No, don't worry, Max, it's not that comparative advantage junk again. I just wondered if you'd comment on this column that PK wrote on social security. On this topic, his heart seems to be in the right place, actually. But if I understood your analysis correctly, PK (and Daniel Patrick Moynihan, for that matter, who wrote on this same topic yesterday) make the same mistake that 99% of all people make, i.e., thinking that a "funded" system actually has funds somewhere. It doesn't, does it? So long as the govt. buys its own paper it's still pay as you go, right? Except that we're paying down the debt and supposedly making more room to borrow back up later if we want. Right? I feel funny asserting that leading economist and the guy that championed the legislation don't seem to understand the underlying mechanism. So I thought I'd better double check that I'm not misunderstanding.
PK's critique of the way privatizers overlook overhang seems right on the money though, and it's nice that that is getting in the Times finally.
Michael
May 31, 2000
RECKONINGS / By PAUL KRUGMAN
Truth in Advertising
O h no, not another column on Social Security! But the mailbag
suggests that the issue needs one more go-round, because some
readers still think Social Security is just a pension fund -- one
that compares unfavorably with private retirement plans. And it's
true that lately it is being run more like such a fund than before.
But the many decades in which it was run on a pay-as-you-go basis
hang heavily over the system's prospects, and any honest plan for
reform must come to grips with that legacy.
For most of its existence, Social Security was basically
"unfunded": it didn't invest the contributions workers paid in, it
simply paid them out to retirees. This hand-to-mouth operation
worked because the nation's working population was steadily
growing; so each generation, when it reached retirement age, could
count on being supported by a much larger generation of workers.
For those who worked in the system's early years it was a terrific
deal.
But baby boom was followed by baby bust. In the decades ahead, a
huge number of retirees will need to be supported by a rather small
number of workers. Pay-as-you-go would require either slashing
benefits, sharply increasing required contributions, or both.
Of course officials have known for a while that this was coming,
and they actually -- surprise! -- took some responsible
precautions. In 1977 required contributions were increased without
a corresponding increase in benefits, and as a result the system
has been steadily accumulating a fund that will greatly delay the
date at which it runs out of money. But the fund still isn't big
enough, and the increased contributions mean that the implied rate
of return for today's workers is low compared with what they could
get if they were free to invest their money for themselves.
The reason for that low return, once again, is not that the Social
Security Administration is a lousy investor; it's that today's
workers must over-contribute because previous generations of
Americans didn't put in enough to finance their own retirement.
It's a legacy of the pay-as-you-go past.
Now what could a politician who wants to let workers invest their
own money honestly propose? He might say: "I think that workers
should be free to invest their own money. Of course, that means
that we won't have enough money coming into the Social Security
system to pay the benefits currently offered to Americans over 65;
so I'm slashing those benefits, starting today. After all, the
future belongs to the young!" Before making that proposal, however,
the politician should learn a trade; he's going to be looking for
another job very soon.
Or he might say: "I think that workers should be free to invest
some of their contributions, say 15 percent, on their own. Of
course, we have to maintain the benefits of today's retirees. So in
return for giving today's workers the privilege of investing 15
percent of their contributions, I'm going to cut their guaranteed
benefits by a lot more than 15 percent -- 30 percent, 40 percent,
whatever it takes to keep the system actuarially sound. I believe
that today's workers can make enough money in the stock market to
compensate. And if you can't, my fellow Americans, that's your
problem!"
That, as far as I can make out, is what George W. Bush is actually
proposing -- though he has been more than vague about the details.
He hasn't specified how much guaranteed benefits would be cut, let
alone clearly stated that the percentage cut would have to be a lot
larger than the share of contributions workers were freed to
invest. (The plan described by Senator Daniel Patrick Moynihan on
this page yesterday would in effect impose cuts on that scale,
mainly through reduced cost-of-living adjustments and increased
taxes on benefits).
What a politician can't honestly say is something like, "Even if a
worker chose only the safest investment in the world, an
inflation-adjusted U.S. government bond, he or she would receive
twice the rate of return of Social Security" -- as if that were a
meaningful comparison, as if the obligations to today's older
Americans didn't have to be met. But that quote isn't made up --
it's what Mr. Bush actually said.
All I can say is that he'd never be able to get away with it if Al
Gore were still alive.