Topic: Social Security

But We Can Trust the Government, Right?

A common criticism of Social Security choice (and defense of the Social Security status quo) is that there are dishonest actors in private markets who would put people’s private account assets at risk of (in the words of the AFL-CIO) “corruption, waste and Enron-ization.” These critics argue that society is much better off keeping Social Security in the honest, benevolent hands of Uncle Sam.

What must these critics be thinking about today’s NYT above-the-fold article on teacher pension fund shenanigans in New Jersey? The lede says it all:

In 2005, New Jersey put either $551 million, $56 million or nothing into its pension fund for teachers. All three figures appeared in various state documents — though the state now says that the actual amount was zero.

Like many state and local government pension systems, New Jersey’s is woefully underfunded compared to the benefits it will have to pay in the future. (This situation will make headlines in the coming years, as state and local governments begin to disclose their pension fund and retirement benefit system shortfalls in accordance with a recent GASB requirement.) In New Jersey’s case, the shortfall is more than has been publicly acknowledged, however: “an analysis of its records by The New York Times shows that in many cases, New Jersey has overstated even what it has claimed to be contributing, sometimes by hundreds of millions of dollars.”

Talk about the Enronization of retirement benefits…

What should be especially troubling to SS choice opponents is that New Jersey has a number of “good government” provisions on its books, including one requiring any new state spending be paid for using a specified revenue source. When the state sweetened its pension benefits a few years ago, lawmakers supposedly complied with the law. Moreover, New Jersey officials told the NYT that there is no impropriety in the pension fund’s accounting — everything (including the apparent misstatements) is on the level.

So, despite “the right” legal safeguards, despite accounting mandates, despite the existence of a special interest (aka the state’s teachers’ union) with strong incentive to make sure the teachers’ pension fund is healthy, and despite the fund’s handling by supposedly honest, benevolent government, New Jersey’s teachers’ pension fund is “in dire shape, with a serious deficit.”

Choice opponents do have a reasonable concern that bad actors in investment markets could harm private accounts. But they fail to acknowledge that bad actors (and even non-bad actors) can — and do — harm public pensions. Wouldn’t it be sensible to allow people to put their public pension nest eggs in many different private investment baskets (some of which may be susceptible to bad actors) instead of keeping those eggs all in one Social Security basket (also susceptible to bad actors)?

At the very least, wouldn’t it be sensible to give people a choice of which bad actor risk they’d rather run?

The Swift-Boating of Andrew Biggs

Anyone who thinks that Democrats might be prepared to work in a bipartisan manner to reform Social Security should be quickly disabused by their disgraceful treatment of Andrew Biggs, President Bush’s nominee to be the next deputy administrator of the Social Security Administration.   Biggs, who once worked for me, is a distinguished economist and expert on Social Security, who has earned the respect of people on all sides of the Social Security debate.  During the time we worked together, he proved to be a rigorous analyst, who followed the numbers wherever they led, always choosing facts over ideology.  No one ever criticized his character or the quality of his research.

However, Biggs is an advocate of personal accounts.  As a result, some Democrats in Congress, the New York Times, and the National Committee to Preserve Social Security and Medicare have embarked on a campaign to smear him and scuttle his nomination.  Democrats appear to be saying that holding any opinion with which they disagree makes one unfit for public office.  If that’s the course they plan to pursue in the next Congress, more than just hope for Social Security reform will go down the drain.

Social Security – Worldwide Failure

Social Security may still be something of the political third rail in this country, but the rest of the world continues to turn away from the traditional government-run model for retirement programs. A new survey by HSBC of industrialized countries finds that only 30 percent of their citizens believe that government should be primarily responsible for funding their retirement, compared to 43 percent who believe that individuals should bear the cost of the own retirement.

Regardless of country, there is little confidence in Social Security. Just 29 percent believe that their governments will be able to pay the benefits it has promised. When asked how to reform their country’s Social Security systems, 37 percent favored the introduction of some form of mandatory savings or personal account program, while just 13 percent would increase taxes to pay for promised benefits.

Privacy Debacle Top Ten

Wired News reporter Annalee Newitz has compiled a “top ten” list of privacy debacles

It’s easy to quibble with the results, but I was delighted to see “The Creation of the Social Security Number” at #1.  Our national identifier has used its government backing to push aside all others and enable government and corporate surveillance on a scale that would never have occurred under natural conditions.

In Identity Crisis: How Identification is Overused and Misunderstood, I discuss how the uniform identification system we’ve built around the Social Security Number is insecure for individuals, making information about them too readily available to governments, corporations, and crooks. 

The fix is nothing so ham-handed as banning uses of Social Security Numbers.  Rather, it will be necessary to remake our identification systems so that they are diverse and competitive, and thus solicitous of individuals’ interests.

Another Year Older and Deeper in Debt

Social Security turns 71 today. One can argue about whether or not the program was a good idea in 1935, but there should be no question about its inadequacies today. And its flaws just get worse with each passing year.

Social Security will begin running a deficit in just 11 years. Of course, in theory, the Social Security Trust Fund will pay benefits until 2040. That’s not much comfort to today’s 33-year-olds, who will face an automatic 26 percent cut in benefits unless the program is reformed before they retire. But even that is misleading, because the Trust Fund contains no actual assets. The government bonds it holds are simply a form of IOU, a measure of how much money the government owes the system. It says nothing about where the government will get the money to pay back those IOUs.

Overall, the system’s unfunded liabilities—the amount it has promised more than it can actually pay—now totals $15.3 trillion. Yes, that’s trillion with a “T.” Setting aside some technical changes in how future obligations are calculated, that’s $550 billion worse than last year. In other words, because Congress failed to act last year, our children and grandchildren were handed a bill for another $550 billion.

Moreover, Social Security taxes are already so high, relative to benefits, that Social Security has quite simply become a bad deal for younger workers, providing a low, below-market rate-of-return. In fact, many young workers will end up paying more in taxes than they receive in benefits. They will actually lose money under the program.

But the single most important problem with the current Social Security system is that workers have no ownership of their benefits. The U.S. Supreme Court has ruled, in the case of Flemming v. Nestor, that workers have no legally binding contractual or property right to their Social Security benefits, and those benefits can be changed, cut, or even taken away at any time. This means that workers completely dependent on the goodwill of 535 politicians when it comes to what they’ll receive in retirement. And because workers don’t own their benefits, those benefits are not inheritable. This particularly disadvantages those groups in our society with shorter life expectancies, such as African-Americans.

Social Security reform was once a bipartisan issue. Democrats like Senators Bob Kerrey and Daniel Patrick Moynihan were outspoken in warning about the program’s looming insolvency, and in calling for innovative approaches to fixing it. The Democratic Leadership Council and its think tank arm, the Progressive Policy Institute, explored many approaches to reform, including personal accounts. Congressmen like Charlie Stenholm reached across the aisle in search of compromise. Even President Clinton led a national debate to “Save Social Security First.”

But since President Bush called for reforming the nation’s troubled retirement program, congressional Democrats have had only one answer: “No.” No to personal accounts. “No” to changes in benefits. “No” to offering a real reform plan of their own. “No” to any discussion or negotiation.

At the same time, Republicans—apparently terrified of offending AARP and other special interests—have scurried for cover, running from positions they should know are correct. Republicans seem to believe that if the just stick their heads far enough in the sand for long enough, Democrats won’t attack them. The result is a choice between Democratic obstructionism and Republican cowardice.

And we wonder why so many young people are turned off to politics?

Sorry, We Can’t ‘Grow’ Our Way out of the Social Security Problem

Many economists and lawmakers — especially conservatives — argue against tax hikes as solutions to entitlement shortfalls, saying the hikes would be counterproductive. According to this argument, higher taxes would retard growth, reduce federal revenues, and worsen entitlement shortfalls. 

For example, Stephen Moore in his June 12 Wall Street Journal column “Don’t Know Much About History…” alludes to a presumed beneficial impact of faster (wage) growth on the financial problems of entitlement programs. Unfortunately, that presumption is incorrect, especially as regards Social Security.

The claim that faster wage growth would reduce Social Security’s financial shortfall is an artifact of the standard (but flawed) 75-year-ahead Social Security financial projections that count payroll taxes through that period but ignore benefit obligations those taxes would create beyond the 75th year. The projections make it look as though robust wage growth would shrink the gap between Social Security revenues and obligations. But the picture changes over a longer timeframe.

The Social Security trustees have in recent years begun publishing estimates of the present value of Social Security’s financial shortfall in perpetuity. This is the correct measure to use in assessing the impact of faster wage growth on Social Security’s financial status because it is comprehensive — it accounts for all future taxes and benefits. Unfortunately, the trustees do not provide any analysis of how sensitive the perpetuity measure is to changes in various underlying assumptions. 

Whether faster economic growth would improve or worsen Social Security’s actuarial deficit depends on the balance between two opposing forces: demographics and wage growth. 

Concerning demographics, as retirees grow more numerous relative to workers, Social Security’s finances would worsen — which is easy to see if benefits depend on current wages. 

Concerning wages, in each time period, benefits mostly depend on past wages. That’s because under current Social Security laws, once a person’s benefit level is determined at the time of retirement, its real value remains constant during the rest of the person’s retirement years because it is indexed to prices. (The real value of benefits would grow were post-retirement benefits indexed to wages instead.) Because current benefits depend mostly on past wages, faster growth in current wages won’t lead to a proportionate increase in current benefits. Benefits would begin to grow faster only after a considerable time lag. Hence, faster wage growth magnifies the financial advantage associated with this time lag and reduces Social Security’s actuarial deficit.

It has been shown that in the case of U.S. Social Security, the force of worsening demographics dominates: The system’s actuarial deficit (i.e., the ratio of the present value of the system’s financial shortfall to the present value of the payroll tax base when both are calculated in perpetuity) increases with faster wage growth — a result opposite to that obtained under 75-year-ahead calculations. 

Thus, based on a comprehensive measure, the view that faster wage growth would deliver us from our Social Security problem is misguided. But many have repeatedly cited it to argue against reforming the program, e.g., Sen. John Kerry during his 2004 presidential bid. 

The Social Security debate would be better served if we put this view in its rightful place: the trash bin.

Of course, the conclusion should not be that we should strive for slower wage growth to improve Social Security’s finances! Mr. Moore’s distaste for growth-retarding tax hikes is correct. But the negative implications of faster wage growth for Social Security’s finances do not provide any purchase for his argument. Indeed, the twin imperatives of maintaining high economic growth and resolving Social Security’s financial shortfall indicate — even more strongly — that reforms should be weighted more heavily toward future benefit cuts rather than tax hikes.

Who’s More Myopic?

Here’s a partial view of the range of issues that needs to be scaled in order to constrain the future size of the federal government. In what follows, A = widely appreciated by the public, N = not widely appreciated, and A-N = appreciated by a few.

  • Waiting to reform will mean that the median voter will be older – and tend to vote for tax hikes rather than benefit cuts as a solution to entitlement shortfalls (A).
  • Waiting to reform entitlements makes the cost of fixing them increase as a percentage of GDP – and last year, we decided to postpone Social Security reform until who knows when. Just for Social Security, each year brings an additional $600 billion in cost (official Social Security Administration estimate). Note, the economy adds only about $450 billion in additional output each year (N).
  • When analyzing the merits and demerits of reforms, we do not consider their full cost because we make policies based on short-horizon fiscal measurements – the 10-year cost of prescription drugs, for example (A-N).
  • Recently emerged needs for countering terrorism and international nuclear blackmail means the peace dividend has evaporated and cutting other government spending is less viable as a means of releasing resources for entitlement outlay needs (A-N).
  • Private saving has declined and remains low (zero percent on personal saving) precisely because of the types of entitlements we have adopted (my finding from past research on why national saving declined in the U.S.). We’re lucky to be able for borrow capital from abroad today, but all such borrowing will have to be repaid with interest – perhaps just when we need to distribute more for retiree support (A-N).
  • We just enacted a massive new and irreversible entitlement – Medicare prescription drugs – the constituency for which will grow more solid by the year (A).

Most of these issues ARE known to policymakers and federal budget practitioners within the beltway. In fact, they have been known since the early 1990s. Despite recognizing these problems, Congress has repeatedly settled into postponing action on entitlement reforms.

What does that tell you?

Those who believe that the government should come to the aid of “myopic” individuals who don’t save enough for the future, think again.