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December 14, 2004

Social Security: Wait and See

Matthew Yglesias joins the "wait and see" crowd on Social Security:

Matthew Yglesias: The $11 trillion long-term Social Security deficit we've been hearing so much about lately -- and that pundits have been screaming about since, quite literally, I was one year old -- are based on a prediction that the economy will do significantly worse in the future than it has in the past. If this is right -- which it may be -- then the stock market will do worse, too, and solve nothing. Changing the underlying assumptions, which is what the privatizers are really doing, solves the problem on its own without any changes to policy.

Part of the Social Security Trustees' pessimism is warranted and based on the idea that population growth will slow down in the future. Demographic projections are never perfect, but demographers have gotten pretty good at making estimates, so this probably will happen.

Much less reasonable are the Trustees' assumptions about productivity growth. They say that after growing 3.8 percent in 2002, 3.4 percent in 2003, and 2.7 percent in 2004, productivity growth will crash to 1.8 percent in 2005 and then slowly decelerate to 1.6 percent by 2012. After that, growth will average 1.6 percent until the end of time. The historical table at the top of the Web page on which this prediction is to be found shows that productivity growth averaged 1.7625 percent from 1960 to 2000. Since 2000, annual productivity growth has averaged 2.75 percent. The postwar years up to 1960, not included on the chart, saw faster growth than did the 1960-2000 period.

The important thing to note is not that the Trustees are necessarily wrong but, simply, that it's silly to pretend to think a panel of government accountants can predict economic events in the year 2037, much less offer a full 75 projection of the future course of the American economy. The trustees might be right: An aging society might prove less innovative and less productive than the America we've come to know. If this is true, Social Security is going to have a problem. So will the stock market. So will the Defense Department. So will just about every aspect of the American government and economy. And if that happens, we'll have to figure out how to respond, ideally by coming up with policies that will boost productivity and get us out of the jam. If we can't do that, we're all going to need to tighten our collective belts -- not just on retirement security, but on all aspects of our lives -- compared with the rapid growth we've learned to expect.

In the meanwhile, we can focus on problems that we do have: a war on terrorism, a large general fund deficit, an inefficient health care system, and a decaying infrastructure. This is how we deal with other areas of public policy. We don't look at the growth in defense spending over the past few years, project it forward, compare it with the tax revenue we can expect under dubious economic assumption, and worry that we may go bankrupt in 2043. Instead, we ask if the size of our military is suited to our present defense needs, and we see if we can't mobilize the resources we need. If we can get by with spending less in the future, we'll spend less. If the economy is too weak to afford what we think we need, we'll have to revise our grand strategy to suit our means.

In the context of a media outcry for politicians to show "courage" about tackling entitlements, "wait and see" sounds cowardly and timid. But it works for everything else, and it's not as if we have no current problems to worry about in place of how to cope with a hypothetical decades-long economic slump that doesn't begin until 2012.

After all, it's not as though we don't have important real problems--many of them self-inflicted by the Bush administration.

Posted by DeLong at December 14, 2004 08:13 AM

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» Ask and you shall receive from Silent E
Yesterday, I asked Whither Medicare? Today, Kevin Drum answers. ... And he's not the only one. Matt Yglesias also mentions it in his Prospect column on Social Security, quoted at length by Brad DeLong. That's a good start [Read More]

Tracked on December 14, 2004 01:11 PM

» Ask and you shall receive from Silent E
Yesterday, I asked Whither Medicare? Today, Kevin Drum answers. ... And he's not the only one. Matt Yglesias also mentions it in his Prospect column on Social Security, quoted at length by Brad DeLong. That's a good start. [Read More]

Tracked on December 14, 2004 01:20 PM



The size of the type and the lack of sharpness make reading the post awful.


Posted by: anne at December 14, 2004 08:53 AM

Gee anne, there's no pleasing you - weren't you complaining about how large the type was last week?

Posted by: fatbear at December 14, 2004 09:05 AM

The whole thing is really rather bizarre. Since when do we worry about things that are going to happen in 40 years? We're not worried about climate change, running out of energy, loose nuclear materials, national debt, or the plain old 400 billion dollar deficit. And yet we're supposed to drop everything and perform heroic surgery to prevent a "crisis" predicted for 2042. Give me a break!

Posted by: wvmcl at December 14, 2004 09:10 AM

For an ordinary person who reads their home-town paper beyond the sports section some mornings and watches local and national TV news most nights, it IS as if we don't have important real problems.

And that's one of them.

Posted by: Guy at December 14, 2004 09:13 AM

Of course, you have evidently solved the posting problem. Terrific. Now all we need is proper size and sharpness and the lovely blog is there for all of us again. What a struggle. Thank you, Dear Brad.

Posted by: anne at December 14, 2004 09:15 AM

"It's silly to pretend to think a panel of government accountants can predict economic events in the year 2037, much less offer a full 75 projection of the future course of the American economy." He is absolutely right, and this goes to the core of the whole issue. One root of the problem is that one thing we can predict accurately a few decades in advance is age-group demographics, and that tempts people into overanalyzing this into the relatively remote future. Social Security is ultimately a pay as you go old age benefit with certain persion-like benefit calculation features, and so must reevaluated as time goes on. The trust fund stabalizes the program but doesn't change its ultimate nature. To discuss whether it will go broke in 2040 ultimately makes no more sense than arguing whether the defense budget or federal disaster relief are destined to go broke in 2040.

Posted by: Ken at December 14, 2004 09:28 AM

To me, the real issue is why Social Security suddenly jumped to the top of the Bush administration's domestic "problem" priority list.

Is it at all possible that there are more pressing problems, such as the fubar American health care/health insurance system?

When your doctor visits all take place after 10-hour waits in hospital emergency rooms, chances are you won't be around long enough to worry about whether that first Social Security check arrives.

Posted by: loid at December 14, 2004 09:39 AM

I hate these mealy-mouths like Matt who say that we're not dealing seriously with the real problems that we have today. After all, we're going to fry Scott, aren't we?

Posted by: joe at December 14, 2004 09:44 AM

Brad, I'm with Anne on this one. PLEASE restore the black type and larger font. Some of your readers are over age 50.

Posted by: MaryLou at December 14, 2004 10:00 AM

Why is there very little mention that FICA taxes are regressive? Matt is right that we have a "National Debt" crisis, not a Social Security crisis.

Posted by: fasteddie at December 14, 2004 10:04 AM

Matthew Yglesias makes many excellent points, some I was trying to make a week ago in a posting. In particular it seems crazy that we have a “crisis” based on one of three projections by the actuaries of the Social Security Administration that use assumptions inconsistent with idea that the recent tax cuts will help the economy grow faster so we can pay for the current deficits.

The issue is, however, that there is a belief that the falling participation rate means “something” needs to be done. It is obvious that a privatization plan will come out of Congress this year. The question for thoughtful people is what can be done to influence the outcome to derive some benefit in both the short and long term?

Posted by: Sam Williamson at December 14, 2004 10:21 AM

This manufactured crisis needs a response. Mine has been to buttonhole the younger generation and ask them if they're prepared to take in aging and ailing baby boomer parents. That's the way it was before SS and if Bush gets his way it will be that way again. Ahh, the good old days of destitute parents moving in with the kids. Maybe this is what Bush means by "family values," cause it's going to cost families plenty to take care of the oldsters.

Posted by: dd at December 14, 2004 10:50 AM

Why don't those of you dissatisfied with the text size enlarge it on your browser, instead of asking Brad to enlarge it in his MT settings? On IE go to View --> Text-size --> Larger or largest. On Firefox... well, I'm not sure off the top of my head, 'cuz this computer doesn't have it, but on Netscape 7.1, go to View --> Text Size --> 150% or 200%. Or with Opera there's a pull-down menu right to the right of the URL bar that allows you to select a larger view-size.

I posted views of yours on the blog that I remember reading but couldn't find, about projections that the current Schumpterian boom would run out of steam in 2015 or something like that. Or maybe I read them in Peddling Posperity. Or maybe it was the Dark Elf King's macroeconomics advisor-on-call who told me via ethereal telepathy. Do you remember any such post, Brad?

Posted by: Julian Elson at December 14, 2004 10:51 AM

I am both pleased and distressed to see that you are all missing the point. I'm pleased because you are taking this seriously and thinking substantively. I'm distressed because you are doing what the Bush administration wants by focusing only on the substance when the politics are the key.

This White House won't get much political benefit from this change, but the Republicans will have removed for the next four decades one of the most troubling problems they have ever faced.

Democrats will no longer be able to conjur up Social Security and that means they will have fewer big issues on which to differentiate themselves. And what's left will mostly play to the Republicans' strength.

This is clearly a Karl Rove initiative to keep the Rs in power. It has nothing to do with increasing retirement income.

Posted by: policywonk at December 14, 2004 11:00 AM

Well said policywonk. The cause is already lost as everyone is referring to social security as a retirement plan when it is actually meant to serve as insurance. They want us to trade our insurance policy for an investment. Apples for oranges. Don't insure yourself, just put some money in the market and hope. And the scary thing is people are going to like it. They will get their statement every quarter that shows their money in their account.

Posted by: Jason at December 14, 2004 11:30 AM

If Social Security is an insurance scheme, why are all Americans -- even the rich -- covered?

Posted by: JT at December 14, 2004 01:03 PM

Insurance should be available to all.

That said, my conservative estimate of $19B additional a year if the cap on SS Tax is removed would go a LONG way toward extending the solvency of the system. Even if it would mean a few more dollars out of (several of our) pockets in the short term.

Posted by: Ken Houghton at December 14, 2004 01:11 PM

"If Social Security is an insurance scheme, why are all Americans -- even the rich -- covered?"

Because that way you provide a welfare entitlement to poor seniors without calling it welfare. After all, they've been working to pay into the system for 45 years. The first stop after retiring shouldn't be a county office to go on the dole. You preserve their dignity, and you preserve broad public support for the program. Social Security has, in that regard, fared far better than other social insurance schemes.

Posted by: Silent E at December 14, 2004 01:17 PM

Everyone is covered by SS to prevent anyone from being a burden on society. I look at it like a mortgagor who requires a homeowner to carry insurance or a state that requires all drivers to be insured. My worry is that people are going to end up at retirement age without significant or predictable cash flow. Look at middle class boomers who haven't saved and would be in trouble without SS. Without SS as it is today, a person could do everything right their whole life and still end up losing everything and being destitute. We should insure everyone against that possiblity. SS reform, in my opinion, should focus on how to do that more efficiently.

Posted by: Jason at December 14, 2004 01:25 PM

Start saving as much as you can now, no matter what your age. Live frugally, like ordinary people did seventy years ago. Remember, Karl Rove hankers after the age of William McKinley. If you can handle a little risk, invest for the short term in yacht makers and Gucci and Neiman Marcus. Buying some gold might not be a bad idea (not for dollars at the moment); there may be a socialist revolution coming down the pike. If our democratic system works the way it has for the last hundred years or so, it won't be violent, but one's confidence begins to slip . . .

Posted by: Invigilator at December 14, 2004 05:01 PM

"The [small] size of the type and the lack of sharpness make reading the post awful." laments Anne.

"Gee anne, there's no pleasing you - weren't you complaining about how large the type was last week?" proclaims Fatbear.

If I may delicately mention the Middle Path in Anne's defense, though I don't think it specifically names Right Type as leading to insight, wisdom, knowledge, etc. ;)

Posted by: Dubblblind at December 14, 2004 06:22 PM