Sunday, March 30, 2008

Paul Krugman on trust fund, with comments from Andrew Samwick

Paul Krugman comments on the latest Trustees Report while Andrew Samwick, from his new blogging location, puts Krugman's claims to the test.

Krugman's basic argument -- which I believe really originated with Dean Baker -- is that however we characterize the trust fund, calling Social Security a "crisis" is incorrect. If we believe there is a trust fund, Krugman says, then the program is solvent until 2041, making it a significant but not-so-pressing problem. If we don't believe there is a trust fund, then Social Security is just a part of the federal government and so is funded in perpetuity.

Clever, but limited for several reasons. For once, consider that much of Medicare is not financed through a trust fund, being paid entirely through general revenues, but that doesn't mean we don't consider its cost growth a problem. (It's the only problem, some would argue.) Likewise, Social Security's costs are projected to rise from 4.3% of GDP today to 6% of GDP in 2030. Those costs must be paid, whether we consider trust fund real or not. Whether we consider the trust fund real may influence how we think they should be paid, but the cost increase is real and significant.

Samwick takes on this quote from Krugman:

"As Kevin Drum, Brad DeLong, and others have pointed out, the SSA estimates are very conservative, and quite moderate projections of economic growth push the exhaustion date into the indefinite future."
Samwick points out, much as I have (see here and here), that this claim isn't particularly plausible:
You can look at the sensitivity analysis for the growth in real wages in Table VI.D4 and see that increasing the projected rate of growth in real wages by 0.5 percentage points (around the baseline growth rate of 1.1% per year) shrinks the 75-year actuarial deficit from 1.70% to 1.12% of taxable payroll. That gets us about a third of the way toward a zero balance over 75 years and is a necessary but not sufficient condition to support Krugman's claim. If continued linear extrapolation is valid, then we would need to add about 1.5 percentage points to the real wage growth rate--over 75 years--to get the balance to zero. That's sustained real wage growth of 2.6% per year for 75 years. Krugman should come out and say that such a number is "quite moderate" if that's what he means. Seems pretty optimistic to me.
For a fairly lengthy alternate take on what it means for the trust fund to be "real", see here.


Bruce Webb said...

I find it a little odd that anytime a critic of 'crisis' points out a variable that seems too pessimistic that supporters of crisis will rush to show that you can't solve the problem by immigration alone or real wages alone or whatever. Well no I suspect you can't, but surely there are addition effects as seen in Table II.D2.—Reasons for Change in the 75-Year Actuarial Balance Under Intermediate Assumptions [As a percentage of taxable payroll] What happens if we combine that real wage increase of 0.5% with ultimate productivity at 1.9% and ultimate immigration at 1.33 million (the actual 2006 number)? Just to pick some figures out of the air. Of course the effects are not strictly additive, increases in productivity traditionally correlating with increases in Real Wage, there is some danger of double counting here, but still I don't have to eat the whole apple with one bite. A little demographic nibble here, some better economic growth there, continued good news on the disability front and that 1.7% gap kind of gets munched down to nothing.

The story of the improvement in long range outlook for Social Security since 1997 must seem like the death of a thousand cuts for a committed privatizer. This goes double for someone like Professor Samwick who already is proposing a 1.5% across the board increase in payroll tax.

What is to prevent the average worker from seeing a 0.5% Real wage increase closing the gap down to 1.12% and then taking the tax increase at that level while saying 'machs Nichts' to LMS and its higher tax?

People like to say 'we can't tax our way out of this' or 'we can't grow our way out' and we could argue the individual points, but it is clear as day that we could take a combined approach, project economic outcomes somewhere above current Intermediate Cost ones plus a modest tax increase and Bob's your uncle.

Not that I have given up on Low Cost, which for the first time actually projects an overfunded Trust Fund after 2043. (Figure II.D6). I don't know where the equilibrium point shown under Low Cost from 1997 to 2007 (fully funded with flat trust fund ratio), clearly it is somewhere south of 2.9% ultimate Real GDP.

Bruce Webb said...

By the way I get the flip side of this all the time. Every time I point to the existence of Low Cost someone will rush back and say 'Fertility Rate!!' Well yeah LC Fertility looks high, this is partly a result of a model that structurally assumes improvement on every variable for LC and regression on every variable for HC, in reality all of these things don't track together.

That is I don't need to have every number of Low Cost come home, only enough to keep depletion pushing back beyond its current 2041 and the payroll gap to the point that we can just gulp and take it.

Andrew G. Biggs said...

Bruce asked: "What happens if we combine that real wage increase of 0.5% with ultimate productivity at 1.9% and ultimate immigration at 1.33 million (the actual 2006 number)?"

Using the simple solvency model ( trust fund solvency extends from 2041 out to around 2055. That's obviously an improvement, but still far from the sustainable solvency situation the program must ultimately be brought to.

Anonymous said...

Biggs left a comment on Krugman's blog. Which elicited the following from me.

Andrew Biggs should know better.

"the burden of funding Social Security...hasn't been made easier.."

depends what you mean by easier. the payroll tax was collected mostly from boomer workers. the money borrowed from the excess tax will be repaid by post boomers who will be largely not "workers," but higher income persons, including corporations. there may well be some cost shifting back on workers. but meanwhile all that extra money collected from the boomers will have been "invested" either in all the good things government does to make us stronger and richer, or, by the high end taxpayers who got tax cuts and presuambly invested the money in all the good things private enterprise does to make us richer and happier.

meanwhile the boomers will have paid for their own retirement benefits, and the following generation will not have to pay more than what they will recieve in benefits in their turn.

Anonymous said...

what is so depressing about the present thread is that Biggs,and Samwick, talk about tiny numbers while deflecting attention from the basic human fact.

so the cost of SS will reach 6% of GDP? we are talking here about basic, shelter, shoes, for about 25% of the population. and moreover, this is money those same people will have set aside out of their own pay (corrected for inflation by the magic of wage indexing and pay as you go).

the only way this could be a problem would be if you had something else to do with the money you thought was more important. ten new submarines?

how about management fees for mutual funds?

it might also be worth noting that the present "4.3%" of GDP comes entirely from 12.4% of wages below 100,000 dollars. presumably 6% of GDP would come from 17% of wages. This is all the workers money to be sure, but he only sees half of it, so he would see an increase in his "tax" from 6.2% to 8.5%. or 2.3% of his wages. In today's terms that amounts to about 15 dollars per week. But by the time the 6% of GDP figure is reached, wages will be more than 300 dollars per week higher, so lets be fair and recognize that it will cost the average worker an extra 20 or 23 dollars out of an income that is over 1000 dollars per week.

but you all keep flogging those numbers. they look scary and there isn't a chance in hell the average worker will understand how you are bamboozling him.

oh, did i mention that the reason the costs are going to increase as a percent of wages is that life expectancy is going to increase. you'll spend a greater percent of your life in retirement.

but biggs has an answer to that one too: no one can retire without a note from his doctor saying he has only one year to live.

Anonymous said...

biggs says extending the Trust Fund solvency is not a final solution.

actually, it doesn't matter when the Trust Fund runs out of money. the Trust Fund is not Social Security.

Social Security can fund itself forever pay as you go.
The current Trust Fund was created... they say... to provide a little generational equity re the Baby Boomers. It will have done its job by the time it runs out of money... "solvency" is a completely inappropriate word to apply to this situation.

but by all means, let us work the people up into a froth of fear because "social security is running out of money. it will be broke. flat busted. in 2055.

do you get some secret pleasure to be able to lie like that to a whole country and get away with it?