Baseball Crank
Covering the Front and Back Pages of the Newspaper
February 25, 2005
POLITICS: Benefits

You know, I'm no expert on Social Security or macroeconomics, so I try to confine my commentary on the subject to obvious examples of logical fallacies and factual whoppers. But those somehow seem all too easy to find. Take this, from Will Saletan:

Republicans won't raise taxes; Democrats won't cut benefits. It looks like there's no way out. But there is a way.

Every time Social Security has drifted into trouble, Congress has tweaked one formula or another to bring it back into balance. We've raised the payroll tax rate, means-tested benefits, and indexed them to consumer prices. But one variable has never been properly adjusted. That variable isn't a tax or a benefit. It's the retirement age.

Now, raising the retirement age is certainly a defensible idea, and one worthy of discussion. But I suspect Saletan - who details later on how much money this would save in outlays - is being deliberately deceptive here in order to sell his idea when he says it's not a "benefit." What he's talking about is eliminating two whole years (or more) of benefits - and for people who die between 65 and 67, eliminating their benefits entirely. I mean, everybody knows this - saying that raising the retirement age isn't a benefit cut is like saying that a baseball team that offers a player $10 million a year for 5 years is offering the same amount of money as one that offers the same player $10 million a year for 7 years.

By the way, have you noticed that the same people who keep telling us that private accounts aren't really that much better a deal for workers than the current system . . . are also the same ones who keep saying we can fix the system with more taxes and fewer benefits? But Eliminating the contribution caps and slashing benefits will greatly increase the number of workers for whom Social Security will produce a net negative return on investment.

As for the frequent charge that private accounts aren't really a fix to the financing problem - a debate I won't get into directly - look: the system has accrued huge unfunded liabilities that we will not be able to cover with the existing structure of receipts. Private accounts won't help us pay those off, but they will stop the bleeding by replacing part of an unsustainable system that's continuing to rack up liabilities with a system that will be inherently sustainable over the long run without repeated crises. Saying that private accounts do "nothing" to fix the financing problem is like saying that cutting up your credit cards does "nothing" to get you out of debt - it ignores the fact that at least you've stopped making the problem worse.

The private accounts option is like the way FIRREA worked with the S&L bailout, or the way the IMF is, at least in theory, supposed to work: a condition of bailing out the current system is that Social Security lock up the booze cabinet and hand over the car keys.

Posted by Baseball Crank at 8:29 AM | Politics 2005 | Comments (7) | TrackBack (0)
Comments


Social Security's problems really are very small and far away compared to the problems of the General Fund right now, and for example projected future Medicare liabilities.

Can you or anyone explain how the mere presence of private accounts will solve any problem on its own? Only benefit cuts are guaranteed to make the system solvent continuously - but then if we did nothing and the economy performs badly we end up with benefit cuts as well (not that big ones in fact). And if we do nothing and the economy does well there is no problem at all.

Posted by: cpviolator at February 25, 2005 1:49 PM

Obviously, how much they solve depends on how they're structured. The point is that personal accounts put an end to the potential for demographic mismatches between the number of present workers and the number of present retirees, since each present worker saves for his/her own future retirement. That's why it avoids recurrence of crises, for the same reason that many corporations switch to defined-contribution from defined-benefit plans.

I'd agree that Medicare is an even bigger problem, but the fact is that Social Security is on the table, and what's more - just as Iraq was a key test of our ability to instigate change in the Middle East - the fate of the Social Security initiative will determine whether it is politically possible to do anything about Medicare. It's not like anybody on the Dem side has a Medicare plan that would solve anything at all (let's recall that the main Dem objections to the prescription drug plan were that it didn't spend enough money and didn't impose ruinous, Econ 101-failing price controls).

Posted by: The Crank at February 25, 2005 2:00 PM

Since Will Saletan hasn't been paying attention, Republicans will actually raise taxes. They say the won't, but they will. Just read this!

Bush May Raise Taxes for Social Security
http://story.news.yahoo.com/news?tmpl=story2&u=/ap/20050216/ap_on_go_pr_wh/bush

Great Article on Republican Tax Raises
http://thinkprogress.org/index.php?p=286

-JP2

Posted by: JP2 at February 26, 2005 2:41 AM

Raising the retirement age is a lousy idea but a political winner. Politicians' biggest fear is the elderly who have a high turnout rate and would target anyone who threatens current benefits. The young think retirement is way off and are doubtful of SSA's promise so they'd be willing to trade a few years of retirement in hopes that the rest of the promise will be kept, and raising the retirement age has less impact now than a tax increase. Crank is right. Private accounts are a step towards changing from a transfer system to a savings system. There will still be a need for a safety net system, but that could be financed out of the general fund. Crank is also right about Medicare. Neither party has a plan or an idea about how to 'save' it. In the long run, people have to be more responsible in paying for health care. That is what will control prices.

Posted by: jimbo at February 26, 2005 5:06 AM

This is my first post here, I've been hanging out at dailythoughts...

I get a little irritated when people tell me I shouldn't try to fix one problem because there are other problems that also need fixed....

If we can FIX Social Security we need to do it, even if there are other problems that also need attention. Using Medicare problems as an excuse for inaction will cause you to never deal with anything.

Raising tax rates or cutting benefits (either the $ amounts or changing the retirement age) will not FIX Social Security, it will only delay the problem. If current demographic trends continue, we will have the number of people in retirement increasing at a rate that is faster than the increase in the number of workers. This is due to increasing longevity and decreasing birth rates, neither trend is likely to change. With a Pay As You Go (PAYG) system such as the current Social Security plan, there is no way this structure can sustain itself. The only alternative is to change from a PAYG system to an investment based system, either private accounts (my preference) or a government run investment program.

I have a natural aversion to a government run investment system. It would take a VERY short time for the government to become the majority stockholder of most US corporations. This would be a socialist state (in the textbook sense) and can cause nothing but BAD things to happen.

Private accounts on the other hand, leave ownership in the hands of the people. They can do what they like with the assets they own, and can vote any corporate shares they own any way they please. They also alow an inheritance path, so that if you die before you retire, you can leave your assets to your family.

I think allowing people to set up SS-IRA accounts would be the best alternative. ALL banks, stock brokers, and other financial institutions already know how to deal with IRA accounts. These accounts allow the owner to decide HOW to invest the money and give them direct ownership. There are already several different types of IRA accounts so adding 1 more type would not be very complicated.

Posted by: Brian H at February 27, 2005 9:46 AM

"Private accounts are a step towards changing from a transfer system to a savings system. "

So are benefit cuts. The difference is that people can save without the involvement of anyone in Washington.

The only thing private accounts get you that plain old benefit cuts don't is a bunch of rules forbidding you to touch the money that is supposedly "yours" for 40 years. Somehow, that doesn't seem like much of an upside to me.

Posted by: Ken at February 28, 2005 11:31 PM

Ken,

Benefit cuts do nothing to change from a transfer system to a savings system. Tax rate cuts on the other hand would. In order to encourage a personal savings system, you would have to have the money available. Reducing the tax rates would make this money available, though not guarantee that the money would be put into savings. Of course the current system would collapse even sooner if there weren't corresponding benefit cuts.

As for not being able to touch the money for 40 years.... isn't that how the current system works? You pay in for 40 years or more with the hope that someday you'll get some of it back? Of course if you start your 40 years now, you will get nothing unless the current system changes. I'd rather be able to put the 13% (6.5% I see on the check and the 6.5% I don't) that I'm paying now into an IRA like account and know that I'll have SOMETHING on 40 years. Of course I know we have obligations under the current plan and that the full 13% would not be available, more like 5%.....

We have several private accounts NOW that are YOUR money that you can't touch (without penalty) until you reach retirement age. We have several types of IRA accounts, 401K accounts, 403B accounts KEOGH, etc.... If you haven't started putting money into one of these types of accounts, I HIGHLY recomend putting as much as you can in. The growth of small ammounts invested these accounts on a tax free basis over a 40 year period can be staggering...... Over a short time period, the numbers are less impressive but still can allow a large nest egg to be amassed.

If you haven't put money into your OWN private account and are relying only on Social Security for your retirement, then you will also need to be on welfare and visiting food pantries when you retire in 40 years (unless Social Security is changed by then).

Posted by: Brian H. at March 3, 2005 8:56 AM
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