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January 07, 2005

The Social Security Debate Once Again

Matthew Yglesias is thinking about the substance of Social Security, and about press coverage of the debate. On the substance, I think that it is worth stressing that there are two unrelated debates going on. The first is the size of the (conventional) Social Security system: should we have one that provides retirement benefits equal to roughly 20% of average wages, or 40%? The second is how and to what degree the government should grease the skids to make individuals fill their own private-account retirement savings. The substantive connections between the two debates are tenuous.

Matthew Yglesias: Supplemental Private Accounts: Another issue in the mix of hypothetical reality-based economic policies is should liberals support some kind of supplemental private accounts plan on top of existing Social Security. Brad Delong says yes... shift the psychology of the situation, which really should increase savings at the margin. Still, I'm skeptical.... The obvious way to increase national savings would be to not have the government borrowing hundreds of billions of dollars every year.... Something that seems more appealing to me would be something like the ASPIRE Act which could be financed through a modest national consumption tax (the tax would be mildly regressive, but the expenditures would be highly progressive, so it works out in the end) which would create a combination of positive incentives to save...

Matthew Yglesias: Not So Crazy: Yesterday, I wondered at some length whether John Sununu hadn't gone barking mad. Today, thanks to Delong, Minuteman, and Somerby that The New York Times just managed to completely misrepresent the Sununu plan. It's really just a more intense version of the Bush plan with a bigger carve-out and bigger transition costs. Still a bad idea, like the Bush plan, but not orders of magnitude more lunatic as Richard Stevenson described it. It would be nice to get accurate information from the newspapers and not need to rely on the blogosphere to find solid reporting.

More serious, it seems to me, is the staffing problem at the New York Times: the fact that Richard Stevenson does not know and has not bothered to learn the most basic features of the Sununu Social Security plan does not seem to be something that the New York Times editors care about. This is very bad.

Posted by DeLong at January 7, 2005 09:14 AM

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In its weird way, life must be kind of cool at the New York Times.

There are some negatives, of course. On the evidence, you have to be kind of an anal type, always making sure you have everyone's middle initial, and trying, more or less, to make your English conform to usage rules derived from Latin and classical Greek. This seems likely to lead to constipation.

But on the other hand, there seems to be very little actual work required. (Are there not press releases? Is there not cut-and-paste?) If you're an opinion writer, there is basically nothing you can't make up and phone in. (Witness David Brooks, still on the positive slope of the Google learning curve.) And the hard news folks, while unprotected by the Times's "anything goes" opinion policy, don't seem to be required to understand or communicate basic facts too often either.

The Public Editor is apparently a fictional construct of some sort, so there's little reason to worry about the readers getting through to anyone who could bother you -- and if they somehow do manage to get on your nerves, there's always the option to publish their names and addresses and let local compassionate conservatives practice their love.

If you have an underdeveloped conscience and no professional standards, it must be pretty nice to be a New York Times writer.

Posted by: "Dan Okrent" at January 7, 2005 09:58 AM

Paul O'Neill has interesting ideas on SS. He certainly does not agree with Bush plans. No wonder Bush fired him.


Posted by: bakho at January 7, 2005 09:58 AM


G.O.P. Divided as Bush Views Social Security


Many of the same Republicans have also come out forcefully against a proposal to deal with Social Security's long-term financial problems by reducing the part of future retirement benefits that would come from the government.

Their approach is embodied in legislation introduced in Congress by Senator John E. Sununu, Republican of New Hampshire, and Representative Paul D. Ryan, Republican of Wisconsin. Their plan would allow investment of 6 percent of the wages subject to the payroll tax and would not mandate across-the-board reductions in scheduled benefits.


What is the problem with this passage?

Posted by: anne at January 7, 2005 10:26 AM

And, Birnbaum at the Post confused 4 percentage
points with 4 percent. Are they just not concentrating?!

For Anne: For one thing, Stevenson's statement
you quote should point out that the 6% (he should
have said 6.2%,no?) would be the entire amount
of the employee contribution. That is half of
what goes into the trust fund for a given employee, ergo, he should damn well explain how the second part of the sentence will work.

Posted by: SEC Overreach at January 7, 2005 11:09 AM


Similarly, White House officials have made no secret that they are most comfortable with proposals that hold the size of the accounts to well below the 6 percent proposal in the Ryan-Sununu bill. They often point to plans like one developed in 2001 by Mr. Bush's Social Security commission that would allow lower-income workers to place up to 4 percent of their wages into their accounts, up to a cap of $1,000.

That dollar cap would also apply to people at higher income levels, though, meaning the percentage of their income they could invest through the accounts would be considerably less - barely 1 percent for someone earning $90,000.

Seeking to head off unhappiness among Republicans who want Mr. Bush to take the bolder route, White House officials have been emphasizing the importance of unifying behind whatever plan has the best chance of being signed into law.

Posted by: anne at January 7, 2005 11:17 AM

What Brad says here:

"More serious, it seems to me, is the staffing problem at the New York Times: the fact that Richard Stevenson does not know and has not bothered to learn the most basic features of the Sununu Social Security plan does not seem to be something that the New York Times editors care about. This is very bad.

explains in a nutshell why he would call himself a liberal and I wouldn't call myself a liberal. (Though I don't know what I'd call myself.)

Okay, Richard Stevenson can't be bothered to learn the most basic features of the Sununu Social Security plan. Why is this a problem? Why would the editors care? From what perspective is this "bad"?

Of course, Brad feels it's a problem because he feels the NY Times should provide accurate information to readers.

But why? Would the NY Times do that? It's a corporation. I don't know what kind of controlling interest the family owners have, but the corporation's objective is to make as much money as possible.

And the money comes mostly from advertisers, not readers. I believe the split is something like 80/20. Certainly its SO skewed that the Times, at least for a while, thought it could just give its writing away online if it didn't have to pay for printing, etc.

So the readers like us are not the NY Times' customers. We're the product it sells to its actual customers, the advertisers.

And the rule in any business is: the customers are always right. And since the customers are businesses, they have very little interest in helping readers get information. As Adam Smith said, of course,

"The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public."

So there's little to no pressure from the customers for editors and reporters to get it right. Think of it this way: if the Times' profits suddenly dropped by 80%, there would obviously be layoffs, restructurings, etc.

But were there massive layoffs, restructurings, etc. because of Judith Miller's heinous "reporting" -- probably one of the most shameful episodes in journalistic history? No. And that's because they didn't effect the bottom line. The customers didn't care.

So where Brad sees failure, I see success. The difference it that we're looking at different things. He's looking at atrocious reporting, I'm looking at gigantic profits.

Now, Brad might say he's canceling his subscription because the Times is so bad. But there aren't so many Berkeley economics professors outraged by incompetent reporting that the Times will have to drop their ad rates. That's the only thing that would get their attention.

Posted by: A Tiny at January 7, 2005 12:44 PM

We already have government subsidized private accounts on top of Social Security. I have a SEP IRA which allows me to put up to 15% of my income into a retirement account and not pay tax on that money, or on anything earned in the account, until I retire.

Posted by: kaleidescope at January 7, 2005 12:59 PM

Laura Tyson in Bidness Week


JANUARY 17, 2005

By Laura D'Andrea Tyson

Social Security Crisis? What Crisis?
Modest benefit cuts and revenue increases would solve the shortfall

Is the Social Security system facing a crisis? President George W. Bush certainly wants us to think so. Indeed, he recently warned that the "crisis is now." After years of repeated warnings by conservative political thinkers, the word crisis has become the mental frame that shapes the way many Americans think about Social Security's future. But as a recent Brookings

Institution book by Peter A. Diamond and Peter R. Orszag demonstrates, Social Security does not confront a crisis; in fact, its solvency for future generations can be ensured through modest benefit reductions and modest revenue increases.

To defuse the crisis hype it is useful to begin with a few facts. First, Social Security is a significant source of income for elderly Americans, providing the majority of income for two-thirds of elderly beneficiaries and all of the income for 20% of them. Second, according to the most recent report by the Trustees of Social Security, even under the cautious assumption that the U.S. economy grows at the anemic rate of 1.6% a year, the revenues into Social Security from the current level of payroll taxes will cover promised benefits for another 38 years and will be enough to finance about 70% of benefits through 2078. The net present value of the shortfall in revenues over the next 75 years is $3.7 trillion, only about one-third of the net present value of the Bush tax cuts of 2001 and 2003 and about 0.7% of gross domestic product projected for the same period. An immediate payroll tax increase of about 2% would eliminate this gap. So would paring the Bush tax cuts of 2001 and 2003 back by less than 50%, and transferring the added revenues to Social Security.

THIRD, THE PROJECTED financing gap in Social Security is not the result of overly generous benefits. Under current law, projected benefits are slated to fall from only 33% of previous earnings for an average worker of 62 today to a low 29% by 2030. And retired workers with low lifetime earnings as well as disabled workers and their families often live in poverty despite Social Security's progressive benefit formula. Any proposal to restore solvency through benefits cuts alone would require a 20% reduction in payouts in addition to the declines built into current law, sharply increasing poverty rates among future beneficiaries (assuming that the disabled and those presently 55 and older are exempt).

In contrast, Diamond and Orszag propose a plan that calls for modest cuts in overall benefits, some improved treatment of the most vulnerable categories such as workers with low lifetime earnings, and a gradual increase in the combined employer-employee payroll tax rate from 12.4% today to 13.2% in 2035 and 15.2% in 2075. Benefits for the average worker aged 45 today would be cut by about 1%, and for the average worker aged 25 today by about 9%, relative to currently scheduled benefits. However, the level of inflation-adjusted benefits would continue to rise.

A major lesson of this analysis is that Social Security can be put on a solid financial footing without dramatic change. In contrast, President Bush is using the specter of an impending crisis to justify allowing workers to divert up to 4% of their payroll taxes into private, individually controlled retirement accounts. This would reduce payroll tax revenues available to cover promised Social Security benefits by as much $2 trillion to $4 trillion, transforming an imaginary crisis into a real one. The Bush Administration has recently indicated that it plans to finance these transitional costs of creating private accounts through additional government borrowing. But the amounts involved are as much as an added $100 billion a year in government borrowing for the next decade, rising to $350 billion a year after 20 years. Additional borrowing of this magnitude on top of already large government deficits could spook global investors, triggering sharply higher interest rates on U.S. government debt and a collapsing dollar. But President Bush has been silent about the possibility of such a crisis. He has also been silent about the fact that individual accounts would require paying financial management fees that could amount to more than 25% of Social Security's current 75-year funding gap.

For nearly 70 years, Social Security has provided all working Americans with a basic level of income protected against inflation, financial market fluctuations, not to mention the risks of disability, losing a family wage-earner, or outliving one's assets. With a few modest changes, it can continue to deliver this remarkable security. There is no crisis.

Laura D'Andrea Tyson is dean of London Business School

Posted by: David at January 7, 2005 01:13 PM

A related issue; what portion of retirement plans should be in the form of annuity.

Private annuities are not a very good deal at present; you pay quite a bit more than net present value to get a given fixed annuity payment. If lifetime guaranteed earnings are important, then many people would need to replace a portion of their current retirement savings with a low-risk means of getting the desired level of annuity insurance.

Efficient inflation-adjusted annuities are harder to find than fixed annuities.

It seems that for many or perhaps most people who have adequate personal savings, any shift to allow private investment accounts under Social Security should result in a shift of the savings outside private SS to rebalance their plans.

If they had 60% allocated to equity, 30% to bonds, 10% to money before; they might switch that to 50% equity, 35% bonds, 15% cash after.

But for every dollar they put in to a private account, they'd lose the treasury bond yield plus, well, Dubya's not negotiating with himself, but I think his evil twin leaked plus 7/10ths of a percent from guaranteed benefits.

That means you'd effectively have a margin loan where you exchange a pretty big chunk of your guaranteed SS annuity for a personal managed account. But you wouldn't really want to change your balance of assets much if at all, so you'd be chasing a higher return while at the same time protecting yourself from risk.

And then you get hit for 10% to 20% to convert whatever you wind up with to an annuity, and hope inflation isn't too bad or that you don't live too long.

Seems that for many or perhaps most people who have reasonable savings outside of Social Security, if we've got the scale of SS annuity benefits approximately right, there would be a negative incentive to accept a private account instead of a large group, low overhead, inflation adjusted annuity.

Posted by: Charlie at January 7, 2005 02:52 PM

Brad -- specifically what did Stevenson get wrong? You do realize that there aren't any benefit cuts in the Sununu plan, yes?

Posted by: Victor at January 7, 2005 03:08 PM

Brad asks whether we should have a system that provides retirement benefits equal to roughly 20% of average wages, or to 40%?

I am quite confused about where these percentages are coming from. My understanding of the Average Wage Index is that this is the average wage that would have been earned by a hypothetical full-time worker, not the average wage that was actually earned given that many people work less (or more) than fulltime or haven't worked for the full 35 years.

What is the definition of "average" in the term "average retirement benefits"? Is it the actual average or what the hypothetical full-time worker would receive?

We read that the current average check, including payments to spouses and survivors, is something like $900 a month. I assume that this is the actual average computed by dividing the total payment by the number of people who get checks. $900 per month is around 30% of the 2003 Average Wage Index of $34065 per year.

On the other hand, a person born in 1940, who earned the indexed equivalent of the year 2000 Average Wage Index amount of $32154 for 35 (or more) years, would get a monthly retirement income of about $1200 (plus possibly some spousal benefit) which is about 45% of their actual year 2000 salary. (Wage indexing stops at age 60 even if one's salary increases so it's not quite clear what the denominator should be here if they continue to pay in until age 65.)

(The current formula for retirement income is 90% of the first $592 of Average Indexed Monthly Earnings plus 32% of any amount over $592 but less than $3567 plus 15% of any amount of $3567.)

However, the progessive nature of SS means that a person who earned above the Average Wage gets a smaller per cent of their income. For example, a person born in 1940, who earned just at the maximum taxed earnings each year, would get a monthly retirement income of $1820 or 29% of their year 2000 yearly salary of $76200.

And, of course, someone who earned more than the maximum gets an even smaller per cent if we used actual wages rather than covered wages in the

Posted by: SusanJ at January 7, 2005 03:39 PM

"In contrast, President Bush is using the specter of an impending crisis to justify allowing workers to divert up to 4% of their payroll taxes into private, individually controlled retirement accounts."

Geez, if even Laura Tyson bungles this, is there any hope? Repeat after me: the proposal is 4% of pay, not 4% of payroll taxes.

Posted by: joe at January 7, 2005 04:06 PM

It is worse than bad. I fear the press is lost. All we can do now is ridicule them and hope we don't get arrested.


Posted by: Aaron at January 8, 2005 11:51 PM

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