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March 23, 2005

Daniel Gross on Social Security and Income Insecurity

A very nice piece by Daniel Gross, taking off from Gosselin, Moffitt, and Hacker. He gets bonus points by citing the extremely smart and thoughtful Raj Chetty:

The New York Times > Business > Your Money > Economic View: Social Security as Dramamine, by DANIEL GROSS:

President Bush's plan to transform Social Security from an insurance program that guarantees a minimum income into something more closely resembling a 401(k) investment program isn't going very well.... [E]conomics could help explain the public's reluctance, too.... As we learn more about income volatility in the information age, some scholars say, Social Security - an insurance program designed for the industrial age - may be even more essential.

Income volatility has long been a hallmark of the American economy.... [S]cholars have concluded that incomes are much less stable - i.e., much more volatile - today than they have been in the past. 'There has unequivocally been general upward-trend income volatility since at least 1975,' said Bruce A. Moffitt, the Krieger-Eisenhower professor of economics at Johns Hopkins University.... According to a measure of volatility constructed by Jacob S. Hacker, a Yale political scientist, which tracks the five-year moving average of family incomes, income volatility rose 88 percent between 1978 and 2000.... A series of articles last year in The Los Angeles Times, written by Peter G. Gosselin, who worked closely with Professor Moffitt and other scholars, reported that in the 1970's, income for middle-class Americans tended to fluctuate by 16 percent a year. But in the 1980's and 1990's, middle-class incomes fluctuated an average of 30 percent. For those whose earnings placed them in the bottom fifth, income volatility rose from 25 percent in the early 1970's to 50 percent in recent years....

[I]ncome volatility can wreak greater havoc now than it did in the past. 'The old view among economists was that income volatility didn't affect consumption much,' said Raj Chetty, an economist at the University of California, Berkeley. It was generally thought that when families' incomes fell sharply and unexpectedly, they would borrow, tap into savings or send a second adult (frequently a mother) into the work force rather than sharply reduce consumption. But, Professor Chetty said, 'that no longer seems to be the case today.' Why? Many families already rely on two incomes. What's more, fixed commitments have risen as a percentage of total income....

THE factors that functioned as internal shock absorbers for families have weakened. And so, too, have external buffers. Over the last three decades, the percentage of workers covered by defined-benefit pension plans and employer-provided health insurance - guarantees that provide ballast for fluctuating incomes - has declined. Add this to the trend of rising volatility - especially for people in the lower and middle income levels - and it's easy to understand the reluctance to transform a government program that guarantees seniors an income. 'Social Security provides a vital kind of insurance,' Professor Hacker said. 'The real issue lurking behind this debate is whether we should have a program that provides the bedrock protection against economic risk.'

Posted by DeLong at March 23, 2005 01:11 PM