Asymmetrical Information

Jane - interesting to see that you favor doing something sooner about global warming.

As I recall, your previous posts on this topic argued that truly doing something about it would require huge reductions in energy usage, with devastating effects on global economies. So do you think we should take such steps nonetheless?

There is a difference between the problems of environmental damage and changing age demographics.

As countries increase their per capita GDP, they spend more resources on reducing their environmental damage, but the age demographic problem gets worse.

If the solution to global warming is to reduce economic output, there will be fewer resources allocated to reducing environmental impact, and the issue will be exacerbated.

You are comparing social security to global warming? The computer studies used to predict the temperature 100 years from now can't get it right for a week from now. Using data from 100 years ago, they don't get it right for today. We should cripple our economy based on that?

Demography on the other hand is a fairly proven science. (It is far less complex than climatology.) Actuaries accurately predict things all the time for insurance and retirement costs. We know in 2018 that social security is going to become a drain on the government under current conditions. There is nothing but wild eyed speculation about what is happening with the climate and no proof that we are anywhere out of the normal cycle for the planet. I would point out that Mars is apparently warming and obviously we aren't causing that.

As an aside, my favorite climate projection is the hockey stick. Nothing much happens for decades then a big spike. Completely nonfalsifiable for the next 100 years. In other words completely useless as a theory.

A close second is that global warming will cause global cooling. Then no matter what the temp does, the theory is proven. (And every summer and winter it is.)

Finally even if we need to do something about global warming eventually, what new technologies will we have fifty years from now? I don't know and neither does anyone else. It seems safe enough to punt on this until warming true believers can actually predict something beforehand and prove they have a clue. At that point it may well be cheaper to deal with using future tech and more likely will never have to be dealt with at all because this is the same crowd that was ranting about the coming ice age in the 70s.

Money on the other hand is money. If I give you 6% compounded annually, I can tell you exactly how much your initial deposit will be worth 100 years from now and at any point in time we can stop and see if I am right. Far better basis for making the countrys long term financial decisions.

CAL

Speaking of the "hockey stick..."

http://www.technologyreview.com/articles/04/10/wo_muller101504.asp

This is wrong on so many levels, I don't know where to start.

Most serious liberals aren't saying "ignore Social Security until the absolute last minute." Drum, DeLong, and the like are instead saying:

1. The Social Security crisis is largely overblown. According to CBO forecasts, the Social Security deficit will slowly increase to 1.8% of GDP by the year 2100. There are far more serious problems that should be attacked first, such as that we are currently running general fund deficits of 5% of GDP, or the downright frightening forecasts for Medicare and Medicaid.

2. Fixing Social Security is relatively easy, requiring fairly modest tweaks in either revenue or expenditures, or both.

3. The "doomsday date" in which the Social Security Trust Fund runs out has been repeatedly pushed back. With vigorous economic growth, it will be pushed back further, and it is possible that will never occur at all. (I will leave it to the economists to discuss the implications of defaulting on the Trust Fund. However, I think this should be the first question that should be answered before we begin any reform.) We should wait until we have a clearer picture before we act. How about we revisit the issue in 10 years?

4. While we have yet to hear the details of Bush's Social Security privatization plan, liberals suspect it will do little to nothing to solve the long-term problems of Social Security, while introducing all sorts of new problems. Max Sawicky has asked for the economic figures which justify the returns on the stock market that privacy advocates assume which don't also implicitly fix Social Security's long-term funding problems.

Fundamentally, this all comes down to liberals being highly suspicious of the true motives of Social Security reform advocates. This is exacerbated by people using "scare figures" such as selectively quoting the number of workers per retiree. If the long-term elimination of Social Security is their true goal, politicians should have the guts to admit it.

It's become the habit of what passes for liberals these days to insist on waiting until there is a truly collossal crisis before they claim to be willing to act.

This was certainly true with the Iraq campaign, where -- because they saw no "imminent" threat -- there was no reason to intervene.

Roderick,

While the fact that you ignored every substantive point I made and changed the subject speaks volumes, it must really bother you that the liberals were proven right about Iraq not posing an "imminent" threat.

No but Drum and some others are saying don't reform SS now, but delay it and make the situation worse. SS has to be reformed either now, 20 years and 40 years from now. The longer we wait, the tougher the fix is.

As for 'easy fixes' to SS, you're faced with cutting benefits and a tax increase. That delays the problem instead of solving it. Plus a payroll tax increase of over $40 billion a year is hardly modest.

I think I agree with Roderick from the other side. "Time gets rid of some problems, but it makes others...worse," is every bit as prescriptive as noting that "sometimes it's sunny, and sometimes it's not." The questions to be answered are (a) is there a problem with Social Security, and (b) if there is, are the proposed solutions likely to make things better? In the absence of clear evidence regarding (a) and (b), you might look to secondary evidence like the credibility of the people on either side of the issue.

So, has either side (1) ginned up evidence, through malice or incompetence about a "coming danger" ("I"), (2) proposed happy-go-lucky silly solutions that make the mindless feel virtuous but which are in fact on-their-face idiotic ("I-R"), (3) implemented their policy proscriptions so badly as to make a bad decision worse ("I-R-A"), and (4) in general, taken a non-situation and turned it into such a mess that every thoughtful person now wishes we'd sat on our hands instead ("I-R-A-Q")? All of which can be distilled to the D-squared judgment criteria (paraphrasing): has this Administration ever done anything important that it hasn't screwed up royally?

Yo, SCMT: Decided my counter-offer wasn't worth it?

Steve: this is the first I've heard of selective quotes for worker-to-retiree ratios. What do you think are the most accurate numbers?

Klug,

I was primarily referring to those who like to state that when Social Security was created, there were over 40 workers for every beneficiary, and there will soon be 2 workers for every beneficiary, implying a crisis of epic proportions. What they fail to note is that, IIRC, there are currently about 3.3 workers for every beneficiary, and Social Security is running ample surpluses. I tend to believe the former statement is either used out of ignorance or in a deliberate attempt to foment fear.

Hope you enjoy the East Coast blizzard next week...

While snowbound, read some global warming skeptics. Science advances by shattering 'consensus,' not enforcing it. Climate changes constantly, and it has always done so. It's impossible to discern any anthropogenic effects from the background. And it's incredibly cost ineffective to 'do something.' You should know that better than most people. Look at the economics of Kyoto.

Deferral is not a good strategy for problems of these potential magnitudes. Time gets rid of some problems, but it makes others, like demographic crises and cumulative environmental damage, worse,

Agreed, but in both cases the solution is gradual rather than radical change. Gradual change can be adjusted as conditions merit.

We know in 2018 that social security is going to become a drain on the government under current conditions.

So what? Social Security is currently relieving the gov't & the economy of larger public borrowing.

Money on the other hand is money. If I give you 6% compounded annually, I can tell you exactly how much your initial deposit will be worth 100 years from now and at any point in time we can stop and see if I am right. Far better basis for making the countrys long term financial decisions.

Yea but who is going to do that? A bank? Which bank will guarantee interest rates for 100 years? Which bank can you be sure will stay solvent for 100 years? A bond? How can you be sure the coupon payments you receive can be reinvested at 6% for the next 100 years?

The science behind global warming has moved beyond 'wild speculation' but I agree it has not yet established itself as proven. So if you think the science has only established global warming with 10% certainity then invest a modest sum today trying to move away from greenhouse gasses. If it turns out to be false, the loss will be manageable (we seem to have done quite well after tossing hundreds of billions into the dot com craze). If it turns out to be true at least we have a head start.

As for 'easy fixes' to SS, you're faced with cutting benefits and a tax increase. That delays the problem instead of solving it. Plus a payroll tax increase of over $40 billion a year is hardly modest.

What's the deficit this year? $500B. At 5% the interest on that is $25B a year. That's just for a single year of Bush deficits.

I was primarily referring to those who like to state that when Social Security was created, there were over 40 workers for every beneficiary, and there will soon be 2 workers for every beneficiary, implying a crisis of epic proportions. What they fail to note is that, IIRC, there are currently about 3.3 workers for every beneficiary, and Social Security is running ample surpluses. I tend to believe the former statement is either used out of ignorance or in a deliberate attempt to foment fear.

It is amazing how we lost 36.7 workers per retired person over the last half century or so and yet the US did not implode. Will another 1.3 workers really be the tipping point to economic meltdown??????

I'm afraid I don't see much reason to do anything about social security. It's a very poorly designed program, but I don't see any reason to try to fix it. When the program goes out of balance, it can be means tested, and the benefits can be cut for wealthier retirees. Then it can return to being a welfare program instead of masquerading as a pension plan.

Klug:

IIRC, you offered, I counter-offered, so I'm assuming you responded with a third proposal. If so, I have to admit that I never got it. I checked the e-mail address I gave you for a couple of days, but then, meaning to check it on a weekly basis, I forgot the password. Here's a different e-mail address if you want to resend your proposal: rgw55eb5d49pgbj@jetable.org.

"It is amazing how we lost 36.7 workers per retired person over the last half century or so and yet the US did not implode. Will another 1.3 workers really be the tipping point to economic meltdown??????"

The tax for OSAI and DI (SS total) has gone from 2% to 12.4% from 1937 to 1990. That's not exactly indicative of a healthy program.

If the current rate is 3.3 workers/retiree that means right now each of those 3.3 workers pays for 30.3% of the retiree's tab. When it goes to 2 workers they will each pay 50%. That's a 65% increase in what each worker needs to contribute, so as you can see it's the change in percentage terms that matters, not the actual count (1.3). Each equal drop in the w/r ratio is exponentially more costly, because the denominator (# of retirees) is not going below 1. For example, dropping from 3.3 to 2.3 w/r is a 43.6% increase in worker burden. Dropping from 2.3 to 1.3 is a 76.8% increase! [3.3 to 1.3 is a 154% increase!

Put another way - going from 3.3 to 2.0 w/r - someone making 30,000/year (as an employee) will need to go from paying $1860 (6.2% of income) per year to $3069 (10.2% of income). If this person is self-employed these amounts are DOUBLED.

Still don't think this will be a problem?

Here's one more way to think of it.

Which is worse:

A. dropping from 100 w/r to 50 w/r?

or

B. dropping from 10 w/r to 5 w/r?

The answer is unequivocally (B).

In the first case the burden per worker per retiree rises from 1% to 2%. In the second case it rises from 10% to 20%. The percentage has doubled in both cases, but the difference in burden is 10 times (with only 1/10th a drop in workers comparatively).

I agree with Jane's overall point, that we all have a tendency to interpret things in a way that is consistent with our preconceptions and a similar tendency to ignore uncomfortable truths for as long as possible. I disagree that the two examples she cites are both good examples of this common human trait. Social Security's problems, and our unwillingness to deal with those problems, may be a good example, but global warming is not.

Those who demand action to end global warming frequently claim that the perils of inaction are so severe we cannot wait to know for sure whether there is a danger or not. The Precautionary Principle, we are told, demands that we do something (anything?). The problem is that the precautionary principle demands just the opposite. "Doing something" about global warming means having the US dramatically reduce its CO2 output. Which, as Jane has pointed out several times, would seriously lower our standard of living. Since life expectancy is highly correlated with the standard of living, doing something about global warming will cost lives. Before taking an action that will cost lives, the precautionary principle requires that we be pretty certain of a positive outcome -- not just a mere hope that doing something would be better than doing nothing at all.

There. Or, did I just prove Jane's point?

Let's think about this. Assume the retired person's benefits are at some fixed amount, say $25K per year.

Dropping from 100 w/r to 50 w/r changes the required payment from each worker to $250 to $500. An increase of 100% and absolute increase of $250.

Dropping from 10 w/r to 5 w/r changes the required payment from $2,500 to $5,000.

If you're looking at percentages there's no difference but your right, in absolute numbers the marginal change from 10 to 5 is much more dramatic than going from 100 to 50.

This all assumes, though, that income stays constant. If absolute real income increases by, say, $10,000 in the period the ratio goes from 10 w/r to 5 w/r then standards of living continue to go up for everyone.

Those who demand action to end global warming frequently claim that the perils of inaction are so severe we cannot wait to know for sure whether there is a danger or not. The Precautionary Principle, we are told, demands that we do something (anything?). The problem is that the precautionary principle demands just the opposite. "Doing something" about global warming means having the US dramatically reduce its CO2 output

Agreed but let's compare what we have really done to address both retirement in 50 years and global warming in 50 years. On the retirement angle we have:

1. In the 80's revamped SS to generate a surplus so as to accumulate savings that can ease the generational burden.

2. Put in place a plan to slowly raise the retirement age from 65 to 67.

3. Instituted private voluntary accounts thru 401K's & IRA's which are available for anyone.

What has really been done to address global warming? Aside from some additional research next to nothing in the US. Have we done any of the following:

1. Classified CO2 as a pollutant? No, even though there's plenty of other substances so classified with a lit less convincing evidence.

2. Instituted a market mechanism to reduce CO2 and other greenhouse gasses? No, even though you can create a 'cap and trade' program with a huge amount of initial emission credits to make the economic impact very minor.

3. Reduced subsidies (direct & indirect) to greenhouse gas generators? No, car use for example receives a net subsidy when you add up all related gov't spending (roads and such) and compare it to the revenue raised by car users (gas taxes). This would be a sensible market reform even if it turns out the greenhouse danger is false! Instead Bush has proposed yet more subsidies, tax loopholes and other mischief as part of his 'energy policy'.

4. Institute a tax on CO2 emissions? No, even though you could set the tax very low and make it revenue neutral by using the funds to cut general taxes. Not as good as #2 but still a potentially useful tool.

The problem is, Boonton, that Social Security benefits are indexed to wages, not prices. THat means that benefits rise in proportion to incomes; rising income doesn't help you meet your share.

While we are on the subject of worker burden, I created a table in Excel assuming a real retiree benefit of $25,000 per year and computed how much increase there is in burden, both percentage and real, as you go from 40 workers all the way down to 1 worker to one retired. Here is what happens when you go from 5 down to 1.

W....$ per W......% inc...$increase
5....$5,000.00....20.00%..$833.33
4....$6,250.00....25.00%..$1,250.00
3....$8,333.33....33.33%..$2,083.33
2....$12,500.00...50.00%..$4,166.67
1....$25,000.00...100.00%.$12,500.00

As expected, going from 3 w/r to 2 w/r would increase the burden by 50% but we made it through previous increases that were hardly trivial. 20%, 25% and 33%. But an interesting feature of the entire sheet is the diminishing returns to going the other way. In other words, if we were to return to a ratio of 5 w/r from 3 w/r will reduce the burden per worker from $2083.33 to $595.24. A cut of 71%. However returning from 3 w/r to 10 reduces the burden by $1856.06 or 89%.

So the burden per worker will decrease a lot if we just increase the worker per retiree slightly but moving beyond that point to return social security to its original state of 40 workers per retireed only gives each worker a slight additional gain.

This turns out to be a pretty potent argument for modest reform, perhaps indexing the retirement age to lifespan but with a lag built in.

The problem is, Boonton, that Social Security benefits are indexed to wages, not prices. THat means that benefits rise in proportion to incomes; rising income doesn't help you meet your share.

As has been pointed out before, there's a one generation lag in the index. My benefits do not go up if my kids are two or three times as productive as I am. Also my understanding is that the benefit formulas are incredibly complicated. Is there really a 1 for 1 index of wages to benefits? In other words does a $100 increase in wages translate into a $100 increase in benefits? Or is it simply one factor that dampens but may not cancel out the benefit from additional income?

The problem is, Boonton, that Social Security benefits are indexed to wages, not prices. THat means that benefits rise in proportion to incomes; rising income doesn't help you meet your share.

Easy solution, index benefits to prices.

Boonton, it appears that you'll consider anything but the possibility that social security is a morally and financally flawed system.

You seem to have no problem that the payroll tax rate has risen 520% over the life of the program. You seem to have no problem with the fact that self-employed people pay double (in a direct sense) what employees pay. You seem to have no problem with increasing the retirement age in order to try and increase the worker to retiree ratio.

How old are you anyway? - do you want to work until you are 80? Do you think everyone should have to - especially those people entirely dependent on SS?

You appear to act as if solving this problem is simply turning some dials to change the w/r ratio. (Perhaps a government program mandating all families have 3-4 babies?)

The benefits cacluations may be complex, but the bottom line does not change. The total cost now for each retirees, no matter what the distribution formula, is born by 3.3 workers. Demographics indicate (unless everyone starts dying young or we have a huge influx of unexpected productive immigration) that this overall cost will eventually be born by 2 w/r. As my earlier numbers point out (and yours), this is a tremendous increase. It's unacceptable.

I hope I'm exaggerating what you think, but you just don't seem to take this seriously at all.

You seem to have no problem that the payroll tax rate has risen 520% over the life of the program

And the w/r ratio has also fallen dramatically, elderly poverty has become a fraction of the problem it used to be.

You seem to have no problem with the fact that self-employed people pay double (in a direct sense) what employees pay. You seem to have no problem with increasing the retirement age in order to try and increase the worker to retiree ratio.

This cannot be a problem. If you believe as Jim Glass does, then workers pay their employers share of the payroll tax thru reduced wages. Hence employed & self-employed both pay 100% of the tax. If that's not the case then self-employed are, in a direct sense, 'their own company' and should be earning additional income for being self-employed. If they are not then they should reconsider their decisions.

How old are you anyway? - do you want to work until you are 80? Do you think everyone should have to - especially those people entirely dependent on SS?

I'm 31 if it really matters to you. What should matter more, though, is your muddled thinking. If someone is 'entirely dependent on SS' then why would they be working until they are 80? If we raised the retirement age to 80 why do you think everyone has to work until 80? People can retire whenever they want. If you want to plan on a 50 year retirement you better accumulate some serious savings during your working year. That's not an amazing concept.

You appear to act as if solving this problem is simply turning some dials to change the w/r ratio. (Perhaps a government program mandating all families have 3-4 babies?)

I think a less radical proposal would be to inch up the retirement age slightly. Maybe index it to lifespans. Additionally we could institute some incentives for people to continue to work in their 'retirement' years. As I said elsewhere, though, that is a tricky thing to do without becoming an additional cost to the gov't.

The total cost now for each retirees, no matter what the distribution formula, is born by 3.3 workers. Demographics indicate (unless everyone starts dying young or we have a huge influx of unexpected productive immigration) that this overall cost will eventually be born by 2 w/r. As my earlier numbers point out (and yours), this is a tremendous increase. It's unacceptable.

It's an increase and it is larger but hardly 'tremendous' when compared to going from 5, 4, 3 workers per retired person. The burden is hardly unacceptable if economic growth is somewhat good.

I hope I'm exaggerating what you think, but you just don't seem to take this seriously at all.

On the contrary, it takes a lot of seriousness on my part to correct all the mistakes you made in just one post! Between Jane's blog and ARnold's we've been tossing this issue around with probably close to a 1000 comment posts!

The benefits cacluations may be complex, but the bottom line does not change. The total cost now for each retirees, no matter what the distribution formula, is born by 3.3 workers. Demographics indicate (unless everyone starts dying young or we have a huge influx of unexpected productive immigration) that this overall cost will eventually be born by 2 w/r. As my earlier numbers point out (and yours), this is a tremendous increase. It's unacceptable.

There's another thing that doesn't change, the implications of moving from 3.3 workers to 2.0 are the same whether or not social security is privitized. Quite frankly, the goods and services consumed by retired people today are produced by working people today...not working people from 1960. Likewise the goods and services consumed by retired people in 2030 will be made by working people in 2030...not working people today.

Even with a privitized system, going from 3.3 workers to 2.0 workers means fewer workers will have to produce more. It means that either retired people will have less of a retirement (you can call that 'benefit cuts' or a 'lower rate of return on their 401K') or working people will have less disposable income (you can call that higher payroll taxes or contributing more to their 401K's).

That is unavoidable but it is important to keep it in perspective. It is the by-product of living in a rich society. It is a sign of our wealth & success that we can afford to indulge in 3.3 workers to 1 retired person rather than 40 workers to 1 retired person.

"On the contrary, it takes a lot of seriousness on my part to correct all the mistakes you made in just one post!"

I don't read the comments here enough. It appears that I've stumbled across one of AI's arrogant trolls.

I think a less radical proposal would be to inch up the retirement age slightly. Maybe index it to lifespans. Additionally we could institute some incentives for people to continue to work in their 'retirement' years.

Boonton, such ideas have merit, along with, perhaps, changing the COLA formula (to the CPI) and some modest reduction of the benefits of the truly affluent.

But I wonder: are any Democrats arguing for such proposals? At least when Bob Kerrey, Paul Tsongas and D.P. Moynihan were in the Senate, we occassionally heard constructive thoughts from the Democrats on the issue. But judging from the opinions I've gleaned from the left-leaning blogosphere, these days no type of curbs on the growth of Social Security are acceptable. In fact, we're told doing nothing is the best way to go because it's perfectly acceptable to see Social Security's take of GDP increase by 50-80% over the next half century. If that eventually means increases in job-destroying payroll taxes, so be it.

My own first choice would be for some of the benefits adjustments I've mentioned here (rather than private accounts), but if I can't get them, I'd much prefer the voluntary benefits cuts that accompany private account participation than doing nothing (i.e., diverting an ever-increasing share of tax revenue to SS after 2018) or increasing payroll taxes. To the extent that private accounts head off such bad policy choices "at the pass", I'm all for them. Indeed, now that I think about it, one huge advantage to the policy approach of privatization is that it's awfully difficult to undo. I would't be very difficult, I imagine, for some future Congress or administration to reverse such benefits-trimming measures as COLA readjustment or a change in the retirement age. But I suspect it will be very tough to reverse course on privatization, once folks begin to accumulate a few bucks in their accounts. To the extent that private accounts "lock-in" a growth-curbing approach to Social Security, the long-term benefits to the nation's public finances should prove considerable.

"Quite frankly, the goods and services consumed by retired people today are produced by working people today...not working people from 1960. "

But they're produced by working people today using equipment built 5-20 years ago, made possible by research done 10-40 years ago, which was in turn made possible by equipment made 15-50 years ago, and so on and so on.

People don't make things with their bare hands. If they did they'd be building mud huts and pointy sticks to throw at animals for food.

"Likewise the goods and services consumed by retired people in 2030 will be made by working people in 2030...not working people today."

It will be "made by working people" at that point in time. But "working people" working today are building things that will improve the productivity of the working people of 2030. Encouraging them to do more of it, such as increasing the funding and incentive for capital investment, will pay off in 2030, even if it doesn't increase the number of working people then.

And, of course, anything that discourages us from having children, such as a guaranteed retirement income and a 15% reduction in take-home pay, can only decrease the number of working people in 2030.

Social Security was a slick con used by the Democrats to separate workers from their money. Most people under 30 know that they'll never see a penny from this program. It's probably better to let it die than to allow government to keep stealing from working people.

There's another thing that doesn't change, the implications of moving from 3.3 workers to 2.0 are the same whether or not social security is privitized....

Even with a privitized system, going from 3.3 workers to 2.0 workers means fewer workers will have to produce more. It means that either retired people will have less of a retirement (you can call that 'benefit cuts' or a 'lower rate of return on their 401K') or working people will have less disposable income (you can call that higher payroll taxes or contributing more to their 401K's).

It's still a one-time transition cost. Presently, the system is headed that general direction anyway, but with the prospect of one ugly morning-after effect.

'This is exacerbated by people using "scare figures" such as selectively quoting the number of workers per retiree.'

People like Paul Krugman, in 'Fuzzy Math', you mean?

http://flyunderthebridge.blogspot.com/2004/12/walnut-shells-pea-and-paul.html

Where he claimed the work force would "stagger under the burden of caring for their elders"

And Boonton, a 50% increase in taxes is TWICE as large as a 25% increase.

Means-test it, and the whole problem goes away.

“…modest reduction of the benefits of the truly affluent.”

"Means-test it, and the whole problem goes away."

The truly affluent don’t receive proportionally higher benefits in relation to their earnings because benefits are capped. In other words, there is not enough to transfer from this group in order to cover the benefits of the less affluent.

In 2001, according to CBO figures, the household income threshold to be in the top 10% of earners was $80,300. The top 5% threshold was $107,300, and the top 1% is $238,000.

According to a calculator at the government’s social security website, a 70-year old retiring next year who has earned $87,900 each year since 1951 will receive $2,168 a month in benefits. If the same person earned $110,000 each year since 1951 the benefit would be the same. Meanwhile, if someone earned $34,200 (the average pre-tax income of the second 20% of households in 2001) all those years, their benefit would be $1870.

Therefore, under the current scheme, even if you cut the top 10% out of social security benefits completely, they cannot cover the gap for the other 90% when the ratio goes to 2 workers/retiree (or less). There simply isn’t enough money for it.

Of course the argument could be made that the threshold for payroll taxes should be raised or unlimited and that this would obviously generate more funds – especially if you paid no benefits to people over a particular wealth/income threshold. I don't have the data to calculate how/if this is possible, but I disagree with this approach, but then again, I disagree with the whole nature of the program in the first place.

If this is even an issue in 40 years, it can only be because there'll be incredible stagnation in technological advancement in the medical industry over that time period. If we lift most of our controls on that industry, no one will need to retire in 40 years.

In 1900, people worried that over the next several decades, our cities would be buried in horseshit. I hope to God we're hearing a 21st century version of that warning.

Therefore, under the current scheme, even if you cut the top 10% out of social security benefits completely, they cannot cover the gap for the other 90% when the ratio goes to 2 workers/retiree (or less). There simply isn’t enough money for it.

David: nobody who has seriously looked at Social Security is suggesting that means-tesing alone is going to solve the program's problems (if, like me, you consider its projected expansion to be a problem). Still, ten billion here and ten billion there, and, pretty soon you're talking about real money (which, added to the "real money" savings of COLA readjustment and increasing the retirement age, would make for a nice, fat savings package).

And, in any event, any money taken from Warren Buffet or George Soros's check is money that doesn't have to taken from some widow who subsists on cat food.

Gee whiz Ken, what if people don't want to work more than 40 years? Is SS a safety net for dramatic cases or is it a retirement program? If it's meant to be the latter for a large segment of the population, the idea of working longer is not so appealing. Otherwise, cut the tax and benefits dramatically and make it a true, backup, safety net for a small percentage of the population.

"increasing the retirement age"

Oh for crying out loud! I think anyone who is calling for an increase in the retirement age is out of touch. Good for you if you love your work and can't imagine ever stopping, but many people do not feel this way and as they approach their 60's can't wait to relax and turn to other activities.

"And, in any event, any money taken from Warren Buffet or George Soros's check is money that doesn't have to taken from some widow who subsists on cat food."

"Bump-bump-BAAAAAAAAAHHHH"

So what your saying is the whole thing is fixed if we take all these guy's money and give it to all the cat food eating widows?

COLA adjustments:

As I noted in an earlier comment, someone making 34.5k over the last 55 years is only going to get 1,870 a month. That's not a ton of money and it's taxed besides. What kind of COLA adjustment do you think is going to have a minimal effect on that sort of benefit and result in any significant program savings?

But I suspect it will be very tough to reverse course on privatization, once folks begin to accumulate a few bucks in their accounts. To the extent that private accounts "lock-in" a growth-curbing approach to Social Security, the long-term benefits to the nation's public finances should prove considerable.

Did you read Krugman's piece? Countries that have tried privatization are still subsidizing retirees whose private accounts have failed to generate enough resources to pay for retirement. There's a nasty edge to this, ever hear of 'moral hazard'? The gov't can easily end up guaranteeing failed investment choices in the private accounts. The S&L collapse is illustrative here of what happens when the gov't guaranttes private investment choices.

It will be "made by working people" at that point in time. But "working people" working today are building things that will improve the productivity of the working people of 2030. Encouraging them to do more of it, such as increasing the funding and incentive for capital investment, will pay off in 2030, even if it doesn't increase the number of working people then.

That's certainly to be hoped but privatization will not increase capital investment either today or in 2030.

Gee whiz Ken, what if people don't want to work more than 40 years? Is SS a safety net for dramatic cases or is it a retirement program?

This is the second time you raise this David, what are you talking about? If you change social security dramatically people very well may have to work more than 40 years to accumulate enough in their private accounts to enjoy a 'proper retirement'. If you insist that we cannot raise SS's retirement age because 'some people don't want to work more than 40 years' then the only real option left is to decrease the disposable income of workers.

You can't escape that math. A lifetime is divided between not working and working. If your lifetime becomes larger...say increasing from 70 years to 100 years then it is quite reasonable to expect to see that increase shared between both working and non-working years.

Oh for crying out loud! I think anyone who is calling for an increase in the retirement age is out of touch. Good for you if you love your work and can't imagine ever stopping, but many people do not feel this way and as they approach their 60's can't wait to relax and turn to other activities.

You can retire whenever you want. You can even retire when your 40 with the system in place today David. Simply save up enough to take care of your desired expenses and relax from 40 yrs old to 70 yrs David.

"You can retire whenever you want. You can even retire when your 40 with the system in place today David."

Not with social security you can't. So what is it Boonton, a retirement program, or just a safety net? You seem to think it's a retirement program:

"If you change social security dramatically people very well may have to work more than 40 years to accumulate enough in their private accounts to enjoy a 'proper retirement'."

"If you insist that we cannot raise SS's retirement age because 'some people don't want to work more than 40 years' then the only real option left is to decrease the disposable income of workers.

BS. It's a pay-as-you-go tax and transfer program, not an investment program or even a pension program. If you want to keep it as a transfer program, then yes you might have to decrease the disposable income of workers. If it migrates to a investment program (or a limited safety net transfer program for the people who really need it) then you start to earn returns on the investments and the entire model changes. This is how, as you know, 401ks and IRA's work, as well as pensions in a similar manner.

Not with social security you can't. So what is it Boonton, a retirement program, or just a safety net? You seem to think it's a retirement program:

I think today it is a bit of both. But you are dodging the question David. You can't deny that your life is divided between periods of work and periods of non-work. An increase in your lifespan means you'll more years will have to be allocated to those periods. Why do you act like it is an outrage if 100% of that increase in lifespan is not allocated to non-work?

If it migrates to a investment program (or a limited safety net transfer program for the people who really need it) then you start to earn returns on the investments and the entire model changes. This is how, as you know, 401ks and IRA's work, as well as pensions in a similar manner.

Since the reform in the 80's it's been moved from a transfer program into a partially funded investment program. 'returns' are essentially nothing more than claims on future production so the demographic math cannot be avoided by giving everyone 401K's in place of SS.

"If you change social security dramatically people very well may have to work more than 40 years to accumulate enough in their private accounts to enjoy a 'proper retirement'."

I missed the word "private" in that.

If you increase the retirement age for SS, by definition you're requiring people to work longer to enjoy a 'proper retirement.' That's the direct, unavoidable effect of increasing the retirement age - a notion which is being suggested so casually by you and others.

You keep arguing that anyone can retire earlier by saving enough, etc. That's right, but that has nothing to do with social security, which is supposed to be a retirement program, no?

So great, it's a retirement program that folks like you think in part should be adjusted to increase the retirement age for benefits. It's not much of a retirement program, therefore.

Oh sure, you argue that since people are living longer, they have to work longer to cover their retirement. Yes, in a pay-as-you-go scam that depends on the vagaries of the political system and demographics, that's true. With an investment -based system, I can accumulate enough money and live off the interest for a very long time without inflation cutting into my spending power significantly. Furthermore, at the end of my life, I have a pot of money that I can decide how to dispose.

Since there will invariably be people whose investments are screwed up by themselves or someone else, we retain a basic safety-net at relatively low standard of living so that no one starves but at the same time no one has an incentive to avoid caring about their future without severe consequences. This, however, would cost very little and I'd be glad to pay the tax to support it.

"Since the reform in the 80's it's been moved from a transfer program into a partially funded investment program.

Bullshit.

Investment in what? Who's doing the investing? What's the return?

If you increase the retirement age for SS, by definition you're requiring people to work longer to enjoy a 'proper retirement.' That's the direct, unavoidable effect of increasing the retirement age - a notion which is being suggested so casually by you and others.

Well to be technical you are just increasing the years until SS starts giving out benefits. There are people who retire before that and there are others who continue to work while still collecting SS. Again you seem to assume that 65 yrs old is some type of magical age where the government MUST make sure everyone can retire. In a period of increasing lifespan, this just cannot be done without asking more of the working years (i.e. higher payroll taxes, higher 401K contributions etc).

You keep arguing that anyone can retire earlier by saving enough, etc. That's right, but that has nothing to do with social security, which is supposed to be a retirement program, no?

It is a retirement program, I don't recall ever saying it was THE retirement program. Even before 401K's people had private savings accounts, pensions and other forms of saving for retirement above and beyond social security.

Oh sure, you argue that since people are living longer, they have to work longer to cover their retirement. Yes, in a pay-as-you-go scam that depends on the vagaries of the political system and demographics, that's true. With an investment -based system, I can accumulate enough money and live off the interest for a very long time without inflation cutting into my spending power significantly. Furthermore, at the end of my life, I have a pot of money that I can decide how to dispose.

You can do this as an individual. Hell if you're very lucky you can win the lottery at 22 and be retired from 23 until your death. Everyone cannot do this all at once, though. The mathematics that I described still function if you label the benefits 'interest' or 'returns on investments'.

Bullshit.

Investment in what? Who's doing the investing? What's the return?

Reduced gov't debt held by the public. The returns are in lower interest payments today and more capital in the private economy.

So if retirement is feasible with private vehicles before the arbitrary SS benefit age is reached, we really don't need SS then.

It certainly is feasible for some individuals. You can strike it rich and that is obvious. The question is, David, whether it is feasible for everyone at once.

That it is too but not if you think there's some way to escape the mathematics of the situation. If your desire to keep retirement at 65 in spite of an inceasing lifespan results in the w/r ratio falling to 2 or 1.5 or even less than one there is no way to avoid the fact that the burden on workers will have to be increased. In a world of just SS that would mean higher payroll taxes, in a world of 401K's that would mean allocating a larger share of paychecks to 401K's.

No, Boonton, in a just world it would be everyone's sole choice and responsibility to save money for their retirement in whatever manner suits them. SS takes 12.4% of my earnings and does nothing for me compared to what that money could be doing.

You should try estimating your expected lifetime income, then take 12.4% of that and see what it amounts to after 30 or 40 years at even 5% interest. Then take those same earnings and plug them into the social security calculator and compare the large difference.

You completely ignore the morality in a weak attempt to equate the SS system with a private system based on the 'math' alone, which, by the way is not the same either since SS is not, despite your weak contortions, any sort of investment program. SS produces no returns.

Someone who earns, on average, $34,200, for 40 years and puts 12.4% of that into investments that on average return 5% over that time period will have $539,295 in present dollars upon retirement. (And note that one more year of this rate will boost the value by 31,000 - social security is much more limited in this respect).

This person will be able to take $2247 (present dollars) monthly - forever - without touching the principal assuming interest rates at 5%. This is 78.8% of their working earnings. This same person is projected to get $1870 from SS (which will require changes in the program to deliver 40 years from now). This is a difference of 20%. In addition, and very significant, is that this person has $539,295 of assets. They have nothing with SS. If these investments have been/are invested in tax sheltered vehicles (Roth, munis) then these are tax-free dollars. Social security dollars are not tax free.

Finally, if this person saves more, or does better with the interest rate, the nest egg will be bigger. Obviously one can invest money on the outside of SS, but one can't divert any of that substantial sum (12.4%) if one thinks the money can do better elsewhere, which it most certainly can.

The inability for social security payouts to match a regular, modest investment vehicle's returns increases as each worker must subsidize more retirees. In other words, what gets paid in is even higher relative to that person's future benefit.

So now we are up to 12.4%, I thought you were upset because the self-employed pay double....now everyone pays double? Jim Glass has gone on extensively that SS's expected benefits are now near zero or negative but that assumes you pay the full cost of the tax. As was discussed extensively in the last big SS Post there's good reason to not believe that. If you missed it you can read it here even though comments are closed:

http://www.janegalt.net/blog/archives/005063.html

You should try estimating your expected lifetime income, then take 12.4% of that and see what it amounts to after 30 or 40 years at even 5% interest. Then take those same earnings and plug them into the social security calculator and compare the large difference.

You can certainly do that but how are you going to guarantee a 5% return? Yes I'm sure you could have gotten one if 30 years ago we passed a special law opting you out of the system but how can you estimate what everyone's return would have been? Are you going to deduct from them the additional taxes incurred from the larger Federal debt.

You completely ignore the morality in a weak attempt to equate the SS system with a private system based on the 'math' alone, which, by the way is not the same either since SS is not, despite your weak contortions, any sort of investment program. SS produces no returns.

SS Trust fund generates surpluses over and above the amounts currently needed to pay benefits. The surpluses reduce Gov't debt held by the public. Every $1 of debt reduced has at least two forms of benefit. First it reduces interest costs to the taxpayers. Second it increases the amount of money available for private investment thereby improving the economy in the long run.

So David, why not simply have the Fed. Gov't borrow $1T (interest rates are at 4.17% for a 10 yr bond according to Yahoo Finance), invest it in an index fund at 5% and then simply fund SS with the difference?

Boonton, I'm done conversing with you. You selectively ignore points I make for which apparently you have no valid response (not that this seems to prevent you from providing other invalid responses). You refuse to take up the morality of the transfer nature of the system, as evidenced by your lastest borrowing blurp. I don't want a government retirement system, no matter how it's done. It's unethical and unnecessary. You are ready to defend it no matter how ridiculous you sound. Who should the government borrow from? It's either going to be from itself, or another country, but either way, it costs taxpayers money and freedom. This boils down to ideology and I'll never agree with you.

David,

I'm sorry you are unable to converse with me any more. I have tried very hard to address the numerous points you have made. You yourself stated that you would 'happily' pay taxes to support those whose retirement accounts did poorly. That's a transfer system and if you feel it is moral I see no need to defend SS's transfer mechanism. Now you take a libertarian angle and say the gov't should have no retirement program at all. That's a respectable position, abolish not only SS but do not replace it with mandated private accounts and abolish the tax favored status of 401K's and IRA's too. Let people choose themselves to save or not and if so how much. That would at least be a consistent position but it is one few would seriously support.

As for your last question to me, who would the gov't borrow from? Who does the gov't borrow from now? Who does anyone who needs to borrow money, more than a few hundred million, borrow from today? The bond market, of course. They issue bonds and sell them to whoever wants to buy bonds (mutual funds, pension funds, investors, Arab oil shieks, Asian central banks and so on).

The rate of return on these bonds is set by their market price. The higher the price the lower the rate of return for the person doing the lending. Conversly, the lower the rate of return the lower the cost to the person doing the borrowing. If the current return on bonds is 4.5% then gov't can earn a rate of return equal that simply by borrowing less or buying back existing bonds. If gov't borrows $100B less it will save $4.5B per year in interest costs....poof a rate of return.

Now if stocks really do return more than bonds even after you adjusted for risk you've found a money tree. gov't can borrow at 4.5% and earn 6% or whatever that is. Historically stock returns have been higher than bond returns even when you equalize risk. This has been called the Equity Premium and why it happens is something of a mystery.

My pet theory is that for a while after the Stock Market Crash and the Great Depression, people were under the impression that stocks were dangerous and bonds were safe. In reality the prices bonds can be just as erratic as stocks. This made stocks cheaper than they should have been and for those who brought stocks they enjoyed a nice return when everyone else figured things out.

Sadly if that is the case then the equity premium is gone. Efficient markets theory is quite clear, rational investors will destroy 'exceptional' returns by entering the market and bidding up the security. If that is the case then you cannot make any estimate of the return on 'private SS' accounts using historical stock market returns.

hi all,
i still think steve's points raised at the beginning of this thread are salient. i don't think folks who favour ss "reform" have really addressed those in any detail.

If you took the time to study the evidence in
detail, you would quickly find that the two
"problems" are very different:

1) There is a strong scientific consensus that
global warming due to human activity is a
real problem, and that it's going to get worse
unless we take action to reduce the output
of greenhouse gases.

2) There is no such consensus about Social
Security. The projections by the SSA are
based on rather pessimistic assumptions about
productivity growth - 1.6%/year, derived
from some questionable averaging over the
histories of business cycles which include
the rather terrible period 1973-1989.
Brad DeLong (www.j-bradford-delong.net) has
been discussing these estimates in detail -
based on the last 20 years, a more plausible
estimate for long-term productivity growth
would be 1.9%/year. And if we achieve 1.85%,
then the current Social Security plan is
fully solvent for the next 75 years with no
changes.

Now there *is* a fiscal problem - but it's
the deficit in the general fund, and that is
a big problem right now, and will only get
worse as the long-term effects of the Bush
tax cuts kick in, and the moderating effect
of the current Social Security surplus is
lost (starting in 2018 IIRC).

So if you're choosing your positions based on
a general feeling that we should fix hard
problems sooner rather than later, just be
skeptical about what is and is not a hard
problem. Many/most economists will tell you
that the federal deficit *is* such a problem;
Social Security is not.

"This turns out to be a pretty potent argument for modest reform, perhaps indexing the retirement age to lifespan but with a lag built in."

Which would be a perfectly reasonable plan that Democrats would support. Not going to happen, of course.

After all, you can pretty much sum up SS's minor problems as "it's hard to fund every-longer retirement time with constant working time."

"But judging from the opinions I've gleaned from the left-leaning blogosphere, these days no type of curbs on the growth of Social Security are acceptable. In fact, we're told doing nothing is the best way to go because it's perfectly acceptable to see Social Security's take of GDP increase by 50-80% over the next half century."

Minority parties don't pass bills, and even participating in the debate on the GOP's terms gives them rhetorical room to shove it through. Tactically, "screw you" is the most effective course of action. We'll tweak it when we get a Democratic majority back.

Here's a more honest plan that maybe the Dems can throw at Bush to see if he will call their bluff:

Institute an additional 2% payroll tax and order that people deposit those funds in an IRA that they can set up at any bank they choose.

1. If social security becomes a huge mess in 20-30 years and benefits are cut people will have their accounts to fall back on.

2. This will undeniably increase savings since the gov't will not be borrowing money as fast as people set up their private savings accounts.

3. Before you bemoan another tax increase keep in mind that funding private accounts by having the gov't borrow today is nothing more than locking in a tax increase at some point.

4. Since this program would essentially be distinctly different from social security, the two could run side by side for years giving us the option of evaluating which one works better.

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