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?

Democratic and Republican Approaches to Social Security

Democrats want to raise the income ceiling to pay in, while Republicans want to means test payments. In other words, Democrats want to tax labor (since social security contributions are determined by labor income), while Republicans want to tax capital (since most of the recipients’ additional income, which would be subject to means testing, is income from capital, either directly or indirectly). So, remind me again: which party is the workers’ party, and which is the capitalists’ party?

That Which We Call a Rose

In a TCS Daily article, Jeff Miron proposes a set of budget cuts that “every economist should endorse, regardless of party affiliation…Democratic economists, and all other economists, should use their blogs, and their op-eds to highlight the enormous scope for welfare-enhancing cuts in government expenditure.” As a Democratic economist (albeit not an influential one), I hereby do use my blog to endorse Jeff Miron’s proposals. (I’m not so sure about some of the stuff he identifies as “pork”, but I’d go along with those cuts if his proposed farm subsidy cuts were also part of the package.) I make this endorsement specifically as an economist with the “Democratic” tendency to be skeptical about the importance of the disincentive effects associated with high marginal tax rates.

What puzzles me, though, is why Republican economists – who typically argue against high marginal tax rates – would support Miron’s proposals (except perhaps because they are sensible deficit hawks and would support any reasonable proposal to reduce the deficit). The heavy lifting in his list of cuts is done through means testing of government benefit programs – Social Security, Medicare, and higher education subsidies. Economically, this is precisely equivalent to increasing marginal tax rates. Think about it: if richer people were to get the same benefits as they get now but pay those benefits back to the government in the form of higher taxes, wouldn’t that be just like not getting the benefits in the first place? If higher marginal taxes discourage people from saving and investing, won’t they also be discouraged by the prospect that their future income will reduce their Social Security benefits?

Politically, “getting the rich off welfare” may be an easier sell with both parties than “raising taxes.” And there may be some substantive sense in which decreasing the amount of money that passes through government programs constitutes “reducing the size of government.” But as far as economics goes, this proposal looks like a tax increase, walks like a tax increase, and quacks like a tax increase. As I said, I support it.