October 24, 2003
Distort, Distort, Distort
Kevin Drum is back in rare form (must be those zinc pills) distorting claims in Megan McArdle's second article on Social Security. Kevin writes,
Megan quite correctly says that the basic problem with Social Security is that as the baby boomers retire they will suck up a larger and larger portion of our national wealth, but then mysteriously suggests that this trend will continue forever until finally Social Security falls "off the cliff into insolvency."
This is quite inaccurate. There is nothing about an endless unchanging upward trend. In fact, if we provide a full quote of the section Keving pulled the "falling off the cliff" snippet from we get a different picture.
To understand exactly why Social Security is so troubled, it's helpful to stop thinking about our looming fiscal crisis, and think instead about the demographic problem that's causing it. For all the exhaustive arguments about tweaking benefit levels, changing the structure of FICA, or raising taxes, the main problem with social security is devastatingly simple. While there are currently 3.3 workers in the workforce supporting every retiree, in the 2040's -- when the Social Security Administration's projections show the program falling off the cliff into insolvency -- there will be fewer than 2, due to a combination of falling birth-rates and longer lifespans. Any long term solution, therefore, must do one of two things: increase the ratio of workers to retirees, or increase the productivity of the workers so that they can support themselves, and the retirees depending upon them, in the style to which everyone has become accustomed.
Hmmm, Megan says we go from 3.3 to 2. Doesn't look like an unchagning trend to me.
Kevin then points to this chart. To prove his point. Unfortunately for Kevin, he fails to note the increasing trend in that graph from about 2035 onwards. Granted, it isn't a steep increase, but it is an increase none-the-less. Further, I don't know of anybody who has claimed that the rate on increase in Social Security is going to be rise dramatically and not become flatter. What I have seen is that there will be a large increase, that will not go away, which is precisely what we see in the graph. In fact, if Kevin were to be honest and look at the page relating to the number of workers from the Trustees Report. He'd see that there is a similar relationship over time with respect to the numer of workers to beneficaries.
Kevin then proceeds to stick his head in the sand here,
4% of GDP is not a huge sum, and neither is 7%. As a country, we could afford to spend 7% of GDP on our retirees today if we needed to, and in 30 years we'll be able to afford it even more easily. And if you prefer to think of it in terms of taxes, it means nothing more than gradually increasing the income cap on Social Security taxes from today's $80,000 to about $300,000 by 2035 (adjusted for inflation, of course). It's just not that big a deal.
First, 7% of GDP is s huge sume, try around $1.4 trillion dollars. And no, it wont be easier to afford it in the future because unless you are cutting benefits, taxes will have to go up to pay for it. How much? Well if we increased the payroll tax right now, today it would have to be a 31% increase in the tax. Where do I get this, from the Social Security Trustees Report. Apparently Kevin didn't read the second page. The final claim is really odd when coupled with the statement that we'll be better able to afford it in the future. Especially Kevin's belief that income mobility is quite low. Basically it means raising taxes. Somehow, you'll find extra money to pay these taxes that itself wont be taxed.
I'm genuinely mystified by the legions of people who insist on perpetuating the myth of Social Security disaster. What's the point? They can read graphs as well as I can, and they must know perfectly well that long term funding of Social Security is not that difficult a problem. So why the apocalyptic rhetoric?
What Kevin is failing to do is to consider that not only is there a problem with Social Security, but with Medicare too. Can you read this graph Kevin? And that graph was created back in the halcyon days of 2000 when everybody was predicitng surpluses for a long time into the future.
Apparently it's to scare everyone into thinking that we should scrap the whole idea of Social Security and move to private accounts. Megan makes a brave effort to wave her hands and claim that somehow it's OK to allocate 7% of GDP to retirees as long as it comes from mandatory investments in private accounts instead of from federal taxes, but this is nonsense. We can either afford to divert that much of our output to nonworking retirees or we can't. It doesn't really matter where it comes from.
This is ridiculous. Kevin makes it seem like the question is, do we allocate 7% of GDP to the elderly or not. That isn't the issue. The issue is with how we are doing it. If the that money is allocated through taxes it is contractionary. If you do it through a program that requires compulsory saving that is something that can enhance growth. Further, if you borrow money to pay for this, you are taking funds that could be used for productive purposes and are instead simply giving it to people so they can maintain a level of consumption.
(And her claim that mandatory accounts increase national savings is purest moonshine. Trading a $200 billion deficit for an extra $200 billion invested in the stock market does us no good at all. If it did, then we could have a real Ponzi scheme in which the feds crank up the printing presses and give us all a bunch of money to invest. By and by, we'd all be rich!)
The only moonshine is the stuff Kevin is drinking. The idea of printing money and giving it to people to invest has the nasty side effect of increasing inflation. Not only will inflation reduce the purchasing power of the money printed, but the pruchasing power of every dollar already out there. I also suggest that Kevin look up what a Ponzi scheme is, printing money has nothing to do with it.
Bottom line: starting around 2010 or so we need to begin raising the income cap on Social Security taxes. In addition, we may want to raise retirement ages and cut back modestly on benefits in other ways. But we don't need to do anything dramatic, and private accounts are mostly a matter of taste, not something that's likely to change this dynamic in any serious way.
Again this is not correct. With a personal account the money is yours. Instead of an IOU, you will actually have money in an account that is yours, and not somebody elses.
After all, once the system got cranked up you'd have workers putting money into private accounts and retirees all withdrawing from private accounts. Net investment: about zero.
This is possible, but it depends on a host of factors such as growth rates for the investments, and how much people withdraw vs. how much people save. For example, if I save $45 and you withdraw $25 there is an increase in savings by $20.
At the end Kevin completely distorts with this,
The chart above is as simple and clear as it can be. Social Security funding is not that big a problem, expenditures flatten out rather than going off a cliff....
Megan said nothing about expenditures falling off a cliff, but that the program, if nothing is done, "...falling off the cliff into insolvency ..."
So, the question is, what does Kevin Drum know that Laurence Kotlikoff, The CBO, and many, many other people do not?
Posted by Steve at October 24, 2003 02:44 PM