Tuesday, April 16, 2013

Expanding Social Security is a bad idea

My comments on the New America Foundation proposal for expanded Social Security, over at The American, AEI’s online magazine.


WilliamLarsen said...

"Social Security already owes around $24 trillion in benefits that have been earned but not yet paid. A 1998 literature review by the Congressional Budget Office concluded that one dollar of future Social Security benefits crowds out between zero and 50 cents of private saving; more recent research using better data settles on the higher end of that range. Let’s assume that, in the absence of Social Security, individuals would have saved around half of that $24 trillion on their own. If the return to capital is around 8 percent, then the current Social Security program reduces annual GDP by almost $1 trillion. I would think carefully about doubling down on that bet."

First, 8 percent is unrealistic. I would use 5 to 6% tops.

Second, for each dollar paid in to Social Security is exactly $1 not being used to reduce debt (mortgage, credit card, college) or add to savings.

Prior to Social Security the US was a country of savers. After Social Security we were told that Social Security Taxes were prefunding the program. The problem was they wanted to pay those early in the program meaningful benefits while not paying meaningful taxes (poizi) which creates not $24 trillion as alluded to by the CBO which has not balanced a general budget since 1957 (good track record?). I would say at todays US Treasury Rate, the earned benefits has a present value liability of over $35 Trillion. But then that is a double knife sword you walk. Pay higher US treasury, the national debt increases. Pay lower US treasury interest and the larger the unfunded liability. Hence the Ponzi scheme.

If you grow up in a family that is unable to save, you will tend not to learn how to save and pass this onto your children, hence low savings rate in the US. How do you increase savings rate; repeal social security.

Everyone is looking for a magic bullet that makes 76 years of social security look like a beautiful wedding cake. The problem is it is moldy and no matter how much you want to believe you can create something from nothing, you can't.

If you ever wondered what the Captain of the SS Titanic along with the guy who designed the ship thought as water was pouring in, SS probably is as good as any analogy. How do you fix it before you drown?

Andrew G. Biggs said...

I think 8% is the average return to capital; part of it is taxed away so the net return to the investor is less, but the effect on GDP is a function of the total return.

Arne said...

"we were told that Social Security Taxes were prefunding the program"

An unfortunatley large number seem to believe that, but anyone paying attention can see it is not true. SS is Pay As You GO and always has been.

"Pay lower US treasury interest and the larger the unfunded liability."

SS is PAYGO by law, it cannot pay benefits unless it has funds, so changing the US treasury interest rate has negligible meaningful impact.

" each dollar paid in to Social Security is exactly $1 not being used to reduce debt ..."

It may not be used by the person paying the tax, but it is used by the beneficiary. The net first order impact is none.

JoeTheEconomist said...

"If the return to capital is around 8 percent, then the current Social Security program reduces annual GDP by almost $1 trillion. I would think carefully about doubling down on that bet."

I am interested in the math behind these statement. The capital isn't destroyed. It changes hands. This changes what the economy provides. Taking my dollar shifts the dollar spend from a bar to a casino. This isn't good for the economy, but I don't see how it costs the economy a trillion dollars...

Andrew G. Biggs said...

Social Security causes some people to save less, but it's not clear why it would make anyone else save more. If there's less saving, the capital stock is lower and future output lower as well. Technically, it would impact GNP rather than GDP, since foreign investment could make up the difference, but then foreigners are getting the returns on that investment as well.

JoeTheEconomist said...

Social Security causes people to save less,whether it is by incentive or shifting resources from people who should save to people who didn't save.

The capital stock isn't changed, though. Whether I invest the money or whether the casino owner invests the money, at some point the dollar reaches someone who invests it. The biggest difference is where the capital is invested - and it may be overseas. The latter would hurt our GDP.

If anything Social Security is an economic steriod which creates irresponsible levels of spending. You have people who should be saving and don't because they feel the illusion of safety. You have people who should be managing their savings better. The proof of this is no further than the nearest Christmas tree which has loads of crap from China for kids.

The high cost of Social Security also plays into the lower savings rates. It is impossible to save for your retirement when you are losing 10.6% of your wages to someone else's retirement.

WilliamLarsen said...

Cash for clunkers took borrowed money and gave it to those who bought a new car. I know many who who were not going to buy a car simply because their old car had some useful life left. What cash for clunkers did was take future sales of cars and move them forward. It interfered with the normal actions of the economy by singling out only automobiles.

Social Security is an artificial stimulant. Money is taken from workers who would use it for many purposes: savings, college, buying a home, paying cash instead of using a credit card, etc.

The workers who pay social security taxes would most like spend these taxes on something different from those who receive social security benefits.

If social security were to have actually been created on an actuarial basis, we would not have a problem, but it was not. Congress interfered and postponed the initial automatic increase in the OASI tax that would have raised it to 6% by 1949. It did not reach 6% until 1965.

As for the internal rate of return for OASI, you need to perform the calculation on a cohort basis. If you do this, you will find those born in 1956 can expect at most to get about 52 cents on the dollar in benefits based on the US Treasury rate paid to the OASI trust fund. For those born after 1985 it falls to 29 cents on the dollar.

The math is simple, I do not understand why so many think the OASI return is 5.5%. It could be that these same people could not understand the link between wage indexing and the ability to pay future benefits; higher wage growth lead to lower payable % scheduled benefits while decreasing wage growth leads to paying higher % of scheduled benefits.

We are dealing not with linear growth rates, but exponential growth rates. If you truly believe the SS-OASI return on taxes paid is 5.5% I have a bridge to sell you.