Sunday, November 18, 2007

Social Security

According to Greg Mankiw,
Concern about social security's future comes not from decades of scare-mongering by conservative ideologues but from decades of dispassionate analysis by some of the best policy economists.
He cites a 1998 statement by Bill Clinton and another by President Clinton’s Advisory Council on Social Security. Greg certainly has a point that Paul Krugman is stretching by using the word “decades,” since 1998 was less than a decade ago, and there were, at the time, clearly many relatively liberal policy analysts who were concerned about the future of Social Security (though I think the most vocal expressions of concern came from conservatives). But I think Greg is also being a bit disingenuous here.

Though I know little about the details of Social Security projections, I know something about the assumptions that go into them, and those assumptions, I’m pretty sure, have changed dramatically between 1997 (when the Advisory Council published its report) and 2007. The title of the report is “Report of the 1994-1996 Advisory Council on Social Security,” which suggests that the analysis was done before 1997, at a time when the US productivity slowdown that began in the 1970s still appeared to be an ongoing process. When productivity grows slowly, the outlook for Social Security looks bad.

Starting in the mid-1990s, but not fully apparent in available statistics until the decade was drawing to a close, US productivity accelerated to growth rates not seen since the 1960s. Productivity in the early 2000s appeared to accelerate even further. Over the past couple of years, productivity has appeared to decelerate again, but this deceleration is at least partly a cyclical phenomenon that is not expected to last (and, for the last two quarters, I might add, productivity has accelerated again, although that acceleration is also suspect). Certainly the average expectation of economists today would call for much faster productivity growth in the future than did the average expectation in 1996. When productivity grows quickly, the outlook for Social Security looks fine.

One could, however, make the point that, if we want to be honest with ourselves, we really don’t have much of a clue whether the Social Security system is in trouble or not. Any expectation – high, low, or in between – about the future rate of productivity growth is scarcely more than a slightly educated guess. To be truly conservative, we should make the worst reasonable assumption (based still on only a slightly educated guess as to what range of assumptions is reasonable), and use that assumption in the analysis, which will then tell us that Social Security is in trouble. So on this issue at least, the conservatives (and Barrack Obama) really are being conservative.

But I still have a problem with Senator Obama’s conservative position. As I understand it, the Medicare system fails even under fairly optimistic assumptions about productivity. If you make the assumptions bad enough to make Social Security require significant changes, you’ve made them so bad that the Medicare system requires a complete overhaul and damn near goes broke anyway. Given our limited analytic and political resources in coming up with and implementing solutions to these problems, doesn’t it make sense to spend those resources in such a way that we at least have a chance of coming out OK – that is, spend them on a Medicare overhaul that is almost surely necessary, rather than on a Social Security overhaul that may or may not be necessary?

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26 Comments:

Blogger Gabriel M. said...

I disagree. The problem is precisely that you're looking at net liabilities driven by hard-to-forecast exogenous factors such as demographics and productivity.

With something like mandatory, personal accounts, invested in a diversified portfolio of local and international assets, you're looking at a higher return and a direct link between effort/contribution and reward (a.k.a. "equity"). Augmented with some "safety net" features for those in accidents or disabled, such a system beats down any pay-as-you-go, Bismarkian sooner-or-later-disaster.

Sun Nov 18, 03:44:00 AM EST  
Blogger knzn said...

Gabriel, you may have a point that such a system would be safe, permanent fix to an inherently risky system, but then my point about political resources becomes even stronger. The Republicans already tried to move in the direction of what you are proposing; that was when they were in control of Congress, and they not only failed in their relatively modest goals, but they spent a whole lot of political capital on the failure. The best hope for "fixing" Social Security now is something like Obama's plan, which will probably cost him politically if it's ever implemented -- and distract him from more important issues.

Sun Nov 18, 05:13:00 AM EST  
Blogger Gabriel M. said...

I'm buying only half of what you're saying... restructuring SS would be difficult in terms of getting the politics right, but in terms of non-political resources, it more of a free lunch.

The experience in Chile and everywhere else, Romania too, starting this year, goes to show that you're actually relieving the budget... and that can spill-over and help with other programs.

I don't get US politics... but as far as I know, I wouldn't call what the Republicans sold under the strange label of "privatization" as a step in the right direction... I don't know.

Sun Nov 18, 05:24:00 AM EST  
Blogger Ken Houghton said...

Yeah, Chile worked SO WELL that the privatized members are getting 1/3 of what their SocSec would have returned.

If you want to be certain Mankiw is being disingenuous, take a look at the projections from the 1983 Greenspan report. The amazing thing about them is that they are still fairly spot-on in all the major demographics.

For Gabriel's general point, we've already p*ss*d away any resemblance of the SSDI Trust Fund surplus on tax cuts for Mankiw, Samwick (who at least admits he doesn't intend to make good on the promise of the Greenspan Commission), and others (self included). The absurdity of claiming you're "relieving the budget" would be at best double counting.

Wed Nov 21, 02:19:00 PM EST  
Blogger Gabriel M. said...

Ken, where you do get your estimate of one third? Plus, that's one big counter-factual, so excuse my skepticism.

Management fees for those pension funds have been excessive, and that's certainly a problem, but you need to look at things on the net.

Wed Nov 21, 02:27:00 PM EST  
Anonymous Anonymous said...

BOTH sides of the SS debate are making a fundamental analytical/conceptual error. SS solvency is IRRELEVANT to our decision of whether or not to reduce projected SS spending (via reduction of benefits and/or eligibility).

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