FactCheck.org has a new brief on a number of advertisements on Social Security being run in Congressional races. Here's the short story: Democrats celebrated Halloween early this year, trying to spook voters with the political boogeyman of risking Social Security in the stock market. Since October 1, we have found 58 ads from Democrats and their allies attacking their Republican House and Senate opponents on the issue. They mislead in several ways: Click here to read the full article.
Friday, October 31, 2008
FactCheck: Dems Mislead on Social Security Plans
The Economist on Social Security Reform
The Economist magazine has a nice report on the candidates' plans to fix Social Security and the general political dynamic surrounding reform. Worth a read.
Thursday, October 30, 2008
CRFB: Guide to Social Security: The 2008 Presidential Election
The Committee for a Responsible Federal Budget released a very useful paper summarizing the presidential candidates' views on Social Security reform and giving a menu of options available to them to make the program sustainable for the long term. It's definitely worth checking out. Click here to take a look.
Wednesday, October 29, 2008
Autumn newsletter from Michigan Retirement Research Center
The Michigan RRC has released its autumn newsletter, updating on new papers, the August RRC conference in Washington, and interviews with MRRC researchers. One interview in particular is well worth reading since it defies current conventional wisdom about Americans' level of preparation for retirement. John Karl Scholz and Ananth Seshadri are economists at the University of Wisconsin–Madison who have written a number of excellent papers on Americans' retirement savings. They conclude – contrary to most press reports – that a strong majority of Americans are actually doing pretty well in terms of their retirement savings. Current retirees are overwhelmingly well-prepared, and even younger Americans – who we often assume to be doing next to nothing to prepare for retirement – are doing much better than most people would expect. The Scholz-Seshadri interview is well worth reading. If you're interested in reading their latest paper, here's a link.
Marmor and Mashaw: “Shoring up Social Security”
Ted Marmor and Jerry Mashaw are professors at Yale University and members of the National Academy of Social Insurance (Mashaw is currently on NASI's board, while Marmow served from 1986-1996). Together they write in today's Philadelphia Inquirer on the presidential candidate's views regarding reform: For the near term, the Social Security trust fund is an island in a sea of budgetary red ink. But, bombarded by talk of a crisis in Social Security financing, many Americans harbor the image of a program on the verge of collapse. Trustees expect the fund to have a $196 billion surplus in 2008, and continued surpluses are projected for the next 18 years. Reserves are expected to grow to more than $5.5 trillion by 2026. So what's the problem? Beginning in 2017, tax revenues flowing into the fund are projected to fall below expenditures. If the trustees' projections are correct and if no changes are made, reserves will be depleted by 2041. Thereafter, Social Security taxes would cover only about 78 percent of benefits due. We should be clear that these are projections, not predictions. Some analysts think they are too gloomy, others too sunny. But when a program supports so many U.S. families, it is prudent to try to secure its future. What have the presidential candidates told us about their plans for keeping Social Security's promises? Not very much. John McCain's position is difficult to pin down. He has expressed antipathy toward the program, calling it a disgrace at one point. His Web site suggests he is still committed to President Bush's plan to "privatize" it, at least partly. On the campaign trail, however, McCain has tried to distinguish privatization from Social Security's long-term financing needs. He could hardly do otherwise. Diverting some Social Security taxes to private, risk-bearing accounts would make the program's long-term financial picture worse, not better. At times, McCain has seemed to promote delegating the Social Security-financing issue to a bipartisan commission. That may well be a good idea. But it provides no information on where McCain really stands on shoring up the program. There are only three ways to do that: Increase tax revenues, decrease benefits, or increase the returns on the Social Security trust fund. The balance among those is what the political struggle over Social Security financing is about. Barack Obama, unlike McCain, has strongly supported Social Security in its current form and promised to maintain benefit levels for future retirees. He says he would shore up the program's finances by levying Social Security taxes on incomes above $250,000. Today, Social Security taxes are not collected on income above $102,000. It's not clear whether Obama's plan would actually fix Social Security, but it is consistent with his promise not to levy new taxes on middle-income Americans. This may be politically astute for this election year, but it is politically dangerous for the program. Social Security has remained immensely popular with U.S. voters largely because it combines two visions of fairness. Benefits are progressive: Lower-wage workers get larger retirement benefits than higher-wage workers in relation to their contributions. But it's not simply a welfare program: The more a worker pays into it, the higher that worker's benefits. The Obama proposal breaks the connection between taxes paid and benefits received. Benefits still would be based on taxes paid on incomes up to $102,000. But retirees would not get additional benefits for the taxes they paid on income above $250,000. Demanding increased taxes without increased benefits is not prudent for maintaining political support for Social Security. It damages the program's long-standing image as earned rather than handed out. Unfortunately, in the heat of this election campaign, one of the nation's most important and popular programs is not being treated seriously. McCain's only concrete proposal is standard Republican dogma: Whatever the problem, privatization is the solution. Obama responds with a standard Democratic nostrum: When in fiscal trouble, soak the rich. The U.S. electorate deserves better. Serious people have made many sensible proposals for safeguarding Social Security's long-term financing. Perhaps, after the election is over, we will get around to discussing some of them.
Monday, October 27, 2008
New paper: “The True Cost of Social Security”
A new paper by Alexander W. Blocker (Boston University), Laurence J. Kotlikoff (Boston University) and Stephen A. Ross (Massachusetts Institute of Technology) attempts to assign a market value to Social Security's long-term unfunded obligations. "The True Cost of Social Security" treats the Social Security program as a financial asset with certain unique characteristics, and then uses modern finance theory to place a value on the promises made under that program. Here's the summary: Implicit government obligations represent the lion's share of government liabilities in the U.S. and many other countries. Yet these liabilities are rarely measured, let alone properly adjusted for their risk. This paper shows, by example, how modern asset pricing can be used to value implicit fiscal debts taking into account their risk properties. The example is the U.S. Social Security System's net liability to working-age Americans. Marking this debt to market makes a big difference; its market value is 23 percent larger than the Social Security trustees' valuation method suggests. In other words, the true value of the long-term Social Security shortfall could be significantly larger than we currently suppose. I may have touched on this issue in discussion of the report of the 2007 Technical Panel on Assumptions and Methods. The panel's report, which came out several months ago, cited a paper by John Geanakoplos and Stephen Zeldes which attempted a similar exercise to the Blocker, Kotlikoff, Ross paper. However, Geanakoplos and Zeldes concluded that, using market pricing, Social Security's long term deficit was around 25 percent smaller than the Trustees project. In other words, both papers utilize more sophisticated analytical techniques but come to precisely opposite conclusions. My issue with the Tech Panel's report was that it recommended adopting the Geanakplos-Zeldes approach in the Trustees Report: The Panel recommends that the Trustees consider adopting risk-adjusted discount rates for computations that involve discounting. As well as making the measures more accurate theoretically, the use of higher discount weights has the salutary effect of reducing the sensitivity of the results to the more distant, and more uncertain, cash flows. This, I thought, was premature given that the Geanakplos-Zeldes paper hadn't even yet been published, and the Blocker, Kotlikoff, Ross paper makes me think even more that these methods aren't quite ready for prime time. The Trustees Report currently contains some new approaches that it didn't use 10 or so years ago – stochastic forecasting, the infinite horizon actuarial balance, and others – but these methods were thoroughly used in academic and policy research before being applied in the Trustees Report. I suspect that market pricing of Social Security liabilities should go through a similar process before going in the Trustees Report.
Samuelson: “Young Voters -- Get Mad”
A few days old but still worth linking to, Robert Sameulson writes on the intergenerational conflict implicit in entitlement reform. You're being played for chumps. Barack Obama and John McCain want your votes, but they're ignoring your interests. You face a heavily mortgaged future. You'll pay Social Security and Medicare for aging baby boomers. The needed federal tax increase might total 50 percent over the next 25 years. Plus there's the expense of decaying infrastructure -- roads, bridges, water pipes. Pension and health costs for state and local workers have doubtlessly been underestimated. All this will squeeze other crucial government services: education, defense, police. Guess what. You're not hearing much of this in the campaign. One reason, frankly, is that you don't seem to care. Obama's your favorite candidate (by a 64 percent to 33 percent margin among 18- to 29-year-olds, according to the latest ABC News/Washington Post poll). But he's outsourced his position on these issues to the AARP, the 40-million-member group for Americans 50 and over. I agree with Samuelson that population aging implies tough decisions, and the welfare of different generations will depend on what those decisions are and when they are made. We should attempt to smooth costs and benefits evenly over generations, rather than letting some groups do well and others poorly. That said, as I've argued elsewhere, I don't believe the underlying Social Security problem is one of greedy Baby Boomers or anything like that. (That might be the problem with Medicare, but that's another story…) Most current and future retirees under Social Security more than paid for their benefits, meaning that their contributions – compounded at the interest rate earned by the trust fund – are enough to finance their benefits. The problem is an inherited "legacy debt" from prior generations, who received much more than they paid for and left the program underfinanced for the long-term. This means a) that there's nothing we can do about the Social Security deficit except suck it and figure out tax increases and/or benefit cuts; but also b) that there isn't a huge moral conflict between young and old, such that one is the victim and the other the villain. So young voters should get mad – at politicians who refuse to take on the tough but important issues. But they shouldn't necessarily get mad at older voters.
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