Brad DeLong's Semi-Daily Journal (2004)

...if we were to boost the FICA tax rate from 12.4% to 13.4% tomorrow.

No need. Just drop the earnings cap. It's the most regressive tax we have, and eliminating the cap makes it more neutral.

Right now, no one is taxed on money over about 90K.

Employers pay half the tax. Why should we subsidize their overpaying corrupt top executives?

Maybe the Trustees are using this 1.1% growth estimate on the presumption that the Reagan-Bush43 fiscal trainwreck and associated reduction in savings and investment will finally has it adverse effects.

I'm curious, how would immigrants becoming citizens, working legally and thus paying into the Social Security system, affect the outlook? I'm probably missing something grand here, but here's what I've thought so far. Speaking generally, the problem is that we won't have as many people paying into the system as we will have people taking money out of the system. A new flow of people paying into the system, most of whom do not have elderly relatives taking out of the system just yet, would make the shortfall a lot less severe. And as these new people paying into the system started having children, or once their children grow up and started paying into the system and have their own children, the system would continue to work relatively well.

Now, as I said before, I'm probably missing something big. If you can think of anything off the top of your head - say, about employment numbers, healthcare costs, current or future benefits, and so on - please do, because the dork in me finds this topic interesting. Even better, if there are some studies out there that you would consider helpful, please share them.

How can we do a 50 year SS projection while not being able to do a 10 year budget projection?

>>Just drop the earnings cap. It's the most regressive tax we have, and eliminating the cap makes it more neutral>>

Benefits are capped. Effectively using SS tax as part of a unified budget is unfair.

I thought the real train wreck was Medicare. SS isn't a serious problem.

http://pep.typepad.com/public_enquiry_project/2004/06/the_brilliant_p.html

Benefits are capped. Effectively using SS tax as part of a unified budget is unfair.

Who is talking about using Social Security as part of a unified budget? I'm talking about using it as Social Security.

It's disingenuous to describe Social Security as some sort of a defined benefits package. It's a program to guarantee that people who have spent their lives working do not end their days living on cat food.

Brad,

If you're going to criticize the assumptions, at least get them straight.

First, they're different productivity concepts. The SSA actuaries use a much broader number, GDP divided by total hours worked in the economy. This includes sectors that are excluded from nonfarm business productivity, primarily agriculture and government. This means much lower measured productivity growth.

Second, productivity growth doesn't equal wage growth. There's the impact of hours worked (the Trustees report assumes no change) plus the increasing role of nontaxable fringe benefits as a share of earnings, plus the "wedge" (CPI inflation minus GDP deflation). When you look at all of this together, the Trustees (and CBO) real wage growth assumptions are perfectly reasonable.

Dave

Gory details are at:

http://www.ssa.gov/OACT/TR/TR04/V_economic.html#wp170227

Richard,

Either account is a train wreck if the demographic realities are not addressed. Medicare is worse in part because we have less control over the cost, which has been escalating. Part of the solution in either case could be to control the costs better.

On the issue of what is fair, well, SS is a transfer program. Somebody else always pays. Lumping a people together by income doesn't really do much to help figure out what is fair. We could just as easily lump them together by life expectancy. A poorly-paid worker with a family history of early death may enjoy a smaller payout from life-long payroll taxes than a well-paid worker decended from long-lived sorts.

The fact is that big earners are benefiting materially from our society to a greater extent than small earners. When we keep that disparity in mind, asking the well-paid to contribute more to transfer programs than they are likely to receive seems no more unfair than allowing their offspring preferential access to medical or law schools that their parents attended, or preferential access to other forms of expensive education that will tend to preserve their parents' advantages. Life ain't fair, but it mostly ain't fair for the poor.

Of course, all the projections are based on SS drawing on the accumulated SS trust fund to make the difference between revenue and benefits. Currently, SS revenue is about 6.7% of GDP and benefits around 4.3%, so SS is contributing 2.4% to the rest of the budget. That contribution disappears entirely in 10-15 years so revenue will have to be incresed from other taxes. Other taxes will then have to be increased to cover the withdrawals from the SS trust fund.

The question is, "Can we afford it?" USA taxes are low compared to other countries including our neighbor, Canada. The money is there to pay for SS. It takes political will. As for health care, that requires getting more bang for the buck.

"It's disingenuous to describe Social Security as some sort of a defined benefits package."

Tell that to the Social Security Administration, which describes the retirement benefit as a 'defined benefit pension'.

"It's a program to guarantee that people who have spent their lives working do not end their days living on cat food."

Yeah, that's why Warren Buffett is collecting right now -- either that or he'd be eating cat food. ;-)

Personally I think that young working people raising kids shouldn't be forced to live on cat food either. Certainly not for the benefit of Warren Buffett. It's just not progressive.

Hmmm, let's see...

Household income and wealth:

age of ... income per ... median ... average
head ....... member ...... wealth .... wealth

65-74 ..... $21,348 ... $146.5k ... $465.5k

25-34 ....... 19,547 ......... 9.0 ........ 65.9
35-44 ....... 21,094 ....... 63.4 .......196.2

[Census and Fed Survey of Consumer Finances -- not including the value of Medicare, etc.]

Do you suppose maybe the tax transfer is going in the wrong direction?

"The money is there to pay for SS."

After paying for Medicare for the same people? That's not entirely clear.

"It takes political will."

Yes, it takes political will to raise taxes.

It also takes political will to instead reform a social program that was designed for a world that has since completely changed, to bring it into the current century.

Social Security was created as a defined benefit pension (as one can read on the SSA web site) for a world in which such retirement plans were few and far between, and in which the old were the poor.

Today retirement-agers are not just the richest they are pulling away from everyone else. Most IRAs, 401(k)s and other such retirement accounts weren't created until the 1980s and so are only half used -- but they hold over $11 trillion now. Give 'em another 20 years to take contributions and compound and guess where they'll be. (Then there's up to $500,000 of tax-free gain on each home one owns over one's life. And Medicare has no small cash equivalent value, which is growing rapidly, while the younger must pay their own bills ...)

The relative wealth of the over-65ers has been rising fast and 20 years from now as a group they will be a heck of lot better off compared to the rest even than they are in the little chart above.

If Social Security *really* is meant to save the old from having to eat cat food, to be insurance against poverty, a safety net -- then this implies an easy & ready fix to all its financing problems that is *progressive* too.

OTOH, if it *really* is now basically a massive transfer to a disproportionately influential, well-organized (and wealthy) political interest group, then I guess we'll just have to screw up the will to raise taxes.

Enough to make sure Bill Gates gets his benefits in full, his safety net intact protecting him from ever having to eat cat food even if he lives to 110.

I think that we can continue to import people to pay social security taxes and we can lower taxes on people with children to allow people to have more children to pay social security taxes. The problem with those approaches is that both immigrants and children are expensive ways to 'save' money.
Solar photovoltaic for peaking power and gas cooled fast breeder nuclear reactors for baseload power are ways to generate electricity with running costs much lower than coal or gas. Investing in these has a higher return than investing in children or immigrants.
This is not to say we should do it, just a point to make about how we should think about what we should do with our money to ensure our retirement.

Forcasting out to 2050 is like having cave men try and plan for the industrial revolution.

says this cave man :)

Matthew Saroff: Social Security benefits as well as the tax are capped. The question comes down to what is "fairer" -- capping a benefit financed by uncapped taxes, or making the capped payout (roughly) proportional to the capped lifetime contribution. The former would redefine Social Security into a form of "retirement welfare", the latter is closer to an insurance. Not a bad thing per se, but I let you be the judge.

To quote another similar example, would you consider it fairer to pay for the same healthcare insurance as a roughly fixed monthly amount, or as a percentage of your (and everybody's) income?

Matthew Saroff: "It's disingenuous to describe Social Security as some sort of a defined benefits package. It's a program to guarantee that people who have spent their lives working do not end their days living on cat food."

Well, it is a kind of defined-benefits package (plus disability and survivor insurance, which is often forgotten), only that we don't know what the future definition of the benefits will be. That will depend on the number and age structure of the beneficiaries, and the "productivity structure" of the economy when the come due.

And you should rather say that "it's a program to guarantee that people who have spent their lives paying enough payroll tax do not end their days living on much less than others who paid payroll tax." I wouldn't venture to make predictions about the food, although I certainly hope it will not be cat food. And assuming that technological progress will continue, I hope for much more than that.

Brian: demographic factors

You are right pointing out your concerns about the structure of the retiree pipeline, but what will (hopefully!) save us are future improvements in technology and productivity, i.e. the same or smaller number of future workers will be enabled to produce enough to provide a decent living standard for themselves and all retirees. If not, somebody will end up royally fucked. Chances are that will be those with the least political and economic leverage -- everybody can go vote, but retirees have a hard time retroactively withholding their labor. Although it's not quite that simple, as many of them may look forward to getting some small help from the kids.

On a related issue -- Brad you should post and comment on the article in the Sunday times on the impact of the switch from defined benefit to defined contribution corporate retirement programs on the wealth and well being of future retirees. the article implies that the wealth position and prospects for the next generation of retirees under defined contributions will be much worse than the past generation of retirees under defined benefit programs. The article implies that the swich has been a massive transfer of wealth from the middle class to corporate profits.

It looked to me like an article that should be discussed.

"The question is, "Can we afford it?" USA taxes are low compared to other countries including our neighbor, Canada. The money is there to pay for SS. It takes political will. As for health care, that requires getting more bang for the buck."

The answer is we cannot afford it. Any increase in taxes may increase the amount collected but it will also lower growth which will just make the problem worse. While it takes political will to increase taxes, it takes even more will to stand up to the Senior Lobby and the AARP who feel that they are owed these benefits by the younger generations. A solution that nobody seems to have talked about is to simply peg the age at which benefits can start to the average life expectancy. This will bring the program more in line with its intentions when it was created and will allow the program to automatically adjust to longer lifespans.

Two questions:

1) The article states that private accounts will not work but offers no proof. I think they would work.

2) If the private accounts won't work and no solution can be found, why not let people opt out of both SSN and Medicare? I would gladly quit both, the government can keep the thousands I have already paid in provided I don't have to pay any more and I will not get any handouts when I am retired.

Jim Glass wrote:

> age of ... income per ... median ... average
> head ....... member ...... wealth .... wealth
> 65-74 ..... $21,348 ... $146.5k ... $465.5k
>
> 25-34 ....... 19,547 ......... 9.0 ........
65.9 > 35-44 ....... 21,094 ....... 63.4
.......196.2
Great statistics. Comparing 1-2 member
households with 3-5 member households and
ignoring the fact that people pay off houses over
time.
So you're probably looking at lower household
income for the elderly, and the cost of their
residence locked up, and you are calling them
"rich"
Smooth.

You could cork for the American Enterprise
Institute.

The actuarial assumptions for earnings growth from SSA really don't seem to far off to me. They are identical to their assumptions for hourly productivity growth, adjusted for projections in changes to benefits (obviously, payroll taxes hit wages, not benefits - they don't project any change in the number of hours worked). They do take as their intermediate productivity assumption a number .1% below what they cite as the 40 year trend. They don't say why they do this, but it is fairly small, and unlikely to have a major impact on the projections.

The immigration assumptions are a bit more problematic. SSA does assume that immigration will drop to .9 million, but they cite current net immigration over the past few years at 1.2 million, not the 2.1 million that Brad cites. But the last few years have been high by historical standards, so it makes sense that they didn't use recent numbers to forecast in perpetuity. SSA immigration numbers match those of the USCIS (formerly INS), and they reduce those numbers by 25% to allow for emigration. Where is Brad getting his 2.1 million number, if not from the USCIS? Is net illegal immigration a lot higher than SSA thinks (they estimate it at around 400k per year for the last few years).

"Just what is supposed to happen in the next generation that will make America a less attractive place to move to?"

Well, for one thing, taxes will either go up or the acknowledged debt of the U.S. will go up. Don't count on fraudulent accounting to hide the problems of Social Security and Medicare forever.

But another phenomenon that is likely to make the U.S. a *relatively* less desirable place to live is that developing countries are generally increasing in desirability much faster than the U.S.

We could could count on Irish immigrants when there were potato famines in Ireland. We could count on Jewish immigrants from Europe during the 1930's. We could count on immigrants from communist countries around the world when communism was big.

Now Ireland's GDP is growing faster percentagewise than the U.S. Same with Mainland China and India. Western Europe hasn't had a war in 50+ years, and is unlikely to have one in the next 50 years.

Those are two reasons why immigration to the U.S. might go down in the next generation, and almost certainly will go down in the following generations.

Be careful what you wish for. FDR said that the payroll taxes were there to show that Soc Sec was not a welfare program. If the tax cap is eliminated, and benefits not credited accordingly, it's only a matter of years before Soc Sec is viewed as welfare and then someone will come along and "end welfare as we know it" - and that's not good. Social Security should be evaluated in its entirey - taxes and benefits. As a whole, it's progressive because the benefits are very progressive. Top earners technically get the worst deal. But it's not so bad when you know that there is a lifetime guarantee of a modest base income for yourself and that the program keeps most of the rest of the people out of misery.

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