Social Security

March 22, 2019 12:58PM

Government Mandated, State‐​Run Auto‐​IRAs Can Cause Real Harm

A number of states have recently enacted employer mandates that force companies who don’t offer retirement plans to enroll their workers in a state-run, auto-IRA plan. Oregon’s program – known as OregonSaves – is the oldest and most established. By mid-2020, Oregon’s mandate will cover all companies; it currently covers companies with twenty or more workers.

One myth – perpetuated by the National Employment Law Project – is that state mandates expand opportunity to retirement savings, especially for low-income workers. They don’t. OregonSaves initially defaults worker contributions into a conservative capital preservation fund before redirecting contributions to a life-cycle fund once balances exceed $1,000. Since inception in 2004, the capital preservation fund has offered a paltry nominal return of 1.52% (essentially an inflation-adjusted return of 0%). OregonSaves also assesses an administrative fee of 100 basis points (that is, 1%) regardless of investment choices, further diminishing this return. This set-up isn’t really an opportunity for Oregon workers, because they already have access to Roth IRAs and investments with a more beneficial set-up. A 25-year-old worker might actively choose a life cycle fund with no minimums for initial investment or additional contributions, along with administrative fees of 75 basis points, significantly lower than OregonSaves. Choosing an index fund that tracks the S&P 500 could have administrative fees as low as 1.5 basis points. Without mandating Oregon employers to enroll their workers, OregonSaves would struggle to compete in a vibrant marketplace with many inexpensive alternatives for retirement contributions.

If government mandates don’t improve access to retirement plans, why have the program? The real reason is that the programs increase participation through inertia; simply put, many workers are asleep at the wheel. Many workers don’t take active steps to plan for retirement regardless of how a program is designed. If the default choice is to actively enroll, many workers won’t participate. If the default choice is automatic enrollment with an opt-out option, many workers do participate. Oregon’s 28% opt-out rate is relatively high, highlighting some of the problems of the program’s design. Among those enrolled, fully 93% of participants stick with the specified contribution rate and an astonishing 79% of all fund balances are invested in the capital preservation fund. Almost all remaining balances are invested in target date funds, likely for workers who have exceeded the $1,000 contribution.

Worker inertia is real, meaning that design choices like opting in or out, asset classes and contribution rates are likely to stick. The one-size-fits-all design of OregonSaves can cause real harm for many workers, an issue I explored with my colleagues in a new study for Journal of Retirement. If OregonSaves were adopted nationally, 24.2 million workers aged 25-64 would initially be opted-in. Approximately 33% of affected workers carry high-interest credit card debt, with balances averaging nearly $5,500. Around 15% of affected workers struggle to meet basic needs like paying rent or utility bills. Workers in these situations come out ahead by paying down debt or meeting basic needs, and siphoning off 5% of their paycheck will likely worsen their overall financial situation.

Financial planning websites consistently emphasize paying off revolving high-interest debt before saving for retirement (unless a company offers a match rate), yet auto-IRAs fail to take these investment lessons into account. Advocates for government mandates emphasize the benefits of compounding for assets in an IRA, while curiously ignoring the reality that unpaid debt compounds in the exact same manner! At an 18% interest rate, an unpaid $5,500 credit card debt would mushroom to $28,800 in ten years. The same amount of money directed towards OregonSaves might accumulate to $12,900 under rosy assumptions about investment returns. Ultimately, our study shows a significant number of workers are in situations like this, and auto-IRAs would do more harm than good for them.

August 21, 2018 1:23PM

Results from the 2018 Libertarianism vs. Conservatism Post‐​Debate Survey

As part of a yearly summer tradition, the Heritage Foundation and Cato Institute co-host a debate in which interns at both think tanks debate whether conservatism or libertarianism is a better ideology. Following this year’s debate, the Cato Institute conducted a post-debate survey of attendees to ask who they thought won the debate and what they believe about a variety of public policy and philosophical issues. The post-debate survey offers a unique opportunity to examine how young leaders in the conservative and libertarian movements approach deep philosophical questions that may be inaccessible to a general audience.

Despite agreement on domestic economic issues and free trade, the survey finds striking differences between conservative and libertarian  attitudes about Donald Trump, immigration, transgender pronouns, government’s response to opioid addiction, police, defense spending and national security, domestic surveillance, and religion. The survey also went further than just asking about policy and used Jordan Peterson’s 12 principles for a 21st century conservatism to examine the underlying philosophical differences between libertarian and conservative millennials. 

Full LvCDebate Attendee Survey results found here

Trump and Partisan Loyalties 

Libertarian and Conservative attendees have starkly different views of President Donald Trump. While 91% of conservative attendees approve of Trump’s job performance, 69% of libertarian attendees disapprove of Trump. 

Eighty-four percent (84%) of young conservative attendees identify as Republicans and that number increases to 99% once independent-leaning Republicans are included. Libertarian millennial attendees are far less partisan: only 19% initially identify as Republicans while 76% don’t believe either the Republican or Democratic parties represent them. However, if libertarian independents had to pick, 60% would lean Republican. Thus, both groups are more aligned with the Republican rather than Democratic Party, but libertarians are far less committed partisans. 

Young Libertarians and Conservatives Have Different Policy Priorities 

When asked to select the top three issues most important to them personally, libertarians and conservatives have different issue priorities. Conservatives are about 30 points more likely than libertarians to place greater weight on abortion (41% vs. 11%) and family values (31% vs. 4%) and are about 20 points more likely to emphasize national security (35% vs. 18%) and civil society (23% vs. 5%). 

Libertarian attendees on the other hand are about 20 points more likely than conservatives to prioritize criminal justice issues (24% vs. 2%), regulation (28% vs. 8%), government spending (37% vs. 22%), and free speech (47% vs. 34%). 

Both libertarians and conservatives agree that taxes (25% vs. 24%), welfare state issues (14% vs. 16%), and immigration (24% vs. 20%) are top priorities. Similarly, both groups say policy related to housing, transportation, the environment, unions, and paid leave are not their top priorities (<5%).

Conservatives Say Political Life Should be Based on Judeo-Christian Principles 

Nearly 9 in 10 conservative attendees (87%) believe that “political life in this country should be based on Judeo-Christian principles,” while 13% believe it should not. Conversely, 70% of libertarian attendees believe that these religious principles should not be the basis of American political life, 30% believe it should be. 

Part of the reason for this may be that conservatives are far more likely to attend church regularly (59% vs. 16%) and to believe people need to be raised with religion to learn good values (84% vs. 41%). Furthermore, conservatives also believe government has a role to play in promoting traditional values (83% vs. 9%). While libertarians are more likely to see value in religious teaching for children they do not extend such a role to government.  

Libertarians Want More Immigration, Conservatives Want to Keep It the Same or Decrease It 

Young libertarian attendees have a more open and permissive view of immigration while conservatives take a more restrictive approach—from the border wall, citizenship for illegal immigrants, sanctuary cities, legal immigration procedures, and the Muslims travel ban.   

Strong majorities of conservatives favor building a large wall along the U.S.-Mexican border (74%), oppose sanctuary cities (94%), and support deportation of illegal immigrants (55%). 

In the opposite direction, strong majorities of libertarians oppose a border wall (86%), support sanctuary cities (58%), and favor citizenship for unauthorized immigrants (59%).

Even when it comes to legal immigration processes, 74% of libertarians want to increase the number of immigrants legally allowed to enter the US, compared to 28% of conservatives. Instead a plurality of conservatives (43%) would rather keep legal immigration flows the same and nearly a third (29%) would decrease it. 

Both libertarian and conservative attendees oppose a temporary travel ban on Muslims entering the United States; however, libertarians are nearly 40 points more opposed (89% vs. 51%). 

Given the divide between young libertarians' and conservatives' views of immigration, it's perhaps unsurprising that conservatives are nearly twice as likely (80% vs. 44%) as libertarians to agree that “Western civilization is at risk of losing its identity.”  

Libertarians Say U.S. Foreign Policy Causes Instability and Chaos 

Young libertarians and conservatives have dramatically different evaluations of the impact of U.S. foreign policy. Nearly 9 in 10 (86%) libertarians believe American foreign policy “does more to promote instability and chaos.” In stark contrast, 82% of conservatives believe American foreign policy “does more to promote peace and stability” in the world. Few questions polarize libertarians and conservatives more than the impact of U.S. foreign policy.  

This might explain why 60% of libertarians think the U.S. should leave Afghanistan “now,” and 93% say at least within the next five years. In contrast, a plurality (40%) of conservatives say the U.S. should stay in Afghanistan for “as long as it takes,” while 31% say the U.S. should leave in the next five years, and only 25% think we ought to withdraw troops immediately. 

What Pronouns Do You Prefer? 

Libertarians and conservatives are also diametrically opposed on the use of transgender pronouns. While three-fourths (75%) of libertarians use a transgender person’s preferred gender pronouns, three-fourths (73%) of conservatives say they use the pronouns corresponding with the transgender person’s biological sex. 

These results are consistent with the fact that a majority (52%) of conservatives do not think society should “do more ensure LGBT people feel fully accepted in society,” 20% have no opinion, and 27% think society does have this obligation. Instead, a majority (55%) of libertarians think society does need to do more to ensure LGBT people feel accepted, while 24% have no opinion, and 22% disagree. 

Conservatives Want Government To Do Something about Opioids 

Nearly three fourths (71%) of conservatives agree that government needs to "do more" to combat prescription painkiller addiction, while 14% think it should not. However, nearly 6 in 10 (59%) of libertarians think government should not do more to address opioid addiction, while 25% think it should. 

Conservatives and Libertarians Disagree About Police Misconduct 

Conservatives and libertarians are divided in their perceptions of police misconduct with conservatives more apt to defend and libertarians more skeptical of police. Eight in ten (80%) young conservative attendees believe that that police only use lethal force when necessary. Conversely, 77% of libertarians instead think that the police are too quick to use lethal force.

Conservatives Support Domestic Surveillance, Libertarians Overwhelmingly Opposed 

A slim majority (54%) of conservative millennials approve of the government’s collection of telephone and internet data as part of anti-terrorism efforts while 46% oppose. However, libertarian attendees are overwhelmingly opposed with 93% who disapprove including 75% who strongly disapprove. Only 7% support such a program. 

Young Conservatives and Libertarians Agree About Economics and Free Trade 

Despite the many aforementioned differences, the young conservative and libertarian attendees agree that smaller government is better, that we shouldn’t tax the wealthy more than we already are to raise revenue for more social programs, and that the costs of free trade to some domestic industries is outweighed by the benefits to consumers.  

Furthermore, nearly 100% of both groups say they prefer a smaller government providing fewer services with low taxes over a larger government with more services and high taxes (96% vs. 97%). Similarly, overwhelming majorities of young libertarians (91%) and conservatives (88%) oppose raising taxes on households earning more than $250,000 a year. 

Despite President Trump’s persistent criticism of free trade deals, strong majorities of conservatives (75%) and libertarians (94%) agree “free trade must be allowed, even if domestic industries are hurt by foreign competition.” A quarter (25%) of conservatives and 6% of libertarian attendees think “trade restrictions should be used to protect domestic industries.” 

Young Libertarians and Conservatives Tolerant of Free Speech and Political Expression 

Another area in which young libertarians and conservatives largely agree is that people should be allowed to express their political opinions publicly. Majorities of both libertarian (91%) and conservative attendees (58%) also believe that NFL players who refuse to stand for the national anthem should not be fired. Even still, libertarians are more than 30 points more likely to say the athletes shouldn’t be fired. Similarly, majorities of both libertarians (95%) and conservatives (58%) oppose a law banning flag burning, even still, libertarians are nearly 40 points more opposed.

Understanding the Differences between Conservatives and Libertarians 

Why do libertarians and conservatives agree on economics but disagree so vehemently on matters of immigration, national security, police, drugs, and LGBT issues? To explore the underlying philosophical differences between conservatives and libertarians, we asked attendees to evaluate a series of statements about tradition, order, change, social conformity, responsibility, and loyalty. Several of these statements come from University of Toronto professor Jordan Peterson’s 12 proposed principles for a 21st century conservatism, several others were written by the survey author.[i] 

Libertarians and conservatives think about change and the importance of social order differently. Fully 88% of conservatives agree that “radical change should be viewed with suspicion, particularly in a time of radical change.” About half that—43%—of libertarian attendees agree with that statement while nearly as many (42%) disagree. Instead, nearly two-thirds (65%) of libertarians agree that “social change and disruption, even if they’re chaotic, are necessary to improve human happiness.” Only a quarter (24%) of conservative attendees agree that sometimes disruption and chaos are necessary for human flourishing.

Libertarians are more likely than conservatives to reject the “wisdom of the ages” idea that longstanding social norms are more likely to be correct. Conservatives are more likely to believe that social institutions and norms that have withstood the test of time have revealed truth given their longevity. A strong majority of conservative attendees (69%) agree that “we should judge our political system in comparison to other actual political systems and not to a hypothetical ideal.” Instead a plurality (45%) of libertarians disagree with this statement while 38% agree with it. 

Those who judge our system relative to a hypothetical ideal would be more comfortable with changing our political institutions to conform with a hypothetical—and thus untested—idea of a better future. However, those more cautious of change would be skeptical of transforming deeply rooted longstanding political institutions, that they view have withstood the test of time, into something untested.

In a similar vein, 67% of libertarian attendees disagree that “it is better to do what everyone has always done unless you have an extraordinarily valid reason not to,” while only 13% agree. Instead, a plurality (42%) of conservatives agree with this statement, 32% neither agree nor disagree and 25% disagree.  

In a consistent pattern, nearly 9 in 10 (89%) of conservatives agree that “intact heterosexual two-parent families constitute the necessary bedrock for a stable polity,” including 73% who strongly agree with this statement. Libertarian attendees are split on this idea with 47% who agree and 40% who disagree. 

Conservatives are more likely to emphasize social conformity as a useful and necessary tool for a properly functioning society. Libertarians tend to be skeptical. Nearly 9 in 10 (86%) of conservative attendees agree that it is “just and right to demand some sacrifice of individual impulse and idiosyncrasy so that society can function properly.” Libertarians are about 50 points less likely to agree (37%). Instead half (49%) disagree that people ought to curtail their own idiosyncrasies to get along in society and 14% have mixed feelings.

One reason why conservatives may expect greater social conformity from others is that they are far more likely to believe there is a “right way” to do things. If one believes there is a hierarchy of proper and effective behaviors it’s clear why one would expect others to get with the program.  Nearly 8 in 10 conservative attendees (78%) agree “there is always a right way to do things.” In contrast, a slim majority (51%) of libertarian attendees disagree that there is always a right way to do things. Ostensibly, libertarians tend to believe there could be several or even many equally effective ways of doing things.

Libertarians may de-prioritize social conformity because they tend to believe that flexible social norms are necessary to allow people to discover better ways of doing things. Even if they believe there is one right way, perhaps society hasn’t yet figured out what that right way is. Thus, 86% of libertarian millennial attendees agree that “we should keep social norms and laws flexible to allow people to discover better ways of doing things.” Only 33% of conservative attendees agree; instead a plurality disagree (44%) with that sentiment. 

Conservative attendees largely agree that “it is more noble to teach young people about responsibilities than about rights.” This is a hard statement to evaluate because many would say both are equally important. Nevertheless, when asked to choose, two-thirds (66%) of conservatives emphasize teaching young people about their responsibilities over informing people of their rights. Libertarians are divided with a plurality (45%) who disagree that teaching responsibilities should come before teaching about rights and 38% who agree.

Do young people love America? If they do, do they love it because it’s home, because of its history, because of the ideals it aspires to embody? What if America ceased living up to those ideals, would they still want to live here? Nearly two-thirds (61%) of young libertarians say no, “if another country better embodied the ideals of America” they would “want to move to that country” instead. Conversely, a majority (55%) of conservatives disagree, they would stay in America anyway. 

Instead, conservatives place greater emphasis on community, which may be one reason they wouldn’t want to leave the country if another country better embodied American ideals. Even though both conservatives (100%) and libertarians (89%) agree that “it’s important for people to have community,” 82% of conservatives “strongly agree” with this statement compared to 51% of libertarians—a 31-point difference. 

Despite these divisions, young libertarians supported several principles Peterson articulated for conservatives—on matters of liberty and just deserts. In fact, libertarians were far more likely to agree that “the government, local and distant, should leave people to their own devices as much as possible.” Although overwhelming majorities of young conservatives (83%) and libertarians (98%) agree, libertarians are 53 points more likely to “strongly agree” (83% vs. 30%) than conservatives. 

Both libertarian and conservative attendees also overwhelmingly endorse the idea of proportional justice that people should reap the benefits of their hard work. Over 9 in 10 libertarians and conservatives agree that “citizens have the inalienable right to benefit from the result of their own honest labor.” 

Who Won the Intern Debate? 

Who won the intern debate depends on whom you ask. Among conservative attendees: 94% said the conservative team won and 6% said the libertarian team won. Among libertarian millennial attendees, 54% said the libertarians won while 46% said the conservatives won. Among the moderates, liberals, and progressives in the audience, 58% felt the conservative team won and 42% thought the libertarians won. 

Summary 

Many observers have assumed that libertarians and conservatives come from essentially the same branch of the political tree, or that one is simply a more stringent version of the other. However, the survey finds striking differences between the two groups in policy beliefs undergirded by different assumptions and philosophical worldviews. This survey of politically engaged young conservatives and libertarians highlights the commonalities as well as conflicts between the two groups and portends the political conflicts of the future.

Full LvCDebate Attendee Survey results found here





[i] Several of Peterson’s principles were re-worded for use in the survey. Although Peterson has said he doesn’t personally identify as conservative, when asked to speak to a conservative group he offered up twelve principles he thought conservatives could be for rather than against. 

July 19, 2018 2:34PM

Appraising MAGAnomics after 500 Days

A few weeks ago, President Trump surpassed his 500th day in office. That's a good vantage point to appraise his economic policies to Make American Great Again.

Over at the Library of Economics and Liberty's Econlog, I offer my assessment. It's not good.

This may seem surprising, given current economic conditions. But economic policy isn't merely about the current moment, but predominantly about improving economic conditions long-term. Aside from a couple of provisions in the December 2017 tax law, President Trump has done precious little in that regard and much to harm the economy long-term, from borrow-and-spend fiscal policy, to disastrous trade and immigration policies, to disinterest in serious regulatory reform, to his refusal to face the country's dreary long-term fiscal challenges.

From my conclusion:

MAGAnomics appears to be little more than an impulsive dislike of free trade and immigration, a hazy desire for less regulation, disinterest in (or perhaps a lack courage to face) the nation’s long-term fiscal problems, and a desire to temporarily lower taxes without making the hard choices necessary to fiscally balance those cuts and make them enduring. In other words, MAGAnomics is a slogan supporting a few weak and many harmful initiatives, not a serious collection of policies thoughtfully designed to strengthen the nation’s economic health.

Take a look and see if you agree.

March 7, 2018 4:01PM

California’s Pension Woes Exacerbated by Politics

California governor Jerry Brown has been taking a victory lap of sorts after putting forth a budget for fiscal year 2019 that would include a $6 billion surplus, a remarkable turnaround for a state that hemorrhaged red ink in the wake of the great recession.

Of course, much of that surplus arrived via a hefty tax increase, as well as a surfeit of revenue resulting from the stock market boom via capital gains taxes, so attributing this turnaround to fiscal probity might be taking things a bit far.

However, Governor Brown does get credit for at least temporarily righting what seemed to be a sinking ship. What’s more, he seems to realize that this surplus can easily disappear, and he has warned his potential successors to resist spending that surplus. What Brown is fully aware of is that even the most spectacular stock market increase is not enough to erase the state's most pressing financial problem—namely, its underfunded government pension.

Currently, it has enough money set aside to cover just 68% of its future obligations—certainly far from the most indebted state (that would be my own state of Illinois), but still low enough to dismiss any notion that future stock market growth can remedy the problem.

Despite this, the California Public Employees Retirement System, or CalPERS, has put politics ahead of achieving a high rate of return by insisting that the boards of the companies it invests in adhere to various social and environmental practices.

It's nonsense, of course, and it amounts to little more than an extension of politics into a realm that doesn't have room for it.

The problem is that these environmental and social constraints inevitably bring with them a lower rate of return—regardless of what CalPERS and other advocates say to the contrary. And these lower returns will only hasten the day when the state's taxpayers—or, failing that, federal taxpayers—will be on the hook to cover California's pension deficit.

A few of the state's politicians seem to be aware of the conundrum this places on California citizens: A Democratic state senator recently offered a bill that would allow new state employees to opt out of the state pension plan and simply participate in a defined contribution plan. The state university system already allows newly hired professors to opt out—a recognition that a defined benefit plan does not work well for a peripatetic workforce like academics.

Ultimately, moving to a defined contribution plan might make sense from a long-term sustainability perspective, but transitioning to such a system for everyone would require someone (namely, current taxpayers and state workers) to cover promises already made to current and future state retirees while new employees build up their own retirement balances. In short, someone’s going to be left holding the bag in the ponzi scheme that is a pay-as-you-go public pension plan.

That's a tricky path to navigate: Utah did such a thing for its new employees with a much smaller per-capita shortfall, accomplishing it by making those new employees fork over a portion of their income to cover promised benefits. It is not clear even that will be sufficient for the state.

California will need every dime it can get its hands on to fund its pension shortcomings, and with the country's highest income tax rate it probably can’t raise personal income taxes too much higher. Governor Brown has commented that the state's retirees should expect a benefit reduction the next time there's a recession but most people think any reductions in promised benefits are precluded by the state's constitution.

At some point a future governor of California will need to figure out how the state’s going to cope with having billions in promised benefits and insufficient money set aside to keep those promises. That calculus will be much easier if CalPERS doesn’t accept a lower rate of return in exchange for dubious political chits.

February 23, 2018 5:03PM

Support Parental Leave by Saving Not Spending

Some conservative writers are proposing to raid Social Security for the costs of a new parental leave program. Proponents are selling it as a sort-of free lunch. The plan would be “self financing” says the IWF’s Kristin Shapiro because “new parents would agree to defer their collection of Social Security benefits upon retirement for the period of time necessary to offset the cost of their parental benefits.”

But Social Security is not a savings program with a pool of assets to draw on. If the government starts mailing checks to millions of new parents, the only “financing” would be more federal borrowing. What Shapiro calls $7 billion a year in “parental benefits” would be $7 billion more in government spending. What Shapiro calls “self financing” would be more government debt.

In theory, the government would delay retirement handouts for participating individuals three decades down to the road. But, if enacted, lobby groups and politicians would get to work undoing those future savings. And if this sort of accounting trick is used for spending on parental leave, then the flood gates would be opened for Social Security spending on home purchases, job training, and other trendy causes.

What ever happened to personal saving? Humans can look ahead and plan, and they have been doing so since the beginning of time. Personal saving is the most powerful financing tool. But the more the government hands out benefits—for retirement, health care, unemployment, parental leave, and many other things—the more it undermines the innate and responsible saving incentive. The more the nanny state spends, the more it sabotages a culture of savings and the practical ability to save as taxes rise.

Young people thinking about having children should start setting aside some of their paychecks. Young people should be taught that kids are expensive, and they should plan accordingly. Alas, personal responsibility and saving are not the starting points for most policy discussions these days.

Put aside parental leave, and think about farm programs. The government spends $20 billion a year to cushion farmers from fluctuations in prices and crop yields. It apparently never occurs to policymakers that farmers should be using their own savings to level out their consumption over time. When corn prices are high, they should be saving the extra profits. When corn prices are low, they can withdraw. Wouldn’t that be easier than writing thousands of pages of farm legislation and extracting $20 billion a year from taxpayers?

At the bottom of Shapiro’s piece, it says the IWF believes that women are “better served by greater economic freedom” than “big government.” Thus, for parental leave, the focus should be on personal responsibility and savings rather than big government spending.

Part of the solution is to cut taxes on saving and make saving simpler, as Ryan Bourne and I discuss in our study on Universal Savings Accounts (USAs). The tax code includes numerous savings vehicles for retirement, but all savings are beneficial. USAs would facilitate personal savings to cover health care, education, parental leave, and many other costs. If Americans had larger pools of savings, they would be more self-sufficient and less dependent on government.

When thinking about policy reforms, the first goal should be to increase the self-sufficiency of Americans and reduce today’s overreliance on government. USAs would not solve every problem, but they would allow Americans to better prepare for their own financial challenges.

Vanessa Brown Calder critiques the paid leave proposals here and here.

February 22, 2018 4:33PM

Problems with Republican Proposal for Paid Leave

A new federal paid leave idea has been produced, promoted, and endorsed by individuals on the right. And now Republican legislators like Marco Rubio, Joni Ernst, and Mike Lee are getting behind it.

Advocates propose using Social Security as a benefit bank for paid leave – the idea is that parents could withdraw Social Security benefits today if they defer collecting benefits later. Of course, if advocates want to provide paid leave, a better idea is cutting Social Security benefits and payroll taxes so new parents don’t have to ask the government for their money back.

Still, it’s a clever idea and maybe the least-bad proposal for federal paid leave. But that does not mean the Social Security paid family leave (SS PFL) proposal is a good idea on its own merit. As described in The Hill yesterday, government-provided paid leave has harmful consequences and is not politically supported. 

Setting that aside, Social Security is a program with an assortment of problems, and allowing beneficiaries to borrow against future benefits does not improve the current model. Given how integral Social Security is to the current proposal, it’s worth a reminder just how deep those issues run.

First, Social Security will shortly be insolvent. Due to Social Security’s structure and demographic trends which include an increase in life expectancy, a decrease in fertility rates, and slowing wage growth, the value of Social Security’s obligations is estimated to exceed the value of its taxes in present value by $8.6 trillion over the next 75 years. (And no, providing paid parental leave and other parental benefits won’t change fertility trends meaningfully.)

In short, there are increasingly more retirees collecting benefits for every worker paying for them. To illustrate, in 1950 there were 12 people older than 65 for every 100 people of working age. By 2050, there are expected to be 35 people older than 65 for every 100 people of working age.

This makes Social Security unsupportable in its current form. The program is already running a cashflow deficit and in trouble financially. Indeed, the Social Security Administration (SSA) projects the present-value of Social Security's unfunded financial obligation is equal to $32.1 trillion through the infinite time horizon. 

How will adding SS PFL change that? AEI's Andrew Biggs says that in the long-run the SS PFL proposal is budget neutral. But in the short-run, the proposal increases Social Security’s financial obligations, thereby hastening Social Security’s decline toward insolvency. It would be one thing if Social Security was based on personal savings accounts and the proposal allowed people access to their savings more flexibly. But Social Security has no pool of savings, so the proposal means going deeper into debt to provide parental benefits. 

The most generous argument is that the SS PFL proposal does everyone a favor, because it forces lawmakers to grapple with Social Security’s problems sooner than they would otherwise. What will that reform look like? If historical precedent is any indication, it will involve increasing taxes and perhaps reducing benefits.

Social Security taxes have already grown substantially over Social Security's lifetime: from a payroll tax of 2 percent at its inception in 1937 to a tax of 12.4 percent today. Indeed, during Social Security’s most recent reform in 1983, taxes were raised in a variety of ways. Recent proposals for reforming Social Security have also suggested expanding taxes to pay for the program.

Of course, benefits have also been reduced in past reforms. But with more obligations to more interest groups (parents, the sick, etc.) under a new version of the program, it will be increasingly difficult to reduce benefits because more groups will be impacted by cuts. 

It seems that an underlying premise of the SS PFL proposal is that nothing major can be done to reform Social Security in the short-term anyway, so let’s enjoy the ride down. Another underlying premise is that Democrats will eventually get their way on paid leave, so let’s preempt it and give them what they want.

Unfortunately for advocates, the current proposal is not what Democrats want, and it’s unlikely they’ll be satisfied. The SS PFL proposal conveniently leaves the door wide open to provision of more generous benefits in the future.

In the meantime, Republicans will have conceded substantial ground, hastened Social Security's decline, and legitimized the provision of paid parental leave at the federal level.  If history is any indication, more taxes will be part of the solution.

 

March 7, 2017 11:49AM

Kenneth Boulding on the Serious Distortion of Economic Ethics

From Kenneth Boulding, A Reconstruction of Economics (NY, Science Editions 1962) pp. 481-82:

“Economic ethics has been seriously distorted by static and short-run criteria of value. ‘Justice’ has been thought of too much in terms of division of a fixed pie than in terms of encouraging the baking of more pies. . . .The importance of this problem rests on a matter of simple arithmetic: that if redistribution toward any group causes a fall in the rate of growth of national income, no matter how slight, there will be some date beyond which the absolute income of the favored group will be less than it would have been if the redistribution had not taken place.”