Monday, March 2, 2009

Arnold Kling and Amity Shlaes on Social Security

Arnold Kling attended an economic bloggers forum hosted by the Kauffman Foundation and provides us with this commentary:

Shlaes argued against cutting payroll taxes. She was making a comment during a discussion, rather than a formal presentation, so she might not agree with my interpretation of what she was saying. Economists take the view that Social Security benefits and Social Security taxes are basically disconnected, so it does not matter if you substitute another tax for payroll taxes to pay for benefits. Shlaes said that what economists would call the illusion that benefits and taxes are linked is actually a key to maintaining American exceptionalism and avoiding a welfare state. That is, our Social Security system falls within a tradition of individual contracts and obligations rather than a tradition of socialism. Cutting payroll taxes and substituting other taxes would be a cultural shift toward socialism. I may be putting words in her mouth, but I think that is what she was saying.

Never mind the fact that Amity Shlaes is not an economist having received a B.A. in English. Not all economists would agree with the proposition that “Social Security benefits and Social Security taxes are basically disconnected” as at least some of us consider the sum of the current Social Security Trust Fund reserve and the present value of expected future contributions to this fund as something that should be devoted to the present value of expected future Social Security benefits. By at least some forecasts, the sum of the current Social Security Trust Fund reserve and the present value of expected future contributions come very close to paying for the present value of expected future Social Security benefits. Which is why we get very concerned about GOP calls to cut Social Security benefits to pay for those General Fund deficits run up during Republican administrations since 1981. After all, President Reagan suggested back in 1983 that the increase in the payroll tax was supposed to go to paying for our future Social Security benefits and not an excuse to give reductions in tax rates for capital income. President George W. Bush, however, saw the Social Security Trust Fund reserve and the Social Security surpluses we’ll likely see through 2017 as a giant piggy bank to raid precisely to give fiscal goodies to his “base”.

Since I was not at this forum, I do not know whether Arnold Kling’s interpretation of what Amith Shlaes said is accurate. But if it is – she has this whole thing exactly backwards. But hers is not a bad question for those who would have had the fiscal stimulus focused more on reductions in payroll taxes. How would the resulting Social Security shortfall be paid for?

Update: Amity Shlaes leaves a long comment over at Arnold’s blog with the key features being:

Any U.S. government, GOP or Democrat, should be shoring up its social contract with citizens. It can do that without promising more, and instead saying: "Here's what I can give you, and here's what I can't. At least I'll be truthful." … So I will tell you now that there isn't enough money there if we keep the current system. Let's make a few adjustments, and have reduced payouts but a commitment to at least make those payouts.

OK – President Obama should be a lot more truthful than President Bush was in 2005. Maybe a “few” (as in small) adjustments will be needed but truth be told – those advocating larger adjustments are hoping to use the Social Security Trust Fund to bail out the General Fund deficit. And when I hear folks uttering “there isn't enough money there if we keep the current system”, this is the kind of dishonesty that Steve Benen called “conversation enders”.

6 comments: said...

This whole Kaufmann Foundation exercise of an econobloggers convention seems to have been sort of a joke, with plenty of libertarian or conservative non-economist bloggers such as the nauseating Shlaes and the charming Virginia Postrel, along with economist libertarians such as Arnold Kling and Tyler Cowen (who seems to have been more concerned with the quality of the barbeque they ate as long as how well they all got along personally), with the only econoblogger there who is an economist and arguably left of center politically being the ever-so well-behaved nice guy, Mark Thoma of economists view. About the only other identifiable "liberal" seems to have been Michael Mandel, who more or less made a fool of himself.

Regarding the remarks of Shlaes, at least for once she had a point of sorts. The funding and payouts of the social security system are deeply linked together in the mind of the public politically and irrevocably, even if Shlaes's analysis of contracts and "socialism" is just plain silly.

This does indeed bring out the hypocrisy of those who both whine about the solvency of social security, based on analysis of its long term time path of revenues and payments, and then call for cutting payroll taxes. They expose themselves for what they are, hypocrites.

There is of course this more subtle argument that one finds among budget-balancing "blue dog" Democrats like Kent Conrad and John Spratt, who realize that it is very hard to get any tax increases by the Republicans filibustering in the Senate and see a "deal on social security" as one way to do it, offering a cut in benefits to go along with a fica tax increase. But, while some of these folks really do believe social security is "in crisis," for some it is simply a cynical exercise based on the widespread public ignorance regarding the true state of the system's finances.

Anonymous said...

I love the time horizon these "experts" use. They should be able to provide valuable advice for say, oh, the next three months. If not, what credibility are their proposals to fix something that "breaks" in 10 to 15 years?

Of course, if instead you are trying to make a case for looting an asset and making it appear like saving an institution - well get in line with the bankers. said...


"breaks in 10 to 15 years"? Are you referring to the official forecast that the social security trust fund will start running a deficit in 2017? Well, heck, the medicare trust fund has been running a worsening deficit for some time now. Is it "broken"? As it is, social security is the only part of the federal government that is runnign a surplus.

The usual date for the system's bankruptcy is 2041, although Dean Baker, trying to be "respectable," puts that off to the 2047 projected by the CBO. As it is, if the system goes "bankrupt" in 2041 and reverts to paying out only what it takes in the poor recipients will receive in excess of 120% in real terms of what current recipients get. Some "bankruptcy."

Anonymous said...

Bait and switch.

Let us forget that 4% plus of the US GDP is frittered away on the warfare state with huge drain on resources better used elsewhere.

Another 4% for corporate welfare in the domestic budgets.

Kling is fast and loose with the word "socialism".

Is socialism spending money on entitlements (people in need) while corporate welfare (in the military industrial complex and other discretionary spending) is capitalism or rather fascism?

There are a bunch more intra governmental trust fund thingies to raid than the SSTF.

There is the federal civil service retirement fund, about $.8T covering about 5% of the folks the $2T in the SSTF is 'covering' and then the military personnel retirement system about $.4T covering half the civil service retirees' number.

The accumulated other "funds" that make up part of the federal debt often borrowed reducing deficits each year.

All the "funds" get interest from the US taxpayer, in some way does that make it all socialism?

Civil service and the military "contracts" are a little less "social contracts", but not much when the deficit hawks are against the little guy.

There will always be cash for aircraft carriers!!

Bruce Webb said...

To pick up on pebird's point.

The mask came off with the 2003 Report. Prior to that the Trustees dealt with ten year and seventy five year windows for Short Term and Long Term Actuarial Balance with a focus on the former. This had been the standard for decades and made a certain amount of sense, because while I won't be here in 2084 I have a great-niece who probably will (women ancestors on both sides having lived long lives). But even then Long Term was recognized to be unknowable, instead after ten years they just set the assumptions to ultimate. Still it was a reasonable planning tool to measure impacts might happen within the lifetimes of people already walking and talking.

But the introduction of Infinite Future Horizon with the 2003 Report was simply a gratuitous opportunity to insert scary numbers, it added no value at all to even large range planning. So why was it done?

Well I have a theory. Starting in the late 90s a handful of economists led by Baker and Weisbrot started pointing out the Phony Crisis. Not only was the gap not that big in dollar terms at less than two percent of payroll, it was actually shrinking over time while being pushed back in time. And most importantly the cost of a straight out fix via payroll was becoming cheaper than any possible transition to private accounts.

By 2001 this problem was becoming acute and a solution was found. Because if you shifted from a 75 year window to Infinite Future you could suddenly push the payroll gap from 1.92% (the 2004 number) to 3.5%. I first encountered this at DeLong in 2004 when a guy I had never heard of was pushing his Social Security plan based on that 3.5% gap. I asked in comments "Whence 3.5% Samwick?" (knowing the standard answer was 1.92%) I was godsmacked by being pointed to a new table that had been inserted in the 2003 Report. Sure enough if you just extended your time horizon to heat death of the Sun you get just enough extra payroll gap to keep your new plan (now known as Liebman-MacGuineas-Samwick or LMS) from being laughed off the stage.

I am not a big believer in coincidence and when I see a footnote in LMS telling me that Samwick "From 2003 to 2004, (he) was Chief Economist
on the staff of President Bush’s Council of Economic Advisers, where his responsibilities included Social Security." alarm bells go off. Because LMS doesn't work using 75 year numbers, it proposes a 5.1% solution to a problem now scored at 1.7%. But you get a lot more cover if you can just insert 3.5% instead and then cry some crocodile tears about 'intergenerational equity'.

Did Samwick suggest the introduction of 'Infinite Future' in the 2003 Report? Probably not, the timing is not quite right. But was this a byproduct of the President's 2001 Social Security Commission examining the numbers in light of Dean and Mark's 1999 Phony Crisis book? A Commission who had a bright young economist staffer by the name of Andrew Biggs on hand?

Whether or not Intermediate Cost assumptions are being kept deliberately too pessimistic, the introduction of Infinite Future and the Stochastic projections in the very same Report year was proof enough to me that this was Downing Street Memo 2 and the evidence being fit around the policy.

I am not sure hypocrisy really covers it. This is a lot more calculated and a lot more cynical. Their goal has not changed since 1936, only their cover story.

Anonymous said...

i thought there was carbon revenue to offset the payroll revenue cut.