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December 16, 2004

Questions to Ask Social Security Planners

David Wessel has questions people should ask Social Security planners:

WSJ.com - Capital: Private accounts alone will not destroy Social Security as we know it, despite claims from some. But private accounts alone won't save Social Security either, despite claims from others.... [H]ere are four tests for judging Social Security fixes.

Does the plan for Social Security increase national saving? The American people, businesses and government don't save enough... the U.S. as a nation needs to save more. The surest way is for the government to "dis-save" less, as economists awkwardly put it. Translation: Shrink the budget deficit (Don't take my word: Alan Greenspan says so). A Social Security change that reduces American savings is a bad idea....

Does the plan plausibly match projected tax receipts to promised Social Security benefits over a long time? Underneath rhetoric about "modernizing" or "protecting" Social Security is a fact: Lengthening lifespans and the impending retirement of the big baby-boom generation require that more money be pumped into the program or less money be pumped out....

Who wins? Who loses? Each arithmetically sound plan to shore up Social Security is different....

Can the proposal for Social Security get through Congress? Fixing Social Security to make it sustainable is a lot easier than doing the same for Medicare. Lots of Social Security plans add up. But the point is to find one that gets broad enough political support to get enacted. Senate Republicans warn they're not walking the Social Security plank unless some Democrats walk with them. If Mr. Bush strives only to please true believers in private accounts and Democrats strive only to please those who find private accounts in all forms abhorrent, we'll have a great debate and no solution.

That would not be a good outcome

But there is a fifth question that David Wessel should have told people to ask: Daniel Davies's question:

Can anyone... give me one single example of something with the following three characteristics: (1) It is a policy initiative of the current Bush administration. (2) It was significant enough in scale that I'd have heard of it (at a pinch, that I should have heard of it). (3)It wasn't in some important way completely f***** up during the execution?

As one former CEA staffer said to me: "Think of the farm bill. Think of the Medicare drug benefit. Think of the steel tariff. Now expand that to the size of Social Security..."

Posted by DeLong at December 16, 2004 03:16 PM

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» Prediction concerning Social Security Reform from Mises Economics Blog
"Think of the farm bill. Think of the Medicare drug benefit. Think of the steel tariff. Now expand that to the size of Social Security..." Says says a former Council of Economic Advisers staffer to Brad DeLong on the likely... [Read More]

Tracked on December 17, 2004 01:42 PM

» Prediction concerning Social Security Reform from Mises Economics Blog
"Think of the farm bill. Think of the Medicare drug benefit. Think of the steel tariff. Now expand that to the size of Social Security..." Says says a former Council of Economic Advisers staffer to Brad DeLong on the likely... [Read More]

Tracked on December 17, 2004 01:46 PM

» Prediction concerning Social Security Reform from Mises Economics Blog
"Think of the farm bill. Think of the Medicare drug benefit. Think of the steel tariff. Now expand that to the size of Social Security..." So says a former Council of Economic Advisers staffer to Brad DeLong on the likely... [Read More]

Tracked on December 17, 2004 03:01 PM

» Social Security Reform from CommonSenseDesk
Where to begin? [Read More]

Tracked on December 18, 2004 10:01 AM

Comments

it doesn't meet the "policy" element of no1 but BushCo ran a pretty good campaign.

Posted by: Anonymous at December 16, 2004 05:03 PM


Brad:

Let me offer you an alternative to the Bush plan.

As part of the giant bargain of the Social Security reforms in 1983 all working Americans agreed to contribute more to the Social Security System than is required to pay benefits. We did this in order to build up a trust fund. This has been our way of saving for the future and is exactly like a large, shared, communal savings account. These excess contributions are what have allowed Social Security to run a surplus.

This surplus money is held by the government for our benefit in the form of bonds us as the social security trust fund and at the beginning of 2004 the government was holding in our communal savings account $1.5 trillion.

The actuarial report for Social Security says that this communal savings account will not need to be used until the year 2018, until then current taxes will pay all current benefits.

The excess of social security taxes over payments will be $200,000,000,000 for each year from 2005 through 2018.

The conservative CATO Institute reports that since 1926, the average real rate of return on the stock market has been 7.56 percent.

So, the alternative plan would be:

1. Have the government sell our bonds on the open market and then invest the money in an index fund like the Vanguard S&P 500 fund. At 7.56 percent return we would earn $113,400,000,000 the first year.
2. The current overpayment from social security taxes is $200,000,000,000 and we would add this to the index fund each year for the next 14 years.
3. If we simply kept the profits in the stock market each year for the next 14 years (2005 through 2018) that value of the account would grow to $8,877,590,914,470.
4. This simple change is more than enough to cover the projected shortfall of $3.7 trillion in the Social Security System.

The advantages of this plan are:

The government would do the investing in one single account, instead of 80,000,000 separate accounts, thus saving all those separate management fees. This would save the system $140,000,000,000 (80,000,000 accounts paying a management fee of $125 per year for 14 years.)

Our $1.5 trillion would be investing as capital to grow the economy.

We would not need to cut benefits or raise the retirement age.


John Otti
johnotti@earthlink.net

Posted by: John Otti at December 16, 2004 06:14 PM


My mother, who works for the SF Fed, sent me this article this morning. Here's how I responded:

Hi Mom,

I call BS. First, he glossed two pretty huge issues--transition cost and transaction/overhead costs. Then, he outright ignored the issue of variance. Finally, he made a completely erroneous statement:

If Mr. Bush strives only to please true believers in private accounts and Democrats strive only to please those who find private accounts in all forms abhorrent, we'll have a great debate and no solution.

That would not be a good outcome.

Really? I would take that outcome in a heartbeat. The SSA traditionally underestimates GDP growth in its predictions. Today, the estimated doomsday of SS is 38 years away. Guess what the doomsday of SS was 10 years ago. It was 35 years away. So, it appears that they're forecast 10 years ago was off by 13 years. Each year, the doomsday year roughly increases by a year. So, if past behavior is an indicator of future behavior, then SS is fine forever. Even if it isn't and it has a problem then we could borrow a little to fix it. That seems to be the preferred solution for the general fund. So why is it so horrible for the SS Trust?

If Bush wants to tinker with the income cap on payroll taxes or the average wage index, so doomsday no longer exists, then fine. I'm game. But, if they want to drop 6 to 12 years of tax revenue in national debt, then every economist in the world should be blasting them for their insanity.

Love,

...

I really shouldn't talk to my mother like this.

Posted by: blank at December 16, 2004 09:30 PM


would the Kolbe-Stenholm bill for privatizing SS be any good plan? (http://www.house.gov/kolbe/socsecurity.htm)

Posted by: andyw at December 17, 2004 09:31 AM


Brad,

This touches on an excellent point. I've said to many people before what you've said: the Bush administration won't have people who know what they are doing - Mankiw or Porterba, for instance - do this. PGL over at Angry Bear agreed, saying that it will be hacks like Lindsay and Kudlow.

All of which raises the question, why? I've gone back and forth between questionin just why Bush does some of the things he does. I like to settle with the idea that he's just misguided on some fronts, and thus, if he did screw something up, it wouldn't be on purpose. But then, he does it very often, and while he may not like to admit mistakes, surely he has to realize he's made them...right? Who knows! Now I have to ask, if he's not intent on destroying the system, why not have people who actually know what they are doing try to fix what problems there are?

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