Social Security Blog Smackdown!



Max Sawicky versus Arnold Kling in the smackdown of the year! Its on the WSJ online (which should be available to the public)

The subject: Social Security Reforms: Necessary or Not?

Kling:  "Social Security’s fundamental weakness is its pay-as-you-go
structure, which makes it dependent on the ratio of workers to retirees. That
ratio clearly is on a long downward trend, which means that under current
benefit formulas higher taxes are likely to be needed. In the context of a
budget that already is bloated with future promises, particularly for Medicare,
this is not a status quo that we should maintain."

Sawicky:  "What would I do about the shortfall? For the next 15 years,
nothing. There is no need, especially in light of more imminent problems, and
larger long-term ones to boot. We might have to fund the shortfall after 2042
with general revenue, something completely feasible. About 2% of GDP (in 2042
and after) would fill the gap between payroll tax receipts and benefits
presently scheduled for 2042 and after. If I was negotiating, I’d be willing to
discuss program savings, if revenue measures were on the table as well. But why
would we even waste time on this in light of the reality that nothing we decided
would be permanent?"

Kling: "Under the status quo, and even if our longevity forecasts are
correct, we have made promises to future retirees that are more generous than we
will be able to keep, requiring "minor adjustments." Under plausible alternative
forecasts, the required adjustments will be major. Surely, the conservative
thing to do — and the right thing to do — is to make promises that we can
keep, not promises that we can keep by making last-minute "adjustments." That
means slowing the growth in projected future benefits. My preferred approach to
doing this would be to raise the age of eligibility to receive benefits for
people now aged 50 and younger. The Bush administration approach is to move to
price indexing from wage indexing. The Democratic Party’s approach is to scream
like a two-year-old denied an extra scoop of ice cream."

Sawicky:  "Since we have not succumbed in this dialogue to any economic
voodoo about privatization inducing some magical rise in GDP, we are left with
the question of how much consumption the elderly should enjoy. As I mentioned
before, I would be open to compromise between present benefits and
price-indexing. Any such a solution would be much more appealing if it included
some kind of mechanism for automatic escalation of benefits if projections

The prime objective is to ensure retirement with dignity, which
means a standard of living that reflects economic progress in general, not one
that confines retirees to second-class status. In effect, you describe this as
"an extra scoop of ice cream." I would say the incessant yowling of the right
for ever more tax cuts to finance obscene levels of crony-capitalist waste and
conspicuous consumption deserves the highest condemnation of a humane society.
But that’s just me.

Good stuff!

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What's been said:

Discussions found on the web:
  1. chris commented on Jan 20

    For the non-economist who read your blog, who won that debate? I’ve read it couple of times, but it goes right over my head.

  2. spencer commented on Jan 21

    What I would like to see in the debate is a
    recognization that if the SS Commission projection that real GDP growth will only be about half the long term record –1.7% vs 3.3% —
    that it is extremely unlikely that stocks will continue to provide the same long term 10% rate of return.

    If you try to work out the numbers of stocks providing 10% returns when nominal gdp growth
    is only 4% you quickly find that you have to get one or a combination of the following:
    1> The market PE has to soar to new levels.
    2> Earnings or profits as a share of GDP have to rise to a level 3 to 6 times their historic norms.
    3> Firms must pay dividends greater than their earnings after about 20 years.

    Since none of these projections sem very likely the discussion about private accounts should assume much lower stocks returns if the assumptions behind the SS crises are to be accepted.

  3. Jerry commented on Feb 8

    The Social Security Trust Fund has IOU’s in it from the Govt.
    Is interest being paid on the funds borrowed?
    If so, at what rate?
    Can the Govt. start paying off these IOU’s so that the Trust Fund is completely solvent by 2018?

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