Burnt Orange Report
News, Politics, and Fun From Deep in the Heart of Texas
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Burnt Orange ReportNews, Politics, and Fun From Deep in the Heart of Texas |
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December 14, 2004Social Security StuffBy Andrew DobbsI saw Nate's post on this earlier and I thought I'd throw in my 2 cents. I know that most Democrats stridently oppose privatization, and I can respect that position even though I'm not totally in agreement with it. Privatization offers a magic bullet kind of scenario in the long run- lower payroll taxes (which are the highest taxes 80% of Americans pay) and higher benefits. In the short run it might not be that great- hence Sweden's situation right now (you can't judge a major public policy after only 3 years of existence)- or it might go gangbusters (see Chile right after their program began, though it is shaky right now still in the short run relatively speaking). But in the long run it will perform very well- over a 20-30 year period the market in the US will always end up gaining. So for people that are in their 20s or 30s the program will be great- giving them 30-40 years to invest their money- but people in their 50s or 60s really won't gain from the system and might in fact lose a lot of money. That is why the switch should probably only be for people 45 or under and the rest should just stay in the system that exists now. But that entails massive transition costs, and from whence will those come? Bush wants to invest 10% of their income while 2.4% will be used for transition (payroll taxes are 6.2% for employees with their employers matching them with their own 6.2%). That will still leave a $2 trillion shortfall over the next 10 years. Bad bad bad. Our deficit is already $450 billion a year, hiking it to $650 billion would be disastrous. Of course, the increased investment might spur big business growth and higher tax revenues, but I hate that kind of budget writing. But the Cato Institute has suggested putting 6.2% into the current system and 6.2% into investment for young people, with more and more money invested as fewer and fewer people remain in the old system. They say it will have nominal transition costs, and if they are right such a program would be the best of all the worlds- small transition costs, a stable current system and a transition into a private system that will mean eventually lower payroll taxes, higher benefits and stronger business growth. So let's hope Bush pays attention to all of his options (though I wouldn't hold my breath). But there are reasonable reasons to be against these proposals I'll admit. Worrying about transition costs, the volatility of the market (though it is very stable in the longrun), the impact of brokerage fees and other legitimate worries abound. I think there are ways of ensuring all of these worries can be addressed by a system of private accounts, but it is easier just to stick with what we have. What is NOT reasonable and should not be acceptable is the position John Kerry had which is easily summed up as "do nothing." We know that Social Security is a train wreck waiting to happen just 20-30 years down the line. Yet when asked would he raise the retirement age, John Kerry said "no." When asked if he would lower benefits he said "no." And I don't think I ever heard him say that he would raise payroll taxes or raise the income rate at which the tax is levied. This position (or lack thereof, to be honest) is borne of overpaid, underwhelming consultants such as Bob Shrum getting $20,000 a month plus 15% of the ad buys to tell him the old "third rail" conventional wisdom. "John, John, its like I told Kennedy in '80- don't talk about Social Security," Shrum said. "But didn't he lose?" Kerry said. "Yeah," Shrum stammered, "but y'know, how can a Kennedy beat that Carter charisma?" Bush has obliterated the conventional wisdom. For two straight elections he has talked openly about radically changing Social Security, and he won both times. Democrats shouldn't be so trepidatious, and they need to be more honest. Without privatization we will have to raise the retirement age, lower benefits or raise taxes (either the rate or the base). Most likely a combination of all three will have to happen. So the Republicans want to take something of a risk and save the systm while keeping the retirement age at 65, dramatically increasing benefits and actually lowering the taxes while Democrats want to do nothing at first and then hastily raise the retirement age, lower benefits and raise taxes. Who's got ahold of the third rail now? Democrats should embrace privatization and should draw up an alternative plan that will keep the GOP honest. If we can create a solid system that will keep us from exploding the deficit, it promises to recreate American society and the American economy for the better. For the first time ever middle and working class Americans will have s serious stake in the workings of corporate America and corporate America's investors will be increasingly common people. Both sides will work for the improvement of the other, creating a more honest business environment and a more prosperous middle and working class. The program is a good one, and we of all people should be behind it. Posted by Andrew Dobbs at December 14, 2004 09:42 AM | TrackBackComments
I respect what you're saying here, Andrew, but on this issue I agree with Big Media Matt. Posted by: Charles Kuffner at December 14, 2004 10:47 AMWe know that Social Security is a train wreck waiting to happen just 20–30 years down the line.You're wrong here. Kevin Drum has a couple of nice discussions about this (here and here) but what is quite clear is that there have been predictions of a train wreck for many years now and what we see is that the predicted date of the wreck keeps moving. Take it from a government economist, economic predictions are an iffy business and when the government's predictions are consistently overpessimistic, one might not want to put too much stock in them. Posted by: Fight the Power at December 14, 2004 10:54 AM The rule of 72, if used here, says that our SS money will only double for dollars paid into the program before age 27. How do you expect to grow anything if you cannot get a better return than 2%? We need another direction. Securing a higher return is required to make any retirement account work. Spend what 8 to 10 Trillion now or 40 some Trillion later to fix this. Its like that 1986 Ford driving down the street, smoke coming out of the exaust. You think to yourself that shouldn't be on the road, but its still driving down the street. Do you want to fix the car or replace it? Fix it and you're still stuck with the 86 Ford. Replace it and now we're more fuel efficient and environmentally friendly, and you're proud to see the car on the street. Lets do something to get a higher return, maybe leave some of it to our offspring. You keep wishing, I'll keep counting. Thanks Fight the Power, I agree that the exact time frame is shaky. But the demographics are very clear- there will be more old people taking social security and fewer young people paying SS taxes and that adds up to a drain on the system. At the current rate of taxes and benefits, the system will eventually consume itself, leading to a massive crisis the likes of which we've never seen. Something has to be done to fix the system. Doing what we are doing now simply won't work. So things have to change. Why not create a system that gives people more money, more control of their tax dollars and lets them give some of it to their kids? The average American worker will have a more secure retirement and their kids will end up wealthier in the end also. My biggest fear, and I should have put this in the post but it was getting kind of long, is that with so many people with so much investment return we'll have a big inflation problem down the line. As an economist, what's your take? Posted by: Andrew D at December 14, 2004 11:37 AMAndrew, I'd encourage you to check out the following as you think more about this: December 7, 2004,"Inventing A Crisis" By PAUL KRUGMAN (NYT) Op-Ed 820 words. Late Edition - Final , Section A , Page 27 , Column 6. "Borrow, Speculate and Hope" By PAUL KRUGMAN. Published: December 10, 2004. (You can access both of these through the UT Library online once they migrate off the NY Times' free service) "It's not broken, so don't fix it" Mark Weisbrot, Center for Economic and Policy Research. Keep in mind that SS is not and never was meant to be a retirement fund. Also, there are serious questions (a la the great collapse of the dot.com boom in the late 1990s) about the wisdom of encouraging the untrained masses to fool around in the stock market, especially when there are no short-term consequences. My personal experience concurs. Back in the day when everyone and their mother got employee purchase plans and stock options, working in a high-tech company in Austin was like living on the trading floor. Every little rumor about something bad happening sent everone clamoring to log onto their e-trade accounts and sell off their stock. Before the privatization argument goes any further, there needs to be some serious discussion of 1) how the government plans to educate Americans about managing investments (and the scientific rigor of said strategies) and 2) the potentially devastating instabilities a huge influx of inexperienced investors could have on the U.S. economy. Posted by: sarah at December 14, 2004 11:42 AMActually, to put this issue into even better perspective, consider that Bush's 2004 campaign was the 3rd consecutive winning campaign to openly discuss partial privatization of Social Security. Of course, this means little to those who are already dismissive of the winning track record the first guy had in electoral politics. So be it. Posted by: Greg Wythe at December 14, 2004 11:45 AMGuys: I would remind everyone who is saying "there is no crisis so we can do nothing" that the government would and should prefer to avoid a train wreck that has a 30 or 40 or 50 percent chance of occurring, if at all possible. The problem is that we also would hope the government would not engineer a guaranteed train wreck. That is why I hope that the Democratic leadership puts together an alternative plan. I agree with Matt Yglesias about the "progress paradox" thing. And I think the Republicans are promising everything but the kitchen sink, and if they do that it becomes inevitable that the social security degenerates into a slush fund for middle-class, middle-aged hedonists. Do the Republicans have the balls to tell people no when they want to raid their accounts early to pay off their credit card? Probably not. After all, the GOP doesn't really want to save social security. But we do, and I think we have a responsibility for devising workable reforms and selling it to the American people as a responsible new covenant with the American people. Posted by: Jim D at December 14, 2004 04:23 PMAnyways, another thought: Because benefits are wage-indexed, saying that a problem does not exists because SSA's projections for GDP growth are "too pessimistic" doesn't get you very far. If GDP growth is higher than 1.6 percent -- and given the demographics, I think that's pessimistic but not excessively pessimistic, I think it's a responsibile estimate -- anyways, if GDP growth is higher, we will have a few more years, but eventually the growth in benefits (which are wage-indexed) will catch up with the higher revenues, and we'll be in the same boat. My guess is that long-run GDP growth will be about 2 percent, and the trust fund will run out of money in or around 2055. Just my gut feeling. I think there's a 30 percent chance it'll be worse and a 30 percent chance it'll be better. Posted by: Jim D at December 14, 2004 04:36 PMI have an idea about how privatization of Social Security might work: A worker could have an account ("ISSA") like an IRA-- choose his own brokerage (or other financial institution(s)) at which to hold it, choose whichever investment vehicle(s) (except certain high-risk ones) he wanted, and pay the brokerage fees for making the investment transactions in the account. However, the brokerage would merely be holding the funds for the Social Security Administration of the government. The worker would retire and start collecting Social Security, and take distributions, just like from his IRA. The government would still continue to calculate the amount to which the worker would be entitled every month, and the SSA (through the brokerage) would pay it out. There could be special rules for a worker who bankrupted his ISSA, like by buying all stocks that went bankrupt-- there would be some formula whereby his Social Security check would be reduced propotionate to his losses. Posted by: S. Friedman at January 7, 2005 07:33 PMPost a comment
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