In his “Inventing a Crisis” in the New York Times (requires simple registration), the former economist (now political hit man) Paul Krugman writes, “since the politics of privatization depend on convincing the public that there is a Social Security crisis, the privatizers have done their best to invent one.” Compare that with this, from the December 1996/January 1997 issue of the leftist magazine Boston Review:
Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in).
For useful information on the actual crisis facing Social Security and why fiddling with retirement dates and taxes (as a variety of people have proposed) isn’t satisfactory, see the Cato Institute web site at www.socialsecurity.org. Allowing people to put their money into fully capitalized, individually owned personal retirement accounts and thereby weaning themselves from the state system is an increase in personal freedom and the wealth producing capacity of an entrepreneurial economy. Eliminating compulsion is the ideal; reducing it and allowing people more freedom of choice with their own property is a step in the right direction. Furthermore, reducing the people’s dependence on the state and therefore the state’s control over them are important elements of the effort to strengthen civil society and limit state powers.
Maybe a little broader question: Isn’t the argument out there that people are incapable of making wise choices on everything? Meaning: Choosing the best social security plan, choosing the best unemployment plan, the best retirement plan etc. That the amount of long-term decision will just become too many in numbers so that an educated choice in each case will become undoable.
If this was the case, what to do? Hire advisers/specialists for each decision? Rational ignorance (which I’d personally not advocate for such long-term decisions as the above mentioned)? Just accepting that some choices will turn out worse than others?
Toby,
If people can’t be trusted to make these sorts of decisions for themselves (or hire advisors, ask friends and family members, etc. to help them do so), how can they be expected to vote for the right politicians to make these same decisions for them? Wouldn’t we expect them to make even *worse* decisions when it comes to voting, since at least with personal savings they have more of a financial incentive to do a little bit of research?
Micha,
I do agree with you, but I may have misworded the aim of my question. In my eyes, people tend to be informed best about the things that directly and immediately affect them (haven’t Schumpeter and Hayek pointed that out?); but what if the sheer number of decisions (with varying importance) becomes to too big too handled properly? Of course, they have a bigger incentive to look into decisions that affect their money.
I am making this argument for the most part for argument’s sake since I am a firm believer in choice; however, a while ago, I came across an article that makes that claim that there is a limit in human beings’ ability to make informed choices. I totally forgot about the author or where I read it, though. I just found it interesting.
Taking a course in game theory, I learned about time-inconsistency problems. Maybe choice can be looked at in the same way: Yes, I do love freedom to make choices, however upon entering a Walmart superstore, I am overwhelmed by the number of brands and types of coffee, making me wish there weren’t that many to pick from. American friends told me that they hate Walmart for that very reason. This would be somewhat in line with the little excerpt of James Buchanan’s article that was posted at Cafe Hayek (–> “paternal socialism”). And to a certain extend, I agree with Don Boudreaux’ last sentence that, if Buchanan was right, it’d be frightening (to a degree again).
Your friend Lew weighs in…
http://www.mises.org/fullstory.aspx?Id=1695
While I don’t disagree with the thrust of your argument, I find it notable that most of the folks who attack Krugman never talk about the meat of his arguments, and instead focus on his (percieved) political agenda.
A thoughtful response to his economic arguments would do more than simply slander him and point to evidence that he changes his mind.
That the SS mechanisms needs changes is obvious; that the so-far nonexistent plan the Bush machine is shopping will be nothing more than a reward for special interests is as well.
It’s not clear whether Skipple Fish is saying that I have slandered Paul Krugman, or other people (which ones?) have done so. Nothing that I have written could be considered slander under any definition of the term.
So far, Krugman has offered little in the way of argument. He’s made some insinuations, such as that Wall Street is pouring huge funding into getting personal accounts for average people (I wish that they were, but, sadly, they aren’t), and he’s asserted things that are contrary to what he ought to know. Paul Krugman (at http://www.nytimes.com/2004/12/10/opinion/10krugman.html ) and Lew Rockwell (in the essay linked to in a comment above) insist that transition to a system of fully funded personal accounts would entail an increase in government debt. That’s just not true. The current debt of the system (also known as its “unfunded liability”) in present value terms is $11.9 trillion. That is not currently acknowledged as a part of the federal government’s indebtedness. Making it explicit does not increase indebtedness. Indeed, by allowing younger workers to opt out of the current system and by limiting future Social Security benefits to increases in the consumer price index (rather than continuing the universally acknowledged unsustainable practice of indexing benefits to the growth of wages), the net indebtedness is reduced from $11.9 trillion to $5.4 trillion. But to do that requires acknowledging — not increasing — the debt.
Note that in today’s New York Times column on the topic (http://www.nytimes.com/2004/12/17/opinion/17krugman.html?oref=login ), Krugman never manages to address whether moving from a pay-as-you-go system (which he accurately called, before GW became president, a “Ponzi game”) to a fully funded system of personally owned accounts would generate greater or lesser returns than the current system. In fact, over the next 75 years the return on Social Security will be only about 1.4 percent, which is not nearly enough to pay the benefits it has promised. Getting a higher return through better management (more importantly, by investing in wealth producing activities, such as equities and corporate bonds, rather than merely in IOUs that have to be financed by increasing taxes or cutting spending in the future) that also requires payment of management fees would still be a good deal. I don’t feel cheated when I spend money to hire someone to provide a service that is far better than I could provide in some other way. Paul Krugman is suggesting that I should feel cheated, even though I’m better off.
Krugman used to be a good economist. I recommend his book on “Pop Internationalism” quite highly (and especially the chapter on “What Every Undergraduate Should Know About International Trade”). But when he became a columnist he changed quite dramatically. Now the best way to know what his views are is to ask first what George Bush thinks. I am confident that you would not lose money by betting that Paul Krugman would take the opposite view. Bush’s stance, pro or con, is a far more accurate predictor of Krugman’s stance than any other. And that’s really rather sad.
With regards to the generalizations on folks sniping at Krugman, I was making a broad point, which is that those who wish to dismiss Krugman typically ignore his analysis, and instead point out that he is a rather shrill commentator, about which I don’t think anyone would argue. I admit that I was using the word “slander” a little loosely; I would not accuse you (or anyone else, as far as I’m aware of what they’re saying) of actually slandering him. I apologize for the careless language.
What I do not follow is your notion of debt and accounting. You appear to leap from the notion that there’s a crunch point, 40 or more years off (and it seems to drift farther into the future as over time, which suggests certain plain economic talking points), to the notion that something must be done now!
I don’t actually disagree that SS is a poor construct, from a philosphical perspective. The fact of the matter is, though, it has worked, is working, and will continue to work for a horizon longer than many of us will be alive. Would that other extremely expensive government projects worked as well (Iraq, the TSA, missile defense, whatever that goofy secret space related porkfest was about; I could do this all day). That it is a Rube Goldberg construct is not in question; that it needs the sort of “fixing” the Bush machine will offer is. And it is quite notable, I’ll point out again, that so far the “solution” offered is mostly PR and fishing for support, rather than any actual ideas — they appear to have picked a vision thing, and are now attempting to figure out what to do with it. It rather reminds me of a particularly statist version of the sillier sorts of corporate focus grouping.
Nobody is talking about interesting approaches, like spinning off the SS administration into something like the Federal Reserve, because that would mean politicians couldn’t milk it, and it would hold them responsible for stupid choices.
Back to Krugman, I don’t believe anyone has yet responded to his notion that the whole “unfunded liability” issue is a sham argument. If you’d like to talk about unfunded liabilities, the US state has plenty – Medicare, government pensions, etc. Arguably, the entire military apparatus, currently costing north of $600B/year, give or take, is an “unfunded liability”, in that spending this year is an implicit promise to spend similar amounts in the future. While it may not be a “promise” to the voters, it is as much a moral certainty that is will continue as anything else government does. Where’s the outrage? The talk of a sudden new crisis that requires a bold initiative?
My hat comes off in sincere respect to the first person supporting this SS boondoggle who also supports privatizing military funding.
Apology accepted. (I wasn’t insulted, anyway.)
Let’s look at the issue of debt and accounting. Social Security has both an income stream and an outlay stream. The two are supposed to be related. The difference between the two, in present value terms, is $11.9 trillion. Although that represents obligations of the federal government, it is not currently included in the national debt. It’s an “unfunded liability,” i.e., an obligation to pay, which we normally call “a debt,” but it is not counted as such under the federal government’s current accounting rules. If a private firm were to do that, the officers would likely find themselves facing criminal charges. If we openly treat the obligation as what it is, it does not mean that we have just increased the national debt by $11.9 trillion. We’ve just recognized what it is. Recognizing the debt while creating a means to cut it roughly in half is not an increase in net indebtedness, but a decrease.
Now let’s look more closely at the frankly fraudulent accounting schemes that have been used to cover up the burdens on young people that the Social Security system represents. Skipple Fish believes that the system is fine until 2042, when the so-called trust fund runs out and the shortfall of revenues compared to expenditures will have to be funded out of general revenues, which means through a tax increase, cuts in government spending, or some combination of the two.
In fact, the problem starts in 2018, when the revenues from the payroll tax will be below the expenditures in the form of benefits sent to retirees. At that point the system begins to draw down the “trust fund.” That “trust fund” is a complete fraud. By law, the surplus of revenues over expenditure for the Social Security system must be “invested” in government bonds, which are nothing more than promises to pay out of future tax revenues. That means that in 2018, when the revenue stream goes negative, the bonds in the trust fund will have to be cashed in and that means that they have to be financed from general revenues, which means through a tax increase, cuts in government spending, or some combination of the two — precisely as if no “trust fund” existed at all. The trust fund is a trick, a shell game to cover up what Paul Krugman rightly called (before Bush became president) a “Ponzi game.” It’s a fraud on top of a fraud.
The year 2018 is not that far off, is it?
Now, regarding Skipple Fish’s point that there’s no point in doing something now to avoid a problem in the future, I’d ask him to think about that a bit longer. My roof is going to collapse if I don’t have it repaired. But it will collapse in the future, so why worry now? My car engine is smoking, but it won’t break down completely for a while, so why change the oil now? My heart will give out if I continue to eat lots of butter and fat, but that will be in the future, so why control my appetite now?
Moreover, my nieces and nephews will certainly be alive when they will have to deal with a much, much less tractable problem, one that merely gets worse the longer we put off change. I think that it’s quite simply immoral to saddle them with an unsustainable burden to pay for my retirement. It “worked” when the system had a ratio of people paying to people receiving of 5.1 to 1 (in 1960), but when it gets to 2.1 to 1 in 2030, it’s rather a different matter. That’s why Paul Krugman rightly called Social Security a Ponzi game, also known as a pyramid scheme or a chain letter. It “works” at the beginning but eventually collapses. That collapse is getting closer every day that we refuse to take action to change the system. To refuse to do so is not merely unwise; it is immoral.
As to actual proposals for change, I’d encourage Skipple Fish and others to look at the bill introduced in the House by Reps. Sam Johnson (R-TX), Pat Toomey (R-PA), and Jeff Flake (R-AX). It’s a detailed and comprehensive approach based on the Cato Institute proposal (http://www.socialsecurity.org/catoplan/ ). It’s not just a lot of PR fluffery, as Skipple Fish seems to think.
Finally, bringing up unfunded liabilities is hardly “a sham argument.” Those are obligations to pay that are not currently reflected in federal accounting. Some of the others that Skipple Fish mentions are also unfunded liabilities (notably Medicare, although most government pensions are not unfunded liabilities, since they are fully funded and based on personally owned accounts). The military budget is also not an “unfunded liability,” because it is openly funded through general tax revenues and does not represent a promise of a particular set of benefits to “defense recipients.” The Social Security system, on the other hand, makes very particular promises that cannot be kept. It’s dishonest. It’s unfair, especially to young people and to African-Americans, who (because their demographics differ from the average) get an especially raw deal. It’s unsustainable. It has to be changed.
An interesting exchange. Not being expert on the topic, I will back off. A couple of notes, however, that I do think bear more attention;
– saying the military budget is different is technically correct while being obviously wrong. No, there are not a particular set of benefits to defense interests made as a promise. However, I would tend to believe that there are very few investors that would bet that the defense bugdet will be smaller in 2018 than it is today.
– Financing the changes to the tune of $2 trillion now instead of either gradual changes over time or big changes in 2042/52 (depending on whom you listen to) and saying this won’t affect capital markets, interest rates, or US creditworthyness seems to put an awful lot of faith in the Modigliani Miller theorem, which doesn’t seem to hold in the real world.
– My personal view, the more I read about the topic, is that the real crisis is in Medicare, and if it is the case that “something must be done”, I would look there, first.
Thanks for the interesting discussion.
Skipple Fish is certainly right that Medicare faces a very serious crisis and that it urgently calls out for action. It does represent an authentic unfunded liability because of the promises being made for which there are no designated revenues. That is to say, there is an authentic debt burden on the federal government that is not reflected in the government’s accounting. I disagree, however, that that means that we should therefore ignore the $11.9 trillion in debt (the unfunded liability) that the Social Security system has incurred. Something can and should be done to drastically reduce and then eliminate that debt, by adjusting benefits only in accordance with inflation, and not with the faster rising growth in wages and by allowing people to move to fully funded accounts that reduce and then eliminate their dependence on the current unsustainable pay-as-you-go system.
One thing to keep in mind is that if the obligations to future retirees are recognized through retirement bonds (sometimes referred to as “recognition bonds”), those would not have the same effect on capital markets as the issuance of other kinds of bonds, because they would not be sold, but would be awarded to people who have paid into the system, as a recognition of the obligation incurred. That makes a big difference. It’s not a dumping of additional debt onto the market, but merely the recognition of a debt that is already understood by market participants to exist.