Monday, June 24, 2013

A New Vision for Social Security

I have a long article in the new issue of National Affairs that pretty much sums up the work I’ve done on Social Security over the past several years. The article (ungated!) outlines both what I would do to reform the program and, more importantly, why.

One of the themes of the piece is that reformers focus excessively on the details of the tax and benefit formulas without thinking enough about the big picture goals of reform: why we have a Social Security program in the first place and how we want it to accomplish its goals. I don’t expect anyone to adopt these ideas en masse, but that’s not the point. The goal is to encourage people to think about the program and reform in a slightly different way, to focus more on the ends of reform and less on then means.

Some of the proposals are pretty far out, but that’s the luxury of working at a think tank. Enjoy!

8 comments:

JoeTheEconomist said...

The plan shifts the goal of Social Security from insurance, which manages risk to a mix of savings and welfare. Your plan looks like you are throwing away the baby and keeping the bathwater.

When you say : "The program's goals can be described as a combination of two important purposes: saving and redistribution", I think you are wrong. Social Security operates like insurance, not savings. One manages risk and the other accumulates wealth. These are very different things. Separately, the man who ran SS in 1944 said that no one wanted to create a welfare program, or a dole as he called it. The goals you describe are yours, and you aren't telling people that they are not historical goals of the program.

I think your presentation would be more transparent if you didn't hide the costs. "Workers would contribute at least 1.5% of pay, matched dollar for dollar by their employers" You know that the full 3% coming from employees as employers cut wages to reflect the higher costs.

You don't mention that one of the things that we have learned is that the 401K account is not a very good idea for all people. Younger people are trading low-taxes for unknown taxes. Towers & Watson recently reported that assets held in 401Ks had a negative return in 2011, a year in which both equities and bond had plus years. Until you can explain why 401K assets underperformed so badly, you probably ought not build your solution around it. Beyond questions tax benefits and poor asset performance, these accounts generate stiff penalties. Younger people do not get compensated for tying-up their money. What I don't see in your piece is what lessons we have learned.

Any welfare component will work only as long as it has political support.

Social Security has a massive economic transfer from single people to married ones. There is no economic basis to justify it within your goals. Why should single people subsidize people like me.

When you give SS a new charter with new goals, you ought to understand one thing. Old-age insurance is a very sound expense for people, and there is really no other place for most Americans to buy it. You are trading SS's function which we can't replace for two new goals which the government already serves.

Arne said...

I have trouble with the assumption that increased savings will increase the size of the economy. Right now, this seems exactly backwards. Increased consumption does more to increase the size of the economy than increased savings. In the longer term, if there are more savings present, supply and demand would seem to put pressure on the ROI such that calculating the increased in GDP is simply impossible.

Increasing work hours after 62 would also put downward pressure on wages. I think that society should do something to encourage gradual transition to retirement, but I think that is a moral bias on my part more than an analytically valid goal.

The 60 percent of people who think they will not receive SS benefits are demonstrably wrong. If their beliefs are resulting in negative decisions, how can meaningful education not reult in more positive decisions?

It seems to me the three legged stool analogy should be brought back out. The other two legs are worse off than SS. That is where we nned to apply more effort.

JoeTheEconomist said...

Why do you think that this new Social Security will create any savings? If we are forced to participate in a 401K, we will lower our other saving patterns.

In fact, if we shift SS from insurance to welfare, we will discourage savings.

Andrew G. Biggs said...

I'll respond at greater length later, but in the short term higher saving can hurt the economy (that's more or less what happens in a recession -- people hold onto cash instead of spending it) but over the longer term higher saving helps growth by providing the capital that raises productivity (here, think of the Asian economies, who grew quickly because of very high saving rates).

JoeTheEconomist said...

In a recession people hold cash. That is very different from increasing savings where people are moving cash into some form of investment. The question is what is the investment in? The Fed is flooding the market with cheap 'savings' but it isn't helping because of where the money is flowing.

In terms of economics is there a difference if the 'higher savings' is displaced by increased borrowing by the government to refi the bonds held by the Trust Fund. If solvency requires 15.1% of wages, and you have 12.4% of wages plus 3% put into savings which is lent to the government to pay benefits. What is the difference?


WilliamLarsen said...

Andrew, good start. Defining what Social Security is and what we want it to be needs to be answered before anything can be done. It is also good to know how we got into this mess to begin with.

The problem is that when we deal with "savings" Joe the Economist is correct; they will shift savings from a 401K, IRA or Roth IRA to this new Social Security Savings.

The real problem now with increased savings is that we spent past "perceived savings OASI taxes" on current benefits, thus increasing the economy more than it would have, had OASI not redirected these funds to current consumption. There was no real savings.

This in itself is the problem. No wealth and an economy built on spending, not savings. Had each cohort continued or been allowed to save as they had in the past, then "savings" would not have been used to create a larger economy. As workers retired, their savings would have funded their retirement and spending, thus sustaining the economy. However, increased savings reduces spending; thus reducing the economy.

What we have is one giant ponzi scheme that is imploding. 10 years ago, it was very hard to change course using far more drastic changes than you propose; Means test all benefits based on assets, let workers keep their full 10.6% OASI tax, use the trust fund to fund benefits for ten years and then fund it through our progressive income tax. It would take 33 years to reach equilibrium, but the equivalent payroll tax would have been about 1% and less than 9% of elderly would need assistance.

“Each person's retirement benefit is determined by first taking into account two factors: the age at which he chose to retire (those who retire early, starting at 62, receive lower benefits than those who wait until the normal retirement age, which is now 66) and a measure of how much he earned during his working years (which indicates the amount he paid into the system through Social Security taxes).”

This is not 100% true and in fact off by a lot. Considering the base has increased far faster than inflation and wage growth combined and that the tax rate went from 2% to 10.6% is not and cannot make wages earned equivalent to taxes paid into the system.

“The only way to avoid a zero-sum game in which different generations fight over limited resources is to build a stronger economy. But Social Security consistently makes our economy weaker.”

Economic growth will help preserve social security is a myth, a mathematical divergent series. We have been experiencing a decreasing birth rate for well over 100 years and now the zero population growth rate will reach equilibrium in a few decades. That being said, our economy has been fighting over limited resources for decades; higher base, tax, increase retirement age, future benefit cuts, etc. Is our economy stronger, the same or weaker than 50 years ago? As productivity improves, who deserves the return on investment that created this; government, workers, investor? If it goes solely to the government, there is no incentive to improve our economy.

“The third major problem is that the program tends to induce workers to retire earlier — again undermining the economy. Back in 1950, the typical American claimed Social Security benefits at age 68 and lived to around age 76.”

According to Social Security the person lived an additional 14 years making it age much higher.

“Despite frequent claims that Social Security is the nation's most effective anti-poverty program, it actually often fails poor seniors.”

I would say that Social Security is the leading contributor to poverty, lower economic growth.

WilliamLarsen said...

“Workers would contribute at least 1.5% of pay, matched dollar for dollar by their employers. Universal retirement savings accounts would allow Social Security to focus its efforts: If everyone saved as they should for retirement, Social Security could concentrate its resources on low earners who needed the program the most.”… “Finally, distributions from these accounts would be tax free (up to a limit) if converted to an annuity that provided a stable monthly income for life upon retirement.”

Too little even for young new workers. Raise that to at least 6% and you may have something. The 2nd problem is how do you pay for it? This will reduce current payroll taxes to fund current benefits. Tax free reduces future Federal Income Taxes. Is this not shifting the chairs on the Titanic?

“Each American reaching the normal retirement age would receive a benefit set at the poverty threshold for individuals over age 65 (which today is about $920 per month).” … “Over time, this flat benefit would rise with wages for new retirees, maintaining Social Security's role as an anti-poverty program even as income levels increased.”

Sounds very similar to what I proposed in 2002 when I ran for congress when it was $1,000 based on assets and increased by wage growth versus inflation, keeping benefits consistent across cohorts.

“Larger families would significantly benefit Social Security's finances. But raising a child entails hundreds of thousands of dollars in costs, from birth through college. To compensate parents for their efforts and expenses, a family-friendly payroll-tax cut would reduce the 12.4% Social Security payroll tax by two percentage points for each child under age 18.”

Walter Hart suggested this was the case decades ago. Those who do not have children have not provided the economic resources to pay their future benefits.

Anonymous said...

Andrew, I'm happy to see that you are focusing on goals instead of starting with details.

I'll provide my goal for Social Security - When people reach age __ they should be able to quit work and have enough income to live indoors and eat at US prices. Your flat $970 per month meets that goal. Congratulations, you have solved the SS dilemma. Now we can talk about how quickly we can lower benefits and lower taxes to get there.

But, then you throw in a goal-less forced savings plan. What does that do? Under such a plan, people will do less voluntary saving. They will be slower to pay down debt - both because they have less disposable income and because their mandatory account statements will make them feel rich.

Plenty of people, mostly young, [b]shouldn't[/b] be saving. They should be paying down high interest debt first. Your program will impede them.

Mandatory savings do not increase total savings, but they do shift savings inefficiently. Not a good idea.