Time for optimism about Social Security

Precisely because several of the initiatives on Social Security seem to have stalled, the
time may be ripe for some real progress to be made.

There are two strong arguments for looking seriously for some reform of the U.S. Social
Security system. The first is what some have called the solvency problem, though I prefer to
think of this as a simple logistical issue of how to deal with the demographic reality that the
ratio of those paying into the system to those being paid by the system is going to continue to
decline. According to the 2005
Report from the Federal Old-Age and Survivors Insurance and Disability Insurance Trust
Funds
, the number of workers per beneficiary fell from 16.5 in 1950 to 3.3 in 2004, and is
projected to decline to 2.2 workers per beneficiary by 2030.

The second issue is the href="http://www.econbrowser.com/archives/2005/07/should_we_worry.html">decline in the U.S.
national saving rate, which over time means a smaller capital stock and more debt owed to
foreigners, both of which will leave us less able to pay for those benefits or anything else in
2030. Because Social Security currently functions as a retirement system that generates zero
national saving, any reforms that would introduce an actual saving component to the system
deserve to be looked at very seriously.

Despite the very good reasons for reform, Bush’s proposal "http://economistsview.typepad.com/economistsview/2005/07/social_security_1.html">appears to be
stalled
, and I certainly hope that the href="http://www.econbrowser.com/archives/2005/06/concerns_about.html">DeMint plan doesn’t
go anywhere either. As a result of the impasse, the Democrats have a rare opportunity to shape
the agenda by putting a constructive proposal on the table.

I for one am very pleased that href="http://economistsview.typepad.com/economistsview/2005/07/bipartisan_supp.html">some
Democrats are doing just that. Among the ideas being discussed are making employee
participation in 401K type plans more automatic (a proposal long favored by href="http://delong.typepad.com/sdj/2005/03/a_positive_prog.html">Brad DeLong) and
supplementing the initial contributions with what would in effect be government funds. I think
it makes a lot of sense for Republicans to take these proposals very seriously as a basis for
finding a truly bipartisan solution to a problem that greatly needs to be addressed.

I would nonetheless like to suggest that it is not realistic to anticipate huge boosts in
national saving from any of the proposals currently put out by either Democrats or Republicans.
For this reason, some rather more mundane steps for coping with the demographic logistics
undoubtedly also need to be part of the picture. I agree with href="http://www.techcentralstation.com/102704D.html">Arnold Kling, href="http://voxbaby.blogspot.com/2004/10/how-to-reform-social-security-part-ii.html"> Andrew
Samwick, and href="http://politicalcalculations.blogspot.com/2005/07/when-will-you-retire.html">Political
Calculations that the most efficacious way to handle the ratio problem is to make further
adjustments beyond those currently scheduled that would increase the average age of retirement.
This just seems like the logical adjustment that needs to be made in response to continuous
increases in life expectancy and the number of people that the system is being asked to support
each year. Senator Chuck Hagel (R-NE) last March href="http://www.centristpolicynetwork.org/pages_2005/03/hagel_bill/hagel_bill.pdf">
introduced a plan one of whose components would do just that, not only by raising the normal
retirement age to 68 in 2023, but also by adjusting the benefit formula so that total expected
lifetime benefits don’t increase as longevity goes up, which has a similar effect to raising the
retirement age while giving workers some added flexibility. href="http://www.centristpolicynetwork.org/pages_2005/03/23_hagel_socialsecurity.html">Centrist
Policy Network and href="http://voxbaby.blogspot.com/2005/03/senator-hagels-social-security-plan.html">Vox Baby
have some helpful analyses.

A solution based solely on adjusting the retirement age
would have no political excitement and some potential political costs associated with it, but
has the otherwise rather strong selling point that it actually would work. In terms of
practical politics, it would obviously have to be packaged together with at least some modest
component of one of the more exotic proposals that have been put on the table.

So here’s my suggestion: the Democrats take some formulation of Hagel’s retirement age ideas,
add it to some of the elements they’re currently discussing, and call it the Democratic Plan to
Save Social Security. Bush and the Republicans shift positions nimbly, claiming that yes, this
was the sort of thing they were trying to accomplish, and they’re pleased to be able to work in
a bipartisan way to solve the problem.

Who would actually get the political credit? I think both sides would, and both sides
should, if it were to work out this way. Bush would deserve credit for spending his political
capital in order to put an issue that everybody was afraid to discuss front and center on the
table. The Democrats would deserve credit for engaging the issue constructively and trying to
forge a solution. Both sides make some compromises, and the public is grateful that actual
progress was made on an important public issue. I don’t know, it seems to me that’s maybe the
way a democracy is supposed to work.

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8 thoughts on “Time for optimism about Social Security

  1. Edward Hugh

    Hello James
    This is Edward from a Fistful of Euros saying hello from across the pond. I am officially on a ‘bloggers holiday’ which means that since I havent gone away yet I have more time to read around :).I would just like to say how well written and informative your blog is.
    I think the current post is very timely, and I broadly agree with you. I think it is important to note that you in the US have a very different demography from the rest of the developed world: the median age in the US is currently 36.27, in Germany it is 42.16, in Italy it is 41.77 and in Japan it is 44.44. You are still a young country (I think btw that this may have something to do with the *net* saving position), and you are nearer to China (at 32.66) than you are to the oldest part of ‘ol Europe and Japan.
    What this means in practice is that you will only be in twenty years time where Germany is now. This – as German ageing expert Axel Borsch Supan puts it – gives you a historic window of opportunity, and you should try to use this wisely.
    I think you are right, that now is a good moment for reform, and especially on things like raising the pension age (I would go for a straight 70, and not do it in steps) since if European experience is anything to go by the nearer you get to the moment when hard decisions have to be taken, the harder it is to actually take them.
    There is also the political difficulty of getting reforms through as society gets older, the balance swings towards those who will lose out, and this can produce a kind of ‘bad’ equilibrium: my feeling is that Germany is already there.
    On more general points from other posts I have read, I tend to agree with your reading of the Bradbury report, most of these things are very difficult to call. Reading the issues with the 54-59 age group, the increase in participation did rather take me back to all the debates about the Nasdaq crash, and people needing to work more to make up for what they had lost before being able to retire. I don’t know if anyone has commented on this.
    On female participation, obviously like oil production, the rate of increase had to slow down sometime. But beware. If Dale Jorgenson and others are right that it was above all increased participation rates in the 90’s which gave the US that extra growth capacity, then a levelling off (or even downward decline) in participation will impact your global productivity reading. It will also make the dependency ratios slighly worse. ‘Oh what you gonna do, when the well runs dry?’ :).
    I’m over towards you on the housing “bubble” too. I think the rate of new home formation seems relatively high – which the demographics would predict – and while there is clearly excess demand related to the highly liquid environment, I’m not convinced that the situation is anything like as distorted as it has been in the UK and Spain. But these days these seem to be very much ‘thoughts out of season’.
    On Greenspans rate raising round, again I think you are right to be cautious, just because there isn’t a bubble, and the labour market isn’t a complete disaster doesn’t mean that it all hunky dory. I can add one mopre reason why he may not want to keep raising so far and so fast: the value of the dollar. Rates in Europe and Japan are either trawling the bottom or dropping, and there is going to be no early change in this. In the UK they will probably start coming down, and in the ECB it’s a case of “plus ca change, the more it doesn’t”. So really along with all the other reasons why euro/dollar might continue to move in favour of the USD, Greenspan might want to think more than twice about forcing the yield curve, at least if he doesn’t want to risk inverting it he might. Otherwise that disinflationary breeze that the BIS and Roach and company keep pointing to might just turn into a force 9 gale.

  2. Lord

    People will have to work longer and retire later, but frankly I don’t see how this can occur. Employment is none too good now, and companies are unwilling to bear the burden of employing the elderly. I don’t expect the impending worker shortage to change this one iota. If we could voluntarily persuade people to retire later, it would help greatly but trying to force people to work when the jobs won’t exist for them is simply cruel.

  3. Hal

    I often see those same figures quoted of workers per beneficiary: from 16.5 in 1950 to 3.3 today, with a further drop to 2.2 by 2030. I’m sure other people have had the same reaction: if we were able to withstand the enormous drop from 16.5 to 3.3 without any problems, why on earth would the slight additional decline to 2.2 be seen as a catastrophe?
    Workers per benficiary declined by a factor of 5 in 50 years and we’re doing fine; yet another decline by a factor of 1/3 over 25 years is supposed to throw us into bankruptcy? Something doesn’t add up.
    At a minimum, these figures are misleading and give the wrong impression of the true situation. I would suggest finding some new numbers if you want to effectively drive home how dire the situation is.

  4. Jim Glass

    “if we were able to withstand the enormous drop from 16.5 to 3.3 without any problems, why on earth would the slight additional decline to 2.2 be seen as a catastrophe?
    “Workers per benficiary declined by a factor of 5 in 50 years and we’re doing fine”
    You forget — Social Security went bankrupt for the first time in 1983, and had to be bailed out with big benefit cuts and tax hikes.
    Which is why workers retiring starting just about now will be the first ever to get less back from SS than they put in — and their loss on contributions will grow ever larger going forward for each retiring cohort.
    That’s not so fine fiscally, starting in 1983.
    It’s also not so fine politically. Remember, SS’s great *political* popularity is rooted in the days when everybody got a huge positive return from it, getting much more than they put in.
    As Paul Samuelson wrote back then in his famous Newsweek essay praising Social Security as “A Ponzi Scheme that Works”…
    “The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in — exceed his payments by more than ten times (or five times counting employer payments)!”
    What’s not going to be politically popular about that?! ;-)
    But now that process is going exactly into reverse. The beneficiaries Samuelson was talking about received $10 trillion more than they put in. As long as SS remains paygo its beneficiaries of the future must get back $10 trillion less than they put in, as a matter of arithmetic. That’s at **$20 trillion swing**. (The swing started for the retirement cohort of 2000.)
    Ask yourself this question: If our parents and grandparents had receieved from SS *$20 trillion less* than they did — and $10 trillion less than they put in, if it had made them *poorer* as a group by $10 trillion (instead of richer by $10 trillion) — would it still have earned the same political popularity among them that it did?
    The answer is significant, because that’s the future of SS as it stands.

  5. Dan

    “Employment is none too good now,”

    “I don’t expect the impending worker shortage to change this one iota.”
    So which is it? Are we running out of jobs, or running out of workers?
    The distinctions are interesting, however. Right now, SS benefits are tied to wages, not prices. If we don’t fix that, then we hit this tragic vicious cycle with positive (bad) feedback loops:
    1. large portion of workers retire
    2. wages go up as worker pool shrinks
    3. benefits for retired workers go up
    4. more workers encouraged to retire/not return to workforce
    5. goto 2

  6. Lord

    We are running low on jobs since so few have been created since the last recession and we will run low on workers over the next decade. Benefits for retired workers are tied to prices not wages. It is only the initial benefit that is tied to wages. Thus wages will go up and workers will be encouraged to retire later, providing more money to pay benefits. So maybe there isn’t a problem after all.

  7. Bill Ellis

    It seems to me that you are all overlooking the real economics of Social Security. As a small business owner my current contribtuion to Social Security is on the order of $11,000 annually. My projected benefit is about $1,800 per month, but that ignores the tax issue. The income tax cost of the $1,800 monthly benefit is about $430 per month, so that my net annual benefit at $16,500 is about 1.5 times my annual contribution cost. In addition, as I expect to work well past the “normal retirement age”, I will continue to be contributing to the system as much as I am receiving. I send money to Washington. They send it back. Tis truly a wonderful system.
    Bill

  8. Elder

    The Social Security System has it’s problems but it is still here. I have worked for GM and was sold to EDS. I have worked for Chrysler and was sold to Genernal Dynamics. I worked for Syncro engineering and it went out of business to open in Alabama under a new name with the same machines (owners pocketing retirememnt funds). Down sized, nobody hires 60 year old computer techs.
    The wonderful GM retirement turned into a terrible EDS retirement that was poor to begin and then changed overtime to barely nothing.
    The benefits by the way were dependent on how much Social Security paid out to the employee.
    The vesting laws never protected me. 20 years, 10 years and then 5 years vesting periods. Now that the vesting period is appropriate the companies have no funds to pay their retired employees. I think the law makers are not and never will be as smart as the companies.
    Our president stated that the congress spent our trust fund and gave us worthless paper instead. This worthless paper has another name, treasury bond(backed by our worthless government?). Not the Republicans nor the Democrats have ever stated publicly that the TRUST FUND needs to purchase municipal bonds or other secure paper. Why?????????????
    If municipal bonds were purchased instead of treasury bonds, we would not have a social security problem.
    The fix buy Good Bonds increase the social security taxable amount to all income.
    By the way notice that since the death of most retirement annuity benefits and selling us on 401’s, 1995 and forward that the stock market and your only means of retirement in the mutuals market; it’s growth is ?????????????

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