December 12, 2004

Social Security: A Two-Act Play

There's so much Social Security commentary out there, I can't keep up. (And silly me, I took a whole day off from the internet yesterday to go watch sea lions flop all over each other. Really!) But I'm going to stick with my preferred frame for this debate: Namely, there are two separate issues here. Issue A is that Social Security will likely run a deficit at some point in the future, either because benefits will exceed payroll tax receipts (maybe), or because the federal government is running a whopping Bush-created deficit and can't pay back money it's borrowed from the trust fund. Issue B is that some people want private savings accounts. Notice that creating private accounts obviously addresses Issue B, but it's completely unrelated to Issue A, and in fact makes the problem worse.

Now if you asked me what I wanted to do about Social Security, here's what I'd say.

First, take a look at Brad DeLong's graph, comparing the yearly balances of the Social Security trust fund with the yearly balances of the general fund. Straighten that out—take every Social Security dollar off-budget. Now notice we have a federal budget deficit approaching $1 trillion by 2012. Treat that as a (breathtaking) problem with the general fund, which it is, and act accordingly. If the federal government wanted to borrow money, invest it in the stock market, and use the returns to pay off its General Fund debt, fine, see what the voters think about that, but at least do it in an honest and straightforward way.

Okay, now second, notice that the Social Security program itself is now solvent for another 40 years, maybe more if we have modest labor force growth and productivity over that time. So leave it mostly alone. On the off-chance that we don't get the labor force growth and productivity we need, Dean Baker has the right approach:
If productivity growth falls back to the 1973-95 rates predicted by the trustees, I would propose a tax increase at the rate of 0.025 percentage points annually (on both employee and employer) for the twenty years from 2025 to 2044. A total increase of 0.5 percentage points on each side by 2044.
Or we could start looking seriously at Andrew Samwick's sensible proposal to raise the retirement age. As Baker has insisted time and time again, this is a problem that should be left to future generations, and the best thing to do is to "maintain decent educational standards," so those future generations can figure out for themselves what to do.

Third, there are some minor, very wonky adjustments that I think ought to be made to Social Security right now. Workers with low lifetime earnings, for instance, get very paltry benefits at the moment. To maintain the "safety net" aspect of the program, we could say that minimum-wage workers who meet some reasonable criteria could receive SS benefits at least equal to the poverty line at some point in the future and above it thereafter. (Details here aren't that important.) Meanwhile, the benefits for elderly widows should be increased, perhaps paid for by reducing benefits for high-income couples while both are alive. I'd also like to see some sort of payroll taxation formula that raised the maximum taxable earnings base to around its average level (ie: somewhere between where it is now in real terms and where it was in 1983). Finally, about 4 million state and local government workers do not take part in the program—they should be brought in.

So after dealing with Social Security's insolvency, then we could start talking about the Issue B—namely, private accounts. Personally, I'm not convinced there's any good way to do private accounts that could a) take advantage of the equity premium, b) avoid hefty administrative costs, c) insure against risk, and d) eliminate the need for a safety net. But I am convinced that this issue should be dealt with separately from the question of Social Security's supposed shortfall.

Afterthought: Just to clarify, what I would recommend on Social Secuirity obviously won't be the same thing as what I think The Democrats should recommend. In fact, I think that private accounts may have to come in to play in order to make any Democratic proposal viable (since private accounts are very popular).
-- Brad Plumer 7:07 PM || ||