Deinonychus antirrhopus

Is Social Security a Problem Today

Or more accurately is it a problem we need to be looking at now rather than later? Kevin Drum feels it is one we can put off for awhile. I think he is wrong.

The problem is that the Social Security surplus is currently used to lower the deficit. So while the fund is "solvent for the next 40 years", it will start running a deficit much, much sooner. In 2022, according to the Trustees Report, the trust fund's income rates become permanently negative. In 2007 the income rates will reach a (local) peak and start declining. This means that starting in 2007, holding all else constant (in real terms), budget deficits will increase.

Another problem that I have is that Social Security can be made solvent "forever".

Some very minor adjustments on either the tax or benefit side would keep it solvent forever. (For example, the Social Security Advisory Board says that even if you addressed the problem solely by tax increases, you'd only have to raise the current payroll tax from 6.2% to 7.1%. That's not exactly Armageddon, but of course you don't learn that until page 21 of this report, which on page 3 talks about Social Security's "looming financial shortfall.")

Here is the problem with this kind of thinking. First, Kevin is ignoring Medicare while the Trustees Report does not. Kevin tends to ignore Medicare based on the false belief that the two problems are unrelated. They aren't. The problem with Social Security is also part of the problem with Medicare. Social Security is head for insolvency because there are going to be a sudden and permanent upsurge in the number of elderly in this country. This absolutely has to affect Medicare expenditures as well. Now Medicare also has a problem due to the accelerating costs of health care, but to pretend that the problem with Social Security is different with the problem of Medicare is just ridiculous.¹

Second it ignores the problem inherent in activist government: rent seeking. The elderly and their vote is something that many, many politicians seek. As such the elderly have quite a bit of clout. Would anybody really object if I claimed that Bush's Medicare Drug Policy is a blatant attempt to get the elderly to vote for him? Now consider that shift in demographics in this country. They are going to far, far more elderly in the coming years. When this happens the urge to pander to the elderly will simply get stronger and stronger. There will be even more pressure to pass policies that give the elderly a "raise" in an attempt to gain the elderly vote.

Finally there is the issue of time inconsistency. Lets assume that Kevin and those who believe as he does are right. The optimal policy is to simply re-index benefits to the price level vs. the growth rate of wages. Further, that there is a minor increase in the payroll tax and a modest increase in the income cap. What does time inconsistency tell us here? It says that the government will now have an incentive to deviate from this policy if everybody believes it. By deviating they can increase the overall welfare level. But forward looking agents will realize this and not believe the government will follow the optimal plan. Thus, individuals will not act as if the plan will be followed and the optimal plan will not be achieved. What will happen? I don't know. Benefits might be cut more. The tax revenue might not materialize and taxes have to be increased even more. The supposed "forever" fix isn't forever. This last one is pretty much a given, in my opinion. Social Security was supposed to be fixed the last time they addressed the problem of insolvency. Didn't work then and based on all the above I don't see any reason why it should work now.

I hate this kind of stuff,

So why do Republicans waste time pushing private accounts? Because lots of people — especially young people — are convinced Social Security won't be around by the time they retire. But why are they afraid it won't be around? Because Republicans keep peddling scare stories about how Social Security is heading toward bankruptcy.

It's a neat circle. It's also untrue. Republicans want private accounts for purely ideological reasons, not because they actually solve a problem. If Democrats and Republicans really wanted to "fix" Social Security, they could do it in about a week of good faith effort — and then move on to other, more real, problems. Now that would be a campaign promise worth listening to.

It is a variant on the demonize the opposition. The benefit of "privatization" (and lets be honest it isn't even really privatization) is that it removes the problems rent seeking and demographics. Since it is my money going into my account there isn't the government can do to increase my future benefits save make sure the economy grows at a decent rate. Since every person is basically financing their own retirement there is no problem with changes in demographics. Notice that none of the above is addressed by Kevin or any other opponent of privatization.²
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¹I think it is also fair to say that part of the problem with the acceleration of health care costs has to do with Medicare. Lets face it the elderly's consumption of health care resources is pretty high. As you age various parts of the human body start to decline. Throw in the huge subsidy that Medicare is, and you have a recipe for ballooning consumption of resources which also forces up the prices for everybody else.
²And I'm now less convinced that privatization is the way to go, but still there is no need to impute less than honorable motives to one's opponents. I don't say that Kevin is advocating the position he is advocating because he hates the elderly, wants them to suffer. I don't claim that he hates the young and wants them to suffer. I think Kevin is wrong, but not that he is a bad man. Why he can't return the favor is beyond me.