, doesn’t seem to either.

Steve Teles writes:

I was reading an article by that wizard Kevin Hassett (he of Dow 4 million or whatever) complaining that lots of other countries (including Mongolia) have individual accounts in their social security systems, and we don’t. Thus the Democrats’ resistance to individual accounts puts them to the left of the Mongolians.

But, of course, what Hassett ignores is that we currently spend about $160 billion a year subsidizing 401ks, IRAs, etc. This is, in effect, the “private” component of our pension system. Unfortunately, this huge expenditure does just about nothing, as far as we can tell, to actually increase savings, because it is terribly targeted, and thus goes to individuals who would probably save anyway.

In addition, the crazy-quilt form of the current subsidy creates very large dead-weight costs, due to the tax planning that’s required to administer the system (both at the individual level, and due to staffing at the business level). Most of these costs are off the books, but they are still real costs.

The real kick from savings incentives comes from those who do not currently save now, and they are disproportionately down the income scale. If you assume that we have about 150 million people currently in the labor force, that means that we have an average subsidy per worker of about $1000 a year.

Imagine what would happen if we made this into a flat subsidy, so that everyone got $1000 in an individual account (preferably invested in something like the federal government’s Thrift Savings Plan, to keep costs down). There is almost no question that net savings would go up, because a large part of the subsidy would be going to people with zero (or negative) savings today. In addition, of course, you’d be moving from a highly regressive system to one that was progressive. Administrative costs would drop considerably.

Such a system might be used to leverage additional voluntary savings out of current income, especially if you created a default system of tax withholding for the accounts (so that everyone would contribute some percentage of their earnings, unless they opted not to). We know from behavioral finance research that such a system dramatically increases contributions in private pensions.

The politics of this would be very complex, because there would be substantial losers: the mostly-prosperous folks who now get huge tax benefits from retirement accounts. But this would seem like the direction that the Democrats should be going, to respond to the administration’s “ownership society” rhetoric-it makes a lot more sense to try to increase savings by fixing the tax-subsidy system, which is broken (both in equity and efficiency terms) than by monkeying with the Social Security system, which is working tolerably well.

In addition, the politics of this might not be so bad, since the benefits would be very clear-everyone gets $1000 tax credit right into an individual account-while the costs would be variable and not wholly transparent.

This seems to me like a major idea, both substantively and politically.

Paul Krugman blows the whistle on the claim that the new-model Bush Social Insecurity plan is redistributive toward the poor.

In fact, Social Insecurity version 2.0, as announced by the President at his press conference, would reduce retirement incomes much more for the middle class than for the rich, simply because the rich don’t rely much on Social Security in the first place. Middle-class retirees in 2075 (people earning the equivalent of $35,000-$100,000) would have their retirement income cut by 10-13%. For the people who got the most out of the tax cuts which blew the Social Security surplus, the hit would be much smaller, down to 1% at the million-dollar-a-year level.

Yes, it’s true that the bottom of the income distribution (among those with enough time in the labor force to qualify for Social Security) would fare better than the middle class. But since when is hammering the middle class while doing nothing for the poor in order to pay for tax cuts for the rich “Robin Hood” behavior?

The truth emerges: or at least part of it. Thank you, Mr. Wehner.

The Social Insecurity plan (I’m pleased to be told by readers that the name is catching on) was never about private accounts. It was about reducing the incomes of future retirees, who in the BushCo moral universe have no legitimate claim to share in the economic growth that takes place after they retire. Thus the plan to wreck the proudest accomplishment of the New Deal is “a moral goal and a moral good,” and the right wing should be glad that “for the first time in six decades, the Social Security battle is one we can win — and in doing so, we can help transform the political and philosophical landscape of the country.”

Here’s the key sentence:

No one on this planet can tell you why a 25-year-old person today is entitled to a 40 percent increase in Social Security benefits (in real terms) compared to what a person retiring today receives.

I suppose I must have moved off-planet without noticing it, but the justification for wage indexing seems pretty clear to me. Either benefits go up with wages, or the increasingly long-lived retiree population will become relatively poorer as it ages.

After all, unless Bushite Peronism really manages to wreck the economy long-term, a child born to the average household in 2050 will be substantially richer than a child born to the average household today, without having done a lick of work to earn it. Is that somehow morally shocking? Then why does it violate some law of nature for older people to get richer along with the rest of us?

There’s a case for worrying that rising OASDI tax rates will become a significant work disincentive, especially if benefit levels are only weakly correlated with taxes paid.

And there’s a case for worrying that the existence of Social Security as a relatively generous indexed annunity may be contributing to low household savings rates, and thus both to low national savings rates and to the scandalous maldistribution of wealth that has the typical American dying with not much more than he needs to bury him.

(For a description of these problems and a sketch of possible solutions from someone who wants to fix the program rather than wrecking it, see James Tobin’s Cowles Commission discussion paper from 1987.)

Now I’m more worried about work disincentives at the bottom of the income distribution, where the current Social Security system acts as an implicit subsidy, than at the top, and I’m far from convinced that private accounts are necessary, or even the best way, to deal with the problems of undersaving and inadequate wealth accumulation.

Still, I acknolwedge that the incentive effects of Social Security are worth worrying about, and that a properly-designed private account scheme might be able to fix them.

A properly-designed system, as my friend David Boyum points out, would have private accounts but not free choice of investment vehicles, and it would be progressive: the annual contribution to the private account would be a fixed sum, not a fixed percentage of earnings. And the payout from those accounts would be in the form of indexed annuities, with individuals having the option to reinvest a portion of what would otherwise be the payout in any given year but not to draw the account down faster than the annuity rate.

And, of course, the transition would be financed with some combination of taxation and spending cuts, not by floating another couple of trillion dollars’ worth of bonds; otherwise the change does nothing for the national-savings problem.

But then Boyum asks the hard question: given that there exists a private-account system superior to the current system, should Democrats say that they’re for it instead of rejecting private accounts altogether? If we had a rhetorically masterful leadership cadre, effective control of the communications channels, and a set of opponents constrained by intellectual honesty, or at least ordinary honesty, in their debating approach, there might be a good case for proposing a serious alternative.

In the actual situation, however, where none of those three conditions holds, I’d say that the duty of the opposition is to oppose. (Some Democrats are hedging by simply listing a set of criteria for the sort of “reform” they will endorse, making sure that no Bush plan will meet those criteria. That’s not a bad idea, as long as it doesn’t elide a question of principle into a question of detail.)

Now that Mr. Wehner has spilled the beans, opposition ought to be relatively easy. It’s not often, after all, that an idea this bad is also potentially this unpopular.

Update: Brad DeLong outlines the problem and the solutions.