New at Reason

Julian Sanchez | April 4, 2005

I want to invest my payroll.
You'll just put the NASDAQ on the dole!

But stock owners vote for the Red team!
That's not as great as it might seem.

We'll be more free if we privatize! Stop the Ponzi if we privatize! Helps GOP if we privatize!
For a small fee if you privatize.

From our April issue, Tyler Cowen and James K. Glassman face off for an antagonistic duet about Social Security reform.

Comments

|4.4.05 @ 2:00PM|#

I love it! Sung to the tune of "America" from West Side Story. (first! =b)

fyodor|4.4.05 @ 2:38PM|#

Ironic that the Left picks on the Bushies' PR attempt to use "personal accounts" and eschew any reference to "privatization," when the fact that this is not true privitization is at the heart of what's wrong with the plan!

|4.4.05 @ 2:42PM|#

I think fyodor said it best.

MP|4.4.05 @ 3:10PM|#

Here's a good example of typical blindness from the anti-privitization crowd:

Smith [a local AARP flunky] agreed that the program requires a fix but would not commit to a specific alternative. She did identify several possibilities, including the government's investing a portion of the Social Security trust fund in the markets and assuming the risk itself, rather than placing it on workers.

So when the government makes a bad investment and taxes go up, that's assuming the risk?

fyodor|4.4.05 @ 3:16PM|#

thoreau, thanks!

MP, interesting, eh? Some people have a genuine fear of freedom and personal responsibility! Maybe something went wrong in their toilet training...

|4.4.05 @ 3:16PM|#

MP, you just don't understand. Government money is magic, and doesn't come from people. The Government is paying for it.

Insurance company money works the same way. Medical insurance should cover everything including yoga, vitimans and frsh fruit, and not cost more the $10 a month. If the insurance compay pays for it, I don't have to.

See how easy it is?

|4.4.05 @ 3:45PM|#

Nothing to say about the article, but the song is awesome.

Brian Marks|4.4.05 @ 3:45PM|#

Insurance Companies grow money on trees and than want to keep all of it.

|4.4.05 @ 3:49PM|#

This whole argument is amusing. They both assume that SS will NOT go broke and it CAN be fixed. Maybe you should have added someone who believes that SS is a complete bust and it will go bankrupt.

|4.4.05 @ 4:00PM|#

We could've included someone who believes Lord Auberon of Fairie will appear to fill the trust fund with magic gold coins, too; I'm not sure what it would've added.

|4.4.05 @ 4:10PM|#

Julian
"We could've included someone who believes Lord Auberon of Fairie will appear to fill the trust fund with magic gold coins, too; I'm not sure what it would've added."

I'm sure that W's schedule would have made his participation impossible.

Billy Beck|4.4.05 @ 4:52PM|#

Julian: the difference lies in the fact that everything about "Lord Auberon of Fairie" is an obvious delusion, where someone who says that social security is a bust and will go broke would have been the only one of the four who was actually dealing in reality.

The nerve of some peoples' equivocations -- like yours, for instance -- is simply outrageous.

|4.4.05 @ 4:52PM|#

Is Glassman so clueless that he couldn�t see Cowen�s initial argument or was he being willfully obtuse? I will state my bias that I find Cowen�s stance more personally acceptable. One thing I would add on is an index on retirement age. The main problem with too many retirees for a worker is that the age of 65 was chosen because it was the average life expectancy of a working American at the time. That age has gone up, so there are more retirees per worker. Increase the retirement age proportional to the average life expectancy of the average American as well as with prices, per Tyler�s suggestion, and the fiscal problem will go away.

Note: This isn�t the ideal solution, but on planet Earth, in the United States, you are not going to be able to do the Greenspan strategy of killing SS.

fyodor|4.4.05 @ 5:18PM|#

Been thinking about social security "going bust." Not sure what to think of it. It's a little like environmentalists talking about "environmental collapse." Taken literally, it's a nonsensical claim based on a static model, ie it doesn't consider changes in the system. The one change that would guarantee SS's continuance would be lowering of benefits. Sure, lowering benefits to zero could very well be considered a difference that makes no difference, and lowering them to nearly zero essentially the same. But there's a lot of lowering you could do before getting to that point. And then there's raising taxes. In the short run, there's no reason we can't raise taxes to cover the expected shortfall, even given no reduction in benefits. (Whether that's fair or worth the repercussions is, I believe, a separate issue.) Now true, at a certain point that could become impractical to the point of being impossible. Such as if each retiree required more from each worker than said worker had available in income. And actually it wouldn't require that because as tax rates became ridiculously high, the incentive to work and the resulting accumulative effect on the economy would combine to create the same effect. Is there any evidence we could get to such a point in the forseeable future? I suppose if current demographic trends continued indefinitely, reaching such a point would be inevitable eventually. But then, if current demographic trends really continued indefinitely, the human race would eventually zero out. Plus, one would assume that as we neared this point of impossibility, we would lower benefits as a necessity. So, it's hard to say that SS could ever just plain go "bust."

As my paranthetical above should indicate, none of this should imply that perpetuating SS as it is is a good thing, only that talking about it "going bust" seems like an overly simplistic and cartoonish analysis. It IS true that under current demographic trends, maintaining current SS benefits will continue to exert an ever larger and harsher drag on the economy via the burden of additional taxation.

|4.4.05 @ 5:23PM|#

As my paranthetical above should indicate, none of this should imply that perpetuating SS as it is is a good thing, only that talking about it "going bust" seems like an overly simplistic and cartoonish analysis.

And when advocates of reform offer overly simplistic and cartoonish analyses, they make it all the easier for their opponents to trash their arguments.

|4.4.05 @ 5:29PM|#

Was means testing mentioned?

fyodor|4.4.05 @ 5:31PM|#

thoreau,

Well, politics is kinda like Saturday mornings, one cartoon fighting the other! :-)

Oh BTW, next time you quote me, would you mind correcting my misspellings? ;-)

I should add at this point that one thing I do like about Bush's SS program is the re-indexing of benefit increases to inflation rather than to wage increases. A widdle step in the right direction!

|4.4.05 @ 5:51PM|#

That age has gone up, so there are more retirees per worker.

Don't worry Mo. Unskilled immigrants from Central and South America are filling the void.

|4.4.05 @ 5:54PM|#

Cowen had the stronger argument in this piece, for sure. Where I find fault with his logic is in the Who of 'Who will pay to fix it?'

Without any plan for reform whatsoever, my generation will be paying the bills, and I will get a starkly reduced "rate of return" in the benefit I receive. With Cowen's plan, this does not change at all. It helps the plan, but it doesn't help the 30 somethings that have to deliver the one-each pound of flesh to the strongest old person lobby in history. I get no tax break, becuase any reduction in my benefit goes to funding the liability.

The whole purpose of the personal account, from my perspective is to buy me off by showing me that I get SOMETHING held in trust, hopefully unraidable by the Abe Simpsons of the world. Cowen does not see that the single generation bearing the brunt of his fix is a problem to be addressed.

I also think that there is merit to the Arnold Kling argument in favor of private accounts, namely that they are a hedge that might prevent future generations from becoming old with no personal savings at all, then demanding payment from younger generations. If there must be welfare, at least force people to pay for some portion of what they will eventually demand from the working young anyway.

It is profoundly unlibertarian, I acknowledge, but so is the existence of an intergenerational welfare program in the first place. I have no libertarian hesitation to force people to save if they are going to force me to spend on them anyway.

|4.4.05 @ 6:09PM|#

To me, the exchange came down to this:

1) They both agree that outright overnight abolition is impractical.

2) They both seem to agree that any transition should, at the very least, index benefits to inflation rather than wages, and increase the age for receiving benefits, to trim it at the margins.

3) They both agree that in the long run people will have to rely more on private retirement accounts.

Where they seem to differ the most is in just how regulated those private accounts should be.

My solution?

1) Higher age for receiving benefits, phased in over time
2) Slightly smaller benefits in real terms. Phase in a cut over time for obvious political reasons.
3) A means test to determine how much (if anything) one receives. But put the means test on a sliding scale, so that a dollar in investment income doesn't cut benefits by a dollar. Otherwise there's less incentive to save.
4) More tax incentives (including incentives related to payroll taxes) for those who divert more money to IRA or 401k accounts. I'm not exactly a fan of this sort of tax code engineering, but it seems better to take the accounts that already exist and boost incentives to invest in them, rather than create a parallel set of accounts that may be even more heavily regulated.

5) Once the comparatively easy task of fixing the SS quandary is done, find somebody much, much, much smarter than me to figure out what to do about Medicare. I know what the easy ideological answer is, but that isn't politically feasible. So we need some sort of plan that is at least somewhat politically plausible, that addresses very real problems, and doesn't create more problems than it solves.

Like I said, it will take somebody much smarter than me. Maybe we can put some of Einstein's DNA into a stem cell and have him figure this out...

|4.4.05 @ 6:24PM|#

In the short run, there's no reason we can't raise taxes to cover the expected shortfall, even given no reduction in benefits.

Fyodor,

FICA taxes were raised this year, in a sneaky way. The FICA cutoff was $87,000 last year, this year it's $90,000. Anyone who earns wages at or above $90,000 will pay an extra 12.4% of the $3000 dollar difference.

fyodor|4.4.05 @ 6:57PM|#

Drooling Richard,

The increase for self-employed folks will be twice that, $744.

|4.4.05 @ 7:09PM|#

Just out of curiosity, how high would you have to raise the retirement age to get the ratio of workers to retirees back to where it was when SS was introduced?

|4.4.05 @ 7:13PM|#

"The increase for self-employed folks will be twice that, $744."

Not really, because employees already pay it through lowered wages. The best trick ever pulled by congress was the specious pretense of having one's employer "pick up" half the FICA. In reality, the employer just pays less for the labor.

As a self-employed person, I admit that psychologically it feels like a bigger sting when I have to pay the tax, but in reality there's no difference.

nmg

|4.4.05 @ 7:16PM|#

Billy, Jack,

I believe both Cowen and Glassmen were arguing that SS is a bust and will go broke -- without certain reforms, like cutting benefits or investing the money in stocks and bonds. To say that SS will go broke no matter what--even if, say, taxes go up, benefits go down, and the retirement age goes to 75--is ridiculous.

Now, you could say SS is morally bankrupt, and it SHOULD go broke, so that we aren't taxed to pay for the retirement of plenty of wealthy old fogies who can afford to pay for their own retirements. I'd agree with that, but it's not the same as saying SS WILL go broke. It also wouldn't have much place in the Glassman/Cowen debate, which was about practical things we could do if we want to save SS.

|4.4.05 @ 7:20PM|#

"...who says that social security is a bust and will go broke would have been the only one of the four who was actually dealing in reality."

A little commentary from the Reality Based Community here.

The average rate of growth since the end of the Civil War - not some cherry picked period, btw, but over the last 140 years - has been 3.4% per year. If economic growth averages slightly UNDER this level, Social Security will never, ever, even using the foolish Bushie gimmick of the infinite timeline, go broke.

To get a sense of what this means, during the last quarter of 2004, the economy grew at a 3.75% annual rate.

New Deal haters lose the values argument, AND you lose the quantitative argument. Please, please, please, conservatives, spend the next three years defending Tom DeLay and pushing Social Security phase out.

|4.4.05 @ 7:23PM|#

The increase for self-employed folks will be twice that, $744.

Aaagh !

Every wage earner pays 12.4% of the first $90,000 they earn in FICA taxes. There is no special penalty for being self-employed.

The difference between being employed by someone else and being self-employed is that, in former case, the employer is responsible for matching the 6.2% contribution the wage earner sees on his paycheck.

Aside from being an accounting nuisance, the employer doesn't give a rat's ass about this technicallity. The employee pays it either way.

This is most sneaky thing about FICA tax. Most wage earners don't know that they paying twice the 6.2% that shows up on their payroll check in FICA taxes.

|4.4.05 @ 7:24PM|#

Rex,
According to my estimates, somewhere between 70 and 74 years old. Probably around 71-72ish. To get the old 1 worker:13.3 retirees, retirees would need to be 7.5% of the population. Approx 5.9% are 75+ and 6.5% are between 65 and 74.

Actually, ignore that. The current size of the labor force is 138 mil, according to the 2000 census. 75+ yo ar 12% of that population. 85+ year olds are 3%. I'd guess to get to a 1:13.3 ratio, you'd need to set the age at about78-79 years old, based on my extrapolation of the census numbers.

All numbers taken from http://censtats.census.gov/data/US/01000.pdf

And yes, it's a slow day at the office today.

|4.4.05 @ 7:31PM|#

Actually joe, picking a period of time right at the end of a war is leaning on the scales. After wars there is a GDP boost due to increased production and a return to the civilian economy. Not to mention there are a whole mess of windows that are broken and need to be fixed, which boosts GDP as well.

|4.4.05 @ 7:32PM|#

Drooling Richard, do you really think that, absent the employer's match mandate, every penny of the employer's half would go into the paycheck of the employees? Really?

|4.4.05 @ 7:33PM|#

"Senator A, which should we do: slash benefits for a large voting bloc of old people, or jack up taxes bigtime on young people who don't vote? We'll have to pick one of 'em, whether or not Bush hides it behind personal account smoke and mirrors."

"Hmm, Senator B. The second one sounds tempting, but I don't want people calling me a tax-raiser. Is there a way to slash the benefits for old people while they are still young?"

"Sure, Senator A. But that requires us doing something decades in advance. Why should we take the political hit when we'll be dead and buried before it's a real problem?"

"Now you're talking, Senator B. In fact, it sounds just like my Medicare plan. Let's grab some lunch and then get some camera time on this steroid bullshit."

|4.4.05 @ 7:37PM|#

Joe: "New Deal haters lose the values argument..."

Just like that eh? By fiat from joe?

Is that how you win debates in the "reality based community"?


nmg

fyodor|4.4.05 @ 7:39PM|#

Drooling Richard, you make me laugh at myself! You were already counting the employer's matching! Okay, my bad! I guess I haven't been studying my paycheck closely enough lately! But back to the point of not exaggerating one's otherwise good arguments (and this has been discussed in this forum before), while you (and nmq) are on absolutely solid ground to say that the FICA employer matching reduces wages, you are on very weak ground to claim that it reduces wages by 100% of the matching amount. Depending on demand elasticity, the amount could be anywhere between 1% and 99%. Only empirical study could determine where within that range it would fall. But yes, the matching does lower wages by some amount. In lieu of the type of empirical evidence needed to determine what exactly that amount would be (and it would likely vary somewhat at different wage levels and at different), let's peg it at about half for argument's sake!

|4.4.05 @ 7:48PM|#

Mo,

It's 140 years! Don't you think that's long enough to drown out the noise you mention?

Tell you what, to make you happy, I'll amend my comment from "averages slightly below" and just say, "If the economic growth matches the average since the end of the Civil War..." Better?

nmg, it's not me. It's the overwhelming majority of Americans, including people under 35, with the pro-phase out numbers looking worse every time a poll is taken. Perhaps you could peruse the poll figures provided on a regular basis on Daily Kos or Talking Points Memo or Eschaton. You won't find them on TCS, Reason, or NRO, though.

(In homey southern accent): Y'all economic elites are jest plumb out of touch with the values of ordinary 'Mericans. Maybe gettin' rid uh Social S'curity looks lack a good idea to some Harvard intellect-shuls, but it shore don't look lack a good idea to or'nary 'Mericans.

|4.4.05 @ 7:55PM|#

Drooling Richard, do you really think that, absent the employer's match mandate, every penny of the employer's half would go into the paycheck of the employees? Really?

Not at all, joe. I just want the wage earners who pay the FICA tax to know that they are paying 12.4%, not 6.2%.

There would certainly be some hysteresis involved in completely repealing the matching contribution made employers that would benefit employers.

That's not my point though. I am simply arguing that the full brunt of the FICA tax that the employee already pays should be directly visible to him.

|4.4.05 @ 8:00PM|#

Uh, sorry to point out the elephant in the room, but Glassman was co-author of a book called *Dow 36,000.* That doesn't exactly help his credibility...

b-psycho|4.4.05 @ 8:48PM|#

Joe: I'd be curious the results if rather than simple "yes/no" polls people were asked to explain why...

That applies to everything, not just SS reform. I notice a common thread with these type of questions: regardless of slant, most people know jack-shit.

BTW: I personally don't support the Bush plan, in case you're wondering. Call me weird, but when I hear "privatization" I don't expect yet another government program...:^/

|4.4.05 @ 8:48PM|#

Joe and Drooling Richard:

Actually, the incidence of the FICA tax on employees is somewhere between 6.2 and 12.4 percent. Since the demand for labor is generally more elastic than the supply of labor, the figure is probably closer to 12.4 than 6.2.

|4.4.05 @ 9:02PM|#

David T, I'm with you on Glassman.

Drooling Richard, "Not at all, joe. I just want the wage earners who pay the FICA tax to know that they are paying 12.4%, not 6.2%." Except that they AREN'T paying 12.4%. They're paying (6.2%) + (whatever portion of 6.2%) that their employers would put into their paychecks.

b-psycho, I'm with you on polls. Also, I noted on a thread months ago that the Bushie language police were actually correct when they insist on the term "personal accounts" instead of "private accounts." Their proposal is not to create private accounts, in the sense that your car is your private property, but to create personal accounts, in the sense that the coat hook with your name above it in kindergarten was your personal coat hook. It belongs to the government, but it is assigned to you.

|4.4.05 @ 10:18PM|#

joe,

There's no whatever about it. Employers have to file a form 941 each quarter that documents the employees' and employer's matching contributions to FICA.

|4.4.05 @ 10:43PM|#

I'm not questioning that they pay that match to the government, Richard, just that, absent that mandate, they would pay that entire amount to their employees.

|4.5.05 @ 2:18AM|#

Have none of you ever received The Lecture or The Memo from your employer about Your Total Compensation, where they detail every expense involved with hiring and retaining you [your wages or salary + employer FICA levy + workman's comp levy + unemployment insurance levy + cash value of whatever non-cash benefits the job provides], usually as a prologue to announcing that the employee-paid share of the health insurance plan is going to be increased? I sure as hell have, and only the invincibly ignorant must be unaware that employers incur costs imposed by the government when they hire. `Course, invincible ignorance is rampant.

Kevin

|4.5.05 @ 2:28AM|#

"I'm not questioning that they pay that match to the government, Richard, just that, absent that mandate, they would pay that entire amount to their employees"


They eventually would. At least most economists think so. The cost of FICA is generally considered to be very close to exactly the difference between your current wages and what your employer would be paying you otherwise.

Now, if FICA were abolished your current employer would probably not rush out to give you your rightful raise, but some would, and others would have to pay more to compete. Wages would creep up, but probably not immediately.

nmg

|4.5.05 @ 9:00AM|#

I wonder how many older people simultaneously bash Social Security reform and 'dem lazy welfare queens.

|4.5.05 @ 9:10AM|#

brzt,

They do it all the time. About ten years ago I remember discussing SSI with a friend's folks. They got red in the face when I told them that the average SSI recepient pays in only the first three years of their return; anything over that being paid by those still in the workforce. They knew exactly what I was accusing SSI recepients of being; welfare queens. :)