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The Return of the Zombie
The Congressional Budget Office estimates that there is only a 7% probability that someone born in 2000 will receive their Social Security benefits as promised today. The better news is that with a probability of 58% the cut in benefits will be 20% or less.
Since the CBO isn't trying to predict future policy, these "probabilities" should be taken with more than a grain of salt. Sill these numbers are an arresting way of presenting the basic data on projected Social Security revenues and scheduled payments.
Hat tip to Paul Krugman.
Posted by Alex Tabarrok on August 25, 2008 at 07:01 AM in Economics | Permalink
Comments
If only Bush had stuck to trying to privatize (3%) Social Security we might be a little bit on the way to saving ourselves from a major headache. As the Chileans have done, I believe.
Posted by: critic at Aug 25, 2008 7:50:03 AM
And yet for some reason it seems that the consensus response among many Democrats is that this means that we need do nothing until 2049, whereupon if we suddenly cut benefits by 20% at that point everything will be fine. I.e., they support the benefit payments estimated under Figure 2 on page 10 (page 18 of the PDF whereby benefits are slashed as soon as the "trust fund runs out."
Posted by: John Thacker at Aug 25, 2008 8:14:53 AM
I only barely skimmed the doc, but this is great news. The projected year for the trust fund running out was 2030 10 years ago. Now it is 2049. Sweet.
Posted by: liberarts at Aug 25, 2008 8:32:14 AM
I worry more about spending the trust fund as that will require either a cut in government effectiveness (less government spending vs taxation) or substantial borrowing (from ~100 billion/yr to 400-500 billion/yr). A good portion of government borrowing is from social security (as the trust fund grows). That must reverse as the trust fund is spent down (starting in 2016 or 2017.
Posted by: nelsonal at Aug 25, 2008 8:52:51 AM
This is just like you claim that shifting Medicare payments from the insurance companies to doctors was the Democrats cutting Medicare.
What curve were you graded on?
Posted by: spencer at Aug 25, 2008 9:54:49 AM
Alex,
What is your opinion as to productivity growth in the US over the next few decades? The projections really depend critically on that.
Posted by: Bernard Yomtov at Aug 25, 2008 11:17:29 AM
Another comment: notice that in all the debates about the SS system the question which is almost never asked is whether it is a good system. Saying it won't collapse until 2049, or whenever, is like saying a 20 year old can drink a quart of gin a day for 30 years and still live. Live, yes. Well, no
Posted by: critic at Aug 25, 2008 12:05:32 PM
Bernard,
I am optimistic about future productivity growth
http://www.forbes.com/home/opinions/2008/01/13/dismal-economics-growth-oped-cx_ata_0116dismal.html
on the other hand I think that more city and state government pension plans will go bust than people expect. In short, I think markets will beat expectations and governments will not! I know, big surprise. Kotlikoff calcuates that even big productivity gains will not overcome the strain. Where this leaves me is less interested in arguing about whether the system will go bust or not and more interested in taking action now which will be wise no matter what happens.
Alex
Posted by: Alex Tabarrok at Aug 25, 2008 12:50:36 PM
Alex,
Obviously, if we expect productivity growth to exceed CBO assumptions then we should consider the projections to be quite pessimistic, shouldn't we?
I do agree with you that an unexpectedly large number of pension plans will go bust. This will, IMO, include lots of private plans as well as city and state plans. Pension underfunding is a potentially very serious problem. Regrettably, the incentives for short-sightedness are strong.
Posted by: Bernard Yomtov at Aug 25, 2008 2:30:24 PM
Still another comment: I find it strange than no one sees to ask the obvious question which is, NOT -can the SS scheme raise enough money from younger workers, assuming some rate of growth, to pay claims at some rate, but rather, how does the actual SS system compare with a capital creating savings system if that had been set up instead by FDR? Actually, in not too many years -after the early participants are gone- we will be in a situation in which almost all citizens will be worse off (forever) than they would have been under a rational social insurance system.
Posted by: at Aug 25, 2008 4:38:13 PM
Should we radically reshape a large entitlement system because it may be insolvent in 40 years? I don't trust forecasting enough to say yes. In fact, I distrust forecasting and fear unintended consequences so much, that I don't think we should legislate any fix to a 2049 problem.
There could be many reasons to reform social security and we should discuss reform in that context, not its forecast insolvency 40 years hence.
Posted by: $9,000,000,000 Write Off at Aug 25, 2008 9:37:41 PM
Oh dear. Yet more massive illiteracy, or to be
more precise, innumeracy, regarding social
security. That "cut" of "20%" is a cut from what
would be provided if the current system were to
move forward under certain projections. Those
projections would have those recipients in 2049
(or a few years earlier, if you are more
hysterical), receiving about 170% in real terms
per capita of what today's recipients get. So,
this "cut" would leave them far above what today's
recipients receive in real per capita terms,
although we know that psychologically people hate experiencing large
losses, which is why such a sudden large cut will
never happen all at once politically.
For those of you who want to say, "but the system
will be bankrupt!!!" I note that this cut would
put the system back into where it would be exactly
pay as you go, with current fica tax revenues
excactly matching the current benefit outflows,
benefits that would be on the order of 140% in
real per capita terms of what current recipients
get. So, all the moaning and groaning by young
people that they are going to get screwed is so
much horse pucky. "Wah, wah, wah! I might only
get 140% instead of 170% of what the current
people get, boo hoo hoo!!!"
Unsurprisingly there is massive ignorance about
this point. I and some colleagues found this out
over three years ago by polling out students.
Not a single one out of about 250 economics
majors knew the facts here, with many thinking
that "bankruptcy" of social security, means
"no benefits." If you think that, you are just
an ignorant fool, sorry to be so blunt.
As for all the calls for "reform" now, which
if one is not going to raise taxes to pay for
the privatization, or just raise taxes as Obama
wants to do, then one is talking about cutting
benefits (or reducing the rate of increase of
benefits) now, because, by gosh, somewhere down
the road in several decades such a cut might
happen. So, "cut now so that we do not have
to cut later!!!" Gag me with a budget deficit.
Posted by: Barkley Rosser at Aug 26, 2008 4:27:25 PM
Barkley Rosser: "this cut would put the system back into where it would be exactly pay as you go, with current fica tax revenues exactly matching the current benefit outflows"
Such a "pay as you go" formula would seem the most fair across generations. Every generation pays the same level of FICA taxes. Every generation's benefits would depend on:
- how many descendants they produced;
- how many productive immigrant workers they allowed into the economy;
- how much they had increased real per capita income;
- how much they had improved life expectancy.
In short, the collective decisions and achievements of a generation would determine their level of government retirement benefits.
Posted by: John Dewey at Aug 27, 2008 2:53:36 AM
John Dewey,
Well, that all sounds nice, except that a lot of that involves matters
that may not be determined when they retire, especially as we have multiple
age groups who are receiving benefits. The current group has lots of "Greatest
Generation" folks, with some of those in-between types (low numbers born in the
30s), and now some baby boomers. Just whose set of stats do we use, and what
if those stats do not reconcile with pay as you go?
Frankly, the current system is so far working fine, and its problems are far,
far away. In some respects the most important shift is happening this year or
next: the end of a rising surplus in the social security current balances, now
on the order of $200 billion per year. Those surpluses have been steadily rising
since the Greespan commission reforms of a quarter of a century ago raised fica
tax rates (substantially) and raised the retirement age, all supposedly to "pay
for the baby boomers' retirement." All those rising surpluses were lent to the
rest of the government.
From now on until sometime after 2030, the SSA system will be experiencing
declining surpluses, which might or might not turn into deficits at some point
(and if that happens might at some later point turn into "bankruptcy," although
if that were to be approaching changes would be made before then). This means
that the rest of the budget will be under the pressure of not being able to
count on rising loans from the SSA, but declining ones. So, in fact, the
budgetary pressure will start now: either increase taxes, cut spending, or
face a rising budget deficit due to the declining surpluses from the SSA.
Posted by: Barkley Rosser at Aug 27, 2008 1:17:34 PM
Barkley Rosser,
I think you misunderstood my comment. I'm saying that the current system has those features. No need to use any stats or any calculation. Just continue the FICA tax at 12.whatever percent amd distribute all the money collected to those eligible to receive it. I think we already have procedures in place to determine who gets how much.
Where I might disagree with you is what to do with the Social Security Trust Fund. As I understand it, social security benefits will exceed FICA receipts in about 9 or 10 years. At that point, the trust Fund is supposed to begin "redeeming" those intragovernment securities. That would mean Social Security benefits would have to be partially funded by sources other than FICA receipts. My solution? Write off the Trust Fund as worthless, and start reducing all promised social security benefits proportionately to match the level of FICA receipts.
That's where the biggest problem lies, and it starts in 2017 or 2018, not in 2030. Isn't that right? Do we:
- raise FICA taxes at that point?
- reduce other government spending and fund Social Security from general revenues?
- implement means testing?
- reduce the benefits of all social security recipients?
Those are tough decisions.
I agree that the overall government budget faces severe shortages as the FICA surpluses decline. It really burns me up that the Greenspan Commission ever proposed a system guaranteed to produce surpluses in the first place. In his defense, he did propose in the mid-90's that FICA surpluses be used to pare down government debt. But that didn't happen, of course. Gingrich and Clinton just spent those surpluses and declared the government's budget was balanced by the end of the century.
Posted by: John Dewey at Aug 28, 2008 11:02:52 AM
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