Thursday, June 2, 2016

Wonk Fight! Munnell vs CRFB on Social Security Myths.

Over at MarketWatch, Boston College economist Alicia Munnell takes issue with the Committee for a Responsible Federal Budget’s “10 Myths” regarding Social Security reform.

You’ll have to read them point-by-point to judge who comes out on top. And I hope the CFRB comes out with more thoughts, since it’s good to keep the discussion going.

I tend to be more partial to the CFRB’s point of view on the specifics, but there is one passage by Munnell that really speaks to me. She writes:

I love the Social Security program, believe it is the backbone of our retirement system, and would like to see 75-year financial balance restored. That said, budget people scare me when looking at Social Security. They see the 75-year shortfall as a simple mismatch of revenues and expenditures, want the gap closed, and many – not all – don’t care very much how that is done. My view is that Social Security will be the major source of income for most of the population, so cutting benefits, as opposed to putting in more revenues, would be a serious mistake.

My time working on Social Security reform in the Bush Administration convinced me that Munnell’s point here has merit. Not the “don’t cut benefits” part – I’d still do that. But I think that fiscal conservatives too often look at Social Security as a budgetary problem to be solved while paying insufficient attention to how Social Security is functioning as a social insurance program for Americans. Yes, Social Security has to be solvent, but there’s more to a good Social Security program than simply not going broke.

That’s why, once I joined the American Enterprise Institute, I stepped back a bit and thought about how I would want Social Security to work as a program, and not simply how would I make the current system solvent. That led to an approach that’s different than the system we currently have, but that has some important similarities to the pension systems in New Zealand, the U.K., Canada and Australia. You can read about plan that here.


JoeTheEconomist said...

"But claiming, as the Myth #1 response does, that postponing a fix raises the total cost of the fix is simply not correct. Figure 2 shows the income and cost rates for Social Security; the shortfall is the difference between these two lines. The total amount of the ultimate required tax increases is not impacted by the timing. The different numbers in the Myth #1 response simply apply to different 75-year projection periods – 2015-2090 versus 2034-2109."

She is saying that if we ignore the time value of money and shorten the definition of solvency by 15 years, then they are wrong.

Arne said...

I think if you click through to , you will find that she is wrong to say it is about the end of the projection period being different, but right about "the total amount." CRFB says "the cost of waiting is high." But the cost is $10.7T (in 2015 dollars.) Delaying changes the annual cost (per trivial math), but does not change the total.

Time value of money does have negligible impact in the analysis of a PAYGO system, but that is not what she was claiming. What she was alluding to was the fact that the increase needed to achieve solvency until 2090 (75 years) does not achieve solvency until 2109. As long as people keep living longer the cost of retirement will keep going up.