Tuesday, March 24, 2009

CBO explains why future GDP growth will be slower than in the past

It's a very common argument on the left that the Social Security Trustees underestimate future rates of economic growth, and that if only the economy would grow in the future as fast as it did in the past then Social Security's solvency would be assured. (I mean you, Economic Policy Institute; and you, American Prospect; and you, David Langer.)

I've tried to explain elsewhere why the Social Security Trustees project lower economic growth in the future. This difference comes down to the fact that the Trustees don't think about "GDP growth" as a single thing, but break it down into its components and project how those components will change over time. In fact, despite Langer's claim that "The Gross Domestic Product (GDP) is the key economic assumption in estimating costs," it actually plays no direct part in estimating Social Security's finances: Social Security doesn't collect taxes based on GDP, nor does it pay benefits based on GDP. Projections of GDP growth are really a byproduct of the other estimates the Trustees and actuaries do; they could easily project Social Security's finances without ever calculating future GDP.

In any case, since my explanations are apparently tainted, here's how CBO director/blogger Doug Elmendorf explained their projections for future GDP growth:

Projected growth from 2015 to 2019 is also below historical average growth rates, a difference that is more than accounted for by slower growth in the labor force because of the retirement of the baby boom generation. Over the postwar period, the labor force grew at an average annual rate of 1.6 percent; by contrast, we project it to grow only 0.4 percent per year in the period from 2015 through 2019. As a result, potential GDP grew 3.4 percent per year on average in the postwar period, but CBO expects that it will grow by only 2.4 percent annually (allowing for a tad more productivity growth) in the 2015-2019 period.

In other words, the economy will grow more slowly in the future because the labor force will grow more slowly in the future. No conspiracy needed. Click here to read Elmendorf's full blog post.

Update: For those interested in playing around with the economic/demographic assumptions to see how they'll affect Social Security's long-term financing, a while back I put together a simple Excel-based model that lets you choose your own inputs. You can read about it and download the file here.

30 comments:

Bruce Webb said...

Excuse me for leaving my tin foil hat on.

A slower growing labor force in the future implies more demand for the labor hours that remain which if the rules of supply and demand work in the way that most economists insist they do should translate into real wage gains (which are directly captured by FICA taxes). Instead we are told that real wage increases will decline permanently to an annual 1.0 to 1.1% rate.
http://www.ssa.gov/OACT/TR/TR08/V_economic.html#188118

Similarly if the economy is sputtering going forward due to a slowing in labor force growth (and so a slip in covered worker ratio) you would think you could counteract that via an increase in legal immigration. Instead we are told that by 2010 legal immigration will stabilize at a rate 21% below that of 2006 and remain at 750,000/year forever.
http://www.ssa.gov/OACT/TR/TR08/V_demographic.html#205410
Which means that as the population increases from 308 million in 2007 to 481 million in 2085 the proportion of foreign born Americans is projected to steadily drop. This flies in the face of American historical experience, when we needed farmers to open up the frontier we got them from the Scots-Irish and the Germans (that's when my ancestors checked into America). When we needed laborers to build the railroads we got them from Ireland and China. If we have a growing yet ageing population and a dire need for more night nurses and geriatric care doctors we have a ready supply going forward in Mexico and the Philippines.

Perhaps someone can provide a reasoned explanation why in the face of an economy handicapped by a stagnant labor supply our policy response will be to clamp down on both legal and illegal immigration in the way implied by the data tables. But until that contradiction gets satisfactorily explained I will be keeping that hat firmly down around my ears.

Because it all still looks like a model chasing a desired conclusion. Particularly when Low Cost itself sees immigration settling out an an absolute rate lower than the 2006 peak. This really does not make much real world sense at all.

Andrew G. Biggs said...

Bruce,
Your argument regarding labor supply is plausible -- if the capital stock stays the same and the labor force declines, then returns to labor (i.e., wages) will rise. But there are a couple ifs:
a) It's not clear that the capital stock will stay steady; Kotlikoff and others have argued that rising entitlement costs will effectively strip the economy of capital; this means relatively higher returns to capital (interest rates, stock returns) and relatively lower wages; and
b) The labor force isn't monolithic; as the Baby Boomers move into retirement the age profile of the labor force will shift younger, and at younger ages people tend to earn significantly less. Even if there were some labor shortages, this age change could reduce wages.

Immigration is anybody's guess, but on the political side I don't see a ton of demand for more immigrants (particularly when wages for low earners are falling) and a lot of reasons by people wouldn't go along. This could obviously change, but I wouldn't bet my Social Security on it.

Anonymous said...

Biggs

isn't arguing that the Trustees don't "think about GDP growth as a single thing" a bit disingenuous if all of their calculations are derived from their estimate of future GDP?

Of course if you are arguing, as you may be, that in the future so much of GDP will be going to indispensable Wall Street experts, not to mention the "non partisan experts" who advise our leaders, that no money will be left over to pay a living wage, much less a wage that allows a reasonable contribution to Social Security, then I can't add anything to that debate.

But short of that, if we continue to have workers, and those workers want to insure their own ability to retire at a reasonable age, their "savings" protected by government pay as you go, ought to be able to provide a reasonable retirement benefit for the generation that precedes them. A somewhat similar arrangement has worked for about the last million years, though first codified as "Honor your father and your mother" about 4000 years ago.

This implies to me at least that the whole debate about the assumptions in low cost intermediate cost and high cost is classic misdirection.

In any case I wouldn't bet my Social Security on your vision of the future.

Andrew G. Biggs said...

Anon: I'll respond to the non personal stuff. When I say the Trustees don't think about future GDP, what I mean is that future GDP is a byproduct of the other projections they need to do, not something they base their estimates on. In other words, they estimate growth of productivity, the labor force, labor force participation, hours worked, unemployment rates, and so on, from which they make an estimate of what GDP will be. They need to make the aforementioned projections to do their calculations regarding Social Security; they don't need to know GDP.

Anonymous said...

Biggs

well, maybe disingenuous is unfair. how about incoherent. you state that a different estimate of GDP doesn't matter, than you go back to showing how different factors (that presumably do matter) would arrive at a different GDP.

and for incoherence, it seems to me that the ONLY part of my comment which you replied to was the "personal stuff."

so let me restate the non personal stuff:

what difference does a small difference in GDP... or its components...make? do you have a proposal in mind that would do a better job of providing worker retirement security than Social Security as presently configured, with a possible 2 or 3 percent increase in the payroll tax (per worker) to pay for a possible 30% increase in post retirement life expectancy?

and since the workers will pay for it themselves... and it is in no way "welfare" or "government spending", why would they want to accept an increase in the retirement age?

and then back to the personal: you seem to be arguing that because the Trustees right hand doesn't need to know what it's left hand is calculating, "the left's" observation that a small difference in that calculation entirely misses the point.

maybe it's me. but then i am not "of the left."

coberly

WilliamLarsen said...

GDP plays no part in the cash flow of Social Security. Anyone who takes the time to map out its cash flow will realize very quickly this is true. Revenues are derived from payroll tax which is a flat tax up to a base limit and interest paid on any trust fund balance. This has nothing to do with the size of the GDP. In fact, the ratio of GDP to wages is different over the past 100 years. Benefits are calculated based on the wages subjected to the Payroll tax and indexed by the change in the US average wage at age 60 and each year worked.

Andrew, you did a find job pointing this out. This is one of the major points I made to the Commission on Social Security and to SSA itself. The other fallacy is that basing it on GDP is a linear method where as using individual variables such as inflation, wage growth, interest rates, employment levels actually are the many of the components of GDP except they do not have the other noise associated with it.

Anonymous said...

Larsen

so you are saying that GDP has nothing to do with predictions of a future shortfall in Social Security funding?

we have switched from a discussion of the probable futures of Social Security to an internal debate on ... well, on what? on how GDP is calculated? or on which components of GDP are used to calculate the projections?

I am sure the members of the Commission were relieved to be able to stop talking about anything substantive in order to have a chance to bore and confuse the public who were only worrying about whether there was a real reason to be concerned about the future of Social Security and had supposed in their ignorance that a normally increasing GDP would take the pressure off.

Now they have to worry about whether an increasing GDP even means that the workers themselves will have enough to eat.

Anonymous said...

Larsen

shorter:

Larsen says "Revenues are derived from payroll tax which is a flat tax up to a base limit and interest paid on any trust fund balance. This has nothing to do with the size of the GDP."

in other words the payroll tax, presumably based on payroll, presumably based on workers wages, presumably based, however loosely, on worker productivity, has "nothing to do" with GDP... a measure of national production, presumably a result of workers and their productivity.

it's a good thing we have "iron laws of accounting" (Orszag) to keep the minds of accountants in their iron corsets of categories that "have nothing to do with" each other, whatever a statistician, even in the absence of common sense, might be able to demonstrate.

Andrew G. Biggs said...

The point we've both made is that the payroll base is what really matters (along with some other things). GDP could be bigger or smaller based on other factors, but isn't a direct input to the system's financing. Imagine if GDP grew really fast but due to other factors (widening earnings inequality, lower wage/compensation ratios, lower compensation/GDP ratios, etc.) that the payroll base didn't grow as fast. Then, higher GDP growth wouldn't benefit the system's financing. The point is that to understand where the system is going you want to project the things that matter to the system; GDP isn't really one of them. When those components that DO matter are projected, they tend to result in lower GDP growth, but aren't derived from an assumption of lower GDP growth.

WilliamLarsen said...

Anonymous,

What is GDP? It is the sum total of Gross Domestic Product. They report it as around $13 Trillion give or take. The US total income reported to the IRS is around $7.5 Trillion give or take. This ratio is what is changing over time. Ask yourself why? What is the difference between the $13 Trillion and the $7.5 Trillion values?

Social security is based on wages paid ONLY! This is on the SSA web site and may help explain it a bit better.

According to the latest Social Security Trustees Report, these cash benefits made up 4.3 percent of the nation's gross domestic product.

Another component is deficit spending. Many will call it borrowing, but it is the same thing. Yes deficit spending is part of the GDP. Does this mean
that when the debt is repaid it detracts from that years GDP?

Another problem with GDP is that as we move from a manufacturing base, GDP as a ratio of our economy shrinks. Material was a large portion of our economy, but that is being replaced by service sector jobs, where labor is the largest component.

Myth 4
Increased Economic Growth will save Social Security

The initial Social Security benefit is based on average lifetime-indexed wages. Wage growth is used to adjust past wages of future retires; similar to inflation being used to adjust social security benefits for current retires. When rate of economic growth, and its resulting increase in wages, exceeds the rate of return on the social security trust fund, then social security is actually disadvantaged due to economic growth.

For example if wages were to rise 5% this year, the initial social security benefit for future retires would also be 5% greater. If the trust fund investment returns did not match or exceed the 5% rate of growth then the trust fund would be falling behind on its ability to meet the pay out commitment.

In simple terms economic growth will not save Social Security and in technical terms, increased economic growth makes funding social security worse.
, http://www.csss.gov/reports/Report-Interim.pdf

Myth 5
Productivity growth is what is needed to save Social Security

Social Security revenues are based on wages earned by the worker. Productivity can contribute to real wage growth (see myth 4) and/or the displacement of workers. Both of these conditions reduce social security revenues. Productivity growth will not help at all.


(Orszag), I have not heard that name in a while. Was he not the person who was one of the author's of the Opt out Proposal in Oregon over a decade ago? He and another person put together a plan for Oregon, as a state, to opt out of SS. As I recall they had two stated tax rates that would apply for two groups of people based on age. I sent him my "what if" table on the tax rates needed to pay full benefits to a group over a particular age and those under that age got nothing. As I recall we differed by about 0.1% in our tax rates. I thought it was interesting at the time that two different people, using two different methods arrived at basically the same conclusion.

I have been modeling SS since the mid 70's. I never used the linear method where I based costs and revenues off GDP. I preferred the more simplistic and what I believe to be the more accurate approach and only time will prove which is right. My method allows the user to input wage growth, interest rates, inflation, employment rates, US treasury rate and uses the SSA population file given to me in 1997 with cohorts from 1940 through 1996 and projected to 2080. These cohorts are divided into one year increments, male and female, divorced, widowed, married, never married.

By assuming a wage growth for any given year, you can accurately calculate the revenues for any given year. You can also calculate the bend points for any given cohort and its average OASI benefit. By assuming a US Treasury rate (use a 10 or 20 year moving average) you can calculate the trust fund revenue on a yearly basis. Since birth rates have been at 2.1 for thirty years, the change in population is slow. This makes it pretty easy to know the number of workers which will enter the job force over the next 18 to 20 years. It also pretty much locks in the number of beneficiaries over the next 65 years.

So how difficult is it really to calculate the cash flow of SS-OASI? Revenues and expenses are based on wages. As wages increase, the bend points increase at the exact same rate, which means you know the average wage for any given year and its average OASI benefit. You also have a great idea of the number of beneficiaries and workers.

It is much easier to do now than 25 year ago. I will stick by my prediction made in 1984 that SS-OASI under current law will be unable to pay 100% of promised benefits past 2038.

Anonymous said...

Biggs

i really think i understand your point. what's more, i agree with it.

i just don't think it is really responsive to the argument, from simpler people perhaps, that a normal rise in GDP would give a better picture of future SS "solvency" than that predicted by the Trustees.

Anonymous said...

Larsen

I offer you the same answer I gave Biggs just above. I am pretty sure I understand and agree with your argument. But it misses the point that was being made by the people Biggs claims to be arguing against.

Peter Orszag wrote a book "Saving Social Security, a balanced approach" which refers to his own "iron logic of accounting" before embarking on a silly argument that begins with a false characterization of the whole problem. Sadly, his "legacy debt" is the equivalent of Biggs' "backward transfer," both of which seem to me to be sophisticated arguments intended to confuse and mislead those who don't have the time to think very carefully.

As for your bottom line: "under current law OASI will be unable to pay 100% of promised benefits past 2038," I have no reason to disagree with you. In my opinion those who argue this point are making a fundamental mistake. Whatever happens by 2038, or 2238, workers will be making an income, more or less, more or less a function of GDP, from which they will have to meet their daily needs and save for their retirement. Social Security provides the safest way for them to do that. And the Trustees intermediate projection, at least, shows that it will cost them no more than about 20 dollars per week extra, out of an income that is 300 dollars per week greater than todays, by 2040, and another 1%, perhaps, of an income that is 230% of today's, by the end of this century.

So, to recap this, I think you and Biggs are making a bit of smoke with a nice distinction about GDP that no one else really fails to understand. But you, and those others, are also making a lot of smoke about an issue that makes no fundamental difference to the long term "solvency" (my definition) of Social Security, not to mention the wisdom of it in essentially its present configuration.

Anonymous said...

btw

anonymous is me,coberly. Peter Orszag, besides writing the book, is also a current advisor to Obama, and was the director of the Congressional Budget Office.

Andrew G. Biggs said...

Coberly,
My reply is reponsive in the sense that it shifts comparisons of future GDP to past GDP to future projected vs historical levels of the subcomponents of GDP. And the key subcomponent of GDP that will be lower is labor force growth, and the reason for that is the well-documented decline in birth rates. Lower birth rates today produce lower labor force growth tomorrow, which in turn produces lower GDP tomorrow.

Anonymous said...

Biggs

let's see if i can follow the logic so far:

"future GDP growth will be slower because of slower growth in the labor force."

therefor GDP does not matter.

because the Trustees estimated shortfall using calculations that were only part of their estimate that future GDP will grow more slowly because of slower growth in the labor force.

so when Bruce suggests that there are forces that may prevent a slower growth in the labor force, the answer is clearly that GDP doesn't matter... beause the trustees only used slower growth in the labor force to predict slower growth in GDP which is not used to predict future shortfall. only slower growth in the labor market is used to predict that.

is that about right?

Andrew G. Biggs said...

The point is that it's not valid to simply compare past to future GDP growth when one of the most important elements of GDP growth -- labor force growth -- will be slower, and for reasons almost everything thinks are reasonable. If we agree that labor force growth will be slower in the future, then we should also agree -- all other things equal -- that GDP growth will be slower.

William Larsen said...

Social Security provides the safest way for them to do that. And the Trustees intermediate projection, at least, shows that it will cost them no more than about 20 dollars per week extra, out of an income that is 300 dollars per week greater than today’s, by 2040, and another 1%, perhaps, of an income that is 230% of today's, by the end of this century.

Ah, numbers, what do they mean? The trustee report shows that a 1.9 or 2 percentage point increase in the payroll tax from 10.6% to 12.5 to 12.6% would solve the problem for 75 years. The problem is in 2010, the same problem starts raising its ugly head.

“...the 75-year time horizon is arbitrary since it ignores what happens to system finances in years outside the valuation period. For example, we could eliminate the actuarial deficit by immediately raising the payroll tax by 1.86 percent of payroll. However, as we move one year into the future, the valuation window is shifted by one year, and we will find ourselves in an actuarial deficit once more. This deficit would continue to worsen as we put our near term surplus years behind us and add large deficit years into the valuation window. This is sometimes called the "cliff effect" because the measure can hide the fact that in year 76, system finances immediately "fall off the cliff" into large and ongoing deficits."

At the end of 75 years, SS-OASI is back where it was in 1950, 1976, 1983 and 2038, except the next 75 year solvency period will require a payroll tax of 18.5% not, 12.5%. The reason is simple, low birth rates of 2.1 will have reached equilibrium throughout the population. And if you think a new baby boom will help, what happens when that one drop down to 2.1?

I totally disagree. A baby born after 1985 can expect to receive at most 29 cents in benefits for each dollar of SS-OASI tax paid plus interest at the US Treasury rate. This comes out to be about zero percent. Yet these workers are borrowing money to buy homes at 4 and 5% if they are lucky. A person who was able to contribute their 10.6% SS-OASI tax to a home mortgage would reduce a 30 year mortgage to 14 year 3, 3 months. After the house is paid off, contribute the combined payment to US savings bonds for the next 15 years, 9 months and not only do you have home paid for, but the average worker would have over $391,000 in liquid assets.

Why does this work? It is no different than credit card consolidation. Pay the higher rates off first. The difference is the lowest rate you are being paid is the one you want to get rid of. So if you have credit card debt and are paying anything more than 1% interest a year on it then SS-OASI is ripping you off.

William Larsen said...

This is most likely going to be off topic, but I think it is important to bring up when the topic is one of solvency and saving social security.

I have identified links below. The problem is my site provider does not allow external links from outside its “service”, but you can copy the link to the task bar and load the pdf files.

For those who want to save social security, I have two papers I hope you will read. One is called Myths: The Political tool of choice. The other is just called Social Security: What went wrong

http://www.justsayno.50megs.com/pdf/political-myths.pdf

http://www.justsayno.50megs.com/pdf/social_security.pdf

For those who would like to see what payroll taxes hold for those in the future based on the current SS-OASI benefit formula here are two papers that identify it.

For a totally pay-as-go program what is the ratio workers to beneficiaries over the next 70 or so years? Based on the SSA population file, this is what we can expect.

http://www.justsayno.50megs.com/pdf/worker_ratio.pdf

Now based on the ratio of workers to beneficiaries, what is the payroll tax needed to pay one average beneficiary an SS-OASI benefit with x number of workers making the average wage?

http://www.justsayno.50megs.com/pdf/old_age_tax.pdf

Anonymous said...

Biggs

you are not getting my point. not sure i can see why.

Larsen

nevertheless that cliff you keep falling off does stabilize at about 18% combined payroll tax rate. This is about 3% for the employee. At an income that is 230% of current levels that would mean an increase in the tax of about 50 dollars a week out of an income of 1600 a week. I think we will be able to afford it. Especially when we remember that the extra money goes to pay for an extra six or more years of life expectancy with a benefit check that is also worth 230% (real value) of today's.

as for reporting the value of benefits net of what "you could have" earned on some other investment "if only" it keeps on paying what you claim it will pay.... well, that's the whole dodge that Social Security was designed to protect workers against. why don't you use honest... or at least transparent... numbers?

Anonymous said...

that's a 3% INCREASE for the employee.

Anonymous said...

as for using your Social Security money to pay for your mortgage in order to save the difference between interest in and interest out..

you could really save by using your grocery money to pay your mortgage.

i think that you have forgotten what social security is. it's not an investment plan. it is insurance. you are buying insurance for your ability to retire at a reasonable age.

somehow, i think, that if you want to invest for higher returns, or pay off your mortgage sooner, i bet you could find some other money int the 91% or 94% that you have left from your paycheck after putting away 9% or 6% for your retirement insurance.

or you could just go bare. no need for car insurance, fire insurance.. hell, why buy milk for the kids when you could get 11% on the market with that money.

on the other hand, if you are going to take your Social Security and "invest" it in treasuries, then who is going to be paying you the interest... the taxpayers? just exactly how are we coming out ahead here?

Andrew G. Biggs said...

This has mostly run its course, but this line from Coberly is worth commenting on:

"I think that you have forgotten what social security is. it's not an investment plan. it is insurance. you are buying insurance for your ability to retire at a reasonable age."

Look, if you knew that your house would burn down 20 years from now, you wouldn't buy insurance you'd simply save enough money to replace it. Likewise, back when it was very uncertain whether you'd survive to retirement age, an insurance approach (basically a deferred annuity) made sense. But today it's really very likely you'll reach 65, meaning that the most sensible thing to do is simply to save for it. There's no real insurable event here. (There IS with the case of disability or survivors benefits, though.)

WilliamLarsen said...

nevertheless that cliff you keep falling off does stabilize at about 18% combined payroll tax rate. This is about 3% for the employee. At an income that is 230% of current levels that would mean an increase in the tax of about 50 dollars a week out of an income of 1600 a week. I think we will be able to afford it. Especially when we remember that the extra money goes to pay for an extra six or more years of life expectancy with a benefit check that is also worth 230% (real value) of today's.

First off, the consumer pays the full payroll tax when they buy goods and services, so the affect is an increase in inflation as well as the cost of doing business making it harder to keep jobs here in the U.S.

So an employee paying 9% of wages from age 20 to age 67 gets a good return of 42% of life time indexed wages adjusted for inflation?
Let’s put your numbers to the test. Here are the assumptions:
$30,000 a year, rate of return 6%, inflation 3.0%, wage increases of 3.5%, death at age 90 and a employee pays 9% to SS-OASI.

At age 67 the value of the balance is $1,126,292. They can withdraw $69,910 in the first year and increase by 3% a year for inflation.

Do you think this is a great value? This produces a replacement rate of 46.26%, slightly higher than the SS’s target of 42% of life time indexed wages.

Here is the problem, only 5% of the population lives to age 90. The average life span at age 67 for boomer is 17.72 more years or age 85. Using 85 years, the persons annuity would climb to 55% of life time indexed wages, or about 25% more than the SS target.

However, the drain on the economy of the 9% you seem to believe is free money is actually paid by the consumer. So in this case the annuity could be as high as 110% of the life time indexed wages or 120% larger then SS’s 42% target.

As for increasing life expectancy, they will not live 6 more years in retirement. Life expectancy is increasing at a rate of 17 to 18 days per birth cohort at age 67. To get 6 more years of life expectancy will require over 121 more years.

Why do more than 1 in 5 individuals age 65 and over have $1 million or more in assets? Why is the median (not average) income of those 65 and over $75,000?

The savings rate of the US has dropped with each increase in the FICA tax. People used to save, but they no longer do, why? As for saving more by cutting out groceries, that would work until you die of starvation. What we need is better utilization of resources.

Bernie Maddof took $65 billion from investors. He paid great returns to poeple. Many cashed out. The problem is he never once made a single investment using the $65 billion he collected. Now there is about $1 billion in left and people are screaming bloody murder. SS took trillions in contributions from millions of workers. They paid out trillions in benefits (95 % of what they took in they paid in benefits). In essence SS has done slightly better than Bernie in that they invested 5% of what you gave them.

Do you feel the taxpayers should bail out the investors Bernie swindled?

If social security is insurance, then what is the basis for a claim. Generally a loss has occurred. In the case of SS the loss is you live long enough to collect. I do not see this as being a loss.

As for using the treasury rate in calculations, it is done to minimize criticism is using overly optimistic rates of return. Therefore, I use the lowest rate of returns known. If they show SS to be bad, then higher rates of returns make it just that much worse.

Andrew, thanks for allowing this discussion.

Anonymous said...

Biggs

Larsen

I agree the thread is played out. Biggs keeps repeating his point as if I don't understand it. Larsen makes a number of points worth refuting, but at a cost of my time and energy and your patience that I don't think I can pay right now.

Anonymous said...

oh heck

Biggs,

when you say that "back when it was very uncertain whether you'd survive to retirement age, an insurance approach (basically a deferred annuity) made sense. But today it's really very likely you'll reach 65, meaning that the most sensible thing to do is simply to save for it. There's no real insurable event here."

it makes me think you don't understand Social Security at all. and this is said with no snark or intent to be insulting.

people would no doubt save for retirement, simply, if they had reason to believe that inflation would not eat up their savings, or markets fail at just the wrong time, or they lose their job and end up with lifetime earnings and savings too low to support a retirement that was not destitution.

and, if we are to be realistic here, we need to allow for the certain fact that a very large number of people... mostly poor... would not save. and that would leave the country with the problem of supporting them in their old age, or watching them starve.

yes, there is an insurable event here.

Anonymous said...

and i think a real economist, not me, and not someone with an axe to grind, needs to think carefully about what it would mean to an economy to have large numbers of destitute people, or large numbers of people terrified of becoming destitute.

and while they are at it, they might want to contemplate the effects of trying to force more money into the stock market than the stock market could use in productive investment.

Anonymous said...

damn! and what with global warming, not enough ice floes.

Shygetz said...

I enjoyed the article and comments, but I felt the need to comment on one thing:

But today it's really very likely you'll reach 65, meaning that the most sensible thing to do is simply to save for it. There's no real insurable event here.

This is patently false. The insurance is NOT in the event that you will live to 65, it is in the event that you will outlive your savings. SS's biggest draw is that it is guaranteed for life, whereas your 401k runs out when it runs out. There is a huge difference between saving for thirteen years of retirement (average life expectancy in the US) and saving for thirty years of retirement. SS helps insure against the latter, providing a basal standard of living for those who outlive their savings.

Andrew G. Biggs said...

Shygetz: You're right, the annuity payment provided by Social Security is VERY valuable in insuring against longevity risk. However, we could cover this simply by mandatory 401ks plus mandatory annuitization, rather than a government run system running throughout your life.

LFC said...

Instead we are told that by 2010 legal immigration will stabilize at a rate 21% below that of 2006 and remain at 750,000/year forever.

Not happening. If business is constrained by the size of the labor force, they'll lobby, scream, cajole, bribe, and Congress will vote to loosen immigration rules. Politically, there is no way growth will get badly throttled over a long period of time by a shrinking labor force.