Friday, July 4, 2008

5 myths about Baby Boomer retirements

In the Washington Post, deputy assistant secretary of the Navy Russell Beland examines a number of "myths" regarding how the retirement of the Baby Boomers will affect the government and the economy. In summary, here they are:

  1. As boomers quit working and ease into their golden years, they could break the backs of the younger workers who will have to support them.
  2. We're running out of time to fix senior-citizen entitlement programs before a crisis strikes.
  3. Boomers' retirement will be bad for the economy.
  4. The politicians know what needs to be done; they just lack the will to do it.
  5. Saving the budget will require either major reductions in the old-age entitlement programs or major tax increases -- or both.

If you want to know why they're myths – to be honest, I find some of it not totally ready for prime-time – you'll have to read the whole thing.


Jim Glass said...

I found the analysis under point 5 particulary impressive.

So why don't we just kick the whole problem over to the experts in the Navy's department of manpower analysis and assessment?

Andrew G. Biggs said...

Point 5 says (in part):
"many economic changes are likely to mitigate the effects on the budget. For example, as the workforce shrinks, the demand for labor will grow, pushing up wages and thus increasing payroll taxes, giving the government more income. Higher wages mean that more people are likely to choose to work, and to work longer before retiring. These changes, and many others like them, are likely to offset most of the increases in Social Security costs even without changes in tax rates."
It's true that as growth of the working age population shrinks, the ratio of capital to labor may rise which leads to an increase in wages. However, a) the effects are pretty modest and temporary (i.e., wage growth will rise for a while, then return to previous rate) and b) there's no plausible level of wage growth that will make Social Security even close to solvent over the long term, due to the fact that benefits are indexed to wages.
All that said, this highlights the importance of using a macro model as part of long-range solvency projections. CBO does, for at least some of their work, but SSA doesn't. This should be an important task for the agency, but they've not shown much interest to date.

Jim Glass said...

"...there's no plausible level of wage growth that will make Social Security even close to solvent over the long term...

Exactly. And this fellow added Medicare and concluded, "Actually, probably none of the above", in denying Myth #5, that either tax increases or benefits cuts will be needed to close the entitlement funding gap.

That's what I meant by "impressive". Really, a conclusion like that is impressive. ;-)

Bruce Webb said...

Interestingly Dean Baker had much the same reaction to this article that Andrew did, not quite right but better than almost all reporting on this topic. I daresay that when you can get both Baker and Biggs agreeing that you are mostly getting it on Social Security that the rest of us need to pay attention.

But I would have to say that I cannot agree with the conclusion "there's no plausible level of wage growth that will make Social Security even close to solvent over the long term...". You can dismiss Low Cost as unlikely and base that on the stochastics or the fertility rates or by arguing that sharp and permanent slowdowns in productivity are inevitable. But 'implausible' is a little strong.

Because the same argument was being made in 1998 and 2000 and 2003, in each case Low Cost was considered to be on the outside edge of the probability band. Yet in most of those years results came in close and in cases beyond Low Cost with consequent improvement in solvency over the long term.

I am no longer as confident in Low Cost outcomes as I was in 2004, the Bush productivity bust followed by the current credit/fuel/food crisis would or should make the sunniest Rebecca of Sunny Brook Farms type be at least a little under the weather. But I just don't see how someone can simply dismiss a potential combination of 4.6% unemployment, 2.9% Real GDP, 2.0% Productivity, and 1.1% Real Wage on average in the years after 2014 to be so reckless as to not even be worth discussing. After all we handily beat the latter three measures in 2004 (3.6%, 2.4%, 1.8%) even in the face of 5.5% unemployment. I just cannot see why thinking that outcomes in the very near future (2012) should of necessity be much worse than those of the very recent past (2004). And I don't think you get their through demography, the time scales in question are simply too short to reflect the small scale changes in the fertility and mortality tables, most of which have already been baked into the cake already.

Given the numbers I am no longer willing to make the big bet I would have in 2004, but treating Low Cost like it was some 36-1 shot seems like overkill. (After all a 36-1 shot did win the Belmont this year).

Low Cost projects an overfunded Social Security system after 2055. This event might be quite unlikely but if it happens will require some pre-planning to prevent some potentially bad outcomes and that preplanning needs to be done in time to implement some solutions around 2020 or so. That Social Security policy people simply refuse to discuss this even in theoretical terms in the face of a historical record that shows outcomes closer to Low Cost than Intermediate Cost have been the norm over the last decade is no longer surprising to me, people have been ducking this issue since the publication of 'Phony Crisis' in 1999. But tossing a judgement of 'no plausible level of wage growth' into the argument and considering that dispositive is not going to make the numbers in the data tables go away.

Low Cost is out there.

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