Progressive Price Indexing

Ogged watches the skies and informs me that my article for Slate is up:

Unfogged: Hey, it's Brad DeLong writing for Slate!

Nice to hear that it's up. It would be *very* nice to have minions who constantly scanned the internets for things of interest to me. Technorati and Google are very nice, but more would be better...

The piece, I think, is quite good and makes a bunch of good points. But I actually don't think it's a plan to kill Social Security--it's floundering around in the hope of gaining traction by proposing something progressive:

Pozen Pill: How Bush's version of "progressive indexing" would kill Social Security. By Brad DeLong. Posted Tuesday, May 3, 2005, at 2:45 PM PT

Will this man kill Social Security?

George W. Bush has come out in favor of a proposal for cutting Social Security benefits called "progressive price indexing."

Or has he? On May 1, White House Chief of Staff Andrew Card appeared on Meet the Press. A proposal by Robert Pozen "... is really not necessarily the president's plan," Card noted. "It's directionally consistent with the president's plan." So what does Pozen say, and where does Bush differ?

As everyone knows, Social Security has a problem: The current level of dedicated Social Security taxes is very unlikely to bring in enough money to fully pay the benefits currently specified by law beyond the middle of this century. Social Security taxes will have to go up, Social Security benefits will have to be cut below currently projected levels, or other tax revenues will have to be earmarked to pay Social Security benefits....

J. Bradford DeLong (2005), "Pozen Pill:

Pozen Pill: "How Bush's Version of 'Progressive Indexing' would kill Social Security," Slate (Tuesday, May 3, 2005) http://slate.msn.com/id/2117948/.

Robert Pozen proposes to fill the post-2050 projected funding gap by using other tax revenues and reducing benefits. He would fill 30 percent of the hole by tapping into income tax revenue. He would fill another 10 percent of the hole by cutting Social Security disability payments. He would fill 60 percent by shifting to "progressive price indexing" of the Social Security retirement benefit formula. That means cutting benefits relative to current-law projected levels for people at the top and the middle.

To understand where Bush might be going with this, let's first review how Social Security works. People contribute to the program through Social Security taxes—12.4 percent of their wages, up to a maximum payment of $11,260 a year taken from them and their employers. In return, they get a disability insurance program, a survivors' insurance program, and a prescribed level of retirement income that's protected against inflation.

The retirement-income component of Social Security provides a better relative deal to the working poor than it does to the relatively rich. For somebody making half the average wage (that is, making $18,000 a year today), Social Security benefits "replace" 49 percent of pre-retirement earnings. For somebody making the average wage ($36,000 a year today), the "replacement rate" is 36 percent. For somebody making the maximum taxed by Social Security ($90,000 this year), it's only 24 percent. This declining replacement-rate benefit formula makes sense: Social Security returns relatively less to high earners, who are more likely to have other retirement savings. But it's not supposed to be a means-tested welfare program: Someone at the Social Security maximum wage gets a check about two-and-a-half times as large as someone making half the average wage.

Now let's look at Pozen's numbers for those retiring in 2075. Pozen would keep the replacement rate at 49 percent for the working poor—those making half the average income. But the replacement rate for those making more would be cut: At the average income, the replacement rate would go from 36 percent to 26 percent; at one-and-a-half times average, from 30 percent to 17 percent; at the Social Security maximum, from 24 percent to 12 percent. Pozen's proposal gradually turns Social Security from a program in which benefits rise with incomes to one in which nearly everybody's benefit is roughly the same: about $1,900 of today's dollars a month. These are ferocious benefit cuts for those at or above average incomes—an across-the-board benefit cut of about one-seventh would do as much for Social Security's overall finances. But that's the point. Pozen's central aim is to keep the poorest one-third of beneficiaries from bearing any of the burden of future benefit cuts.

This sounds like a not unreasonable way to keep Social Security healthy through most of the century. And progressive price indexing, by itself, is neither left-wing nor right-wing. Insulating the working poor from benefit cuts and tapping income-tax revenues to fund Social Security is "liberal." For Social Security to become a flat-benefit guardian against destitution, rather than a substantial base line layer of retirement income for everyone, is arguably "conservative." But when you combine Pozen's progressive indexing with Bush's separate proposal for private accounts, it becomes something different: a way of phasing out Social Security altogether. Here's how:

Pozen's proposal caps the maximum Social Security retirement benefit at roughly $22,500 dollars a year (adjusted for inflation). Bush's private-accounts plan—which would allow people to contribute 4 percent of their wages—makes retirees repay the taxes they diverted into private accounts out of their standard Social Security benefit. Medicare premiums are already deducted from your Social Security check. Deduct the claw-back for the private-accounts diversion as well, and by late in this century the odds are that—at least for the upper middle class—the standard Social Security check would be zero. Social Security would no longer be a universal program: It would be a program in which the half of America that is richer and more powerful and more likely to vote sees large chunks of its money going in and nothing coming out.

Even without private accounts, aggressive means-testing a la Pozen risks undermining Social Security over time. Insulating the poor from cuts is a left-wing goal. But it will create a large class of Americans who get much, much less out of Social Security than they put in and for whom Social Security as a whole is demonstrably a very bad deal. Early Social Security guru Wilbur Cohen may well have been correct in his belief that "in the United States, a program that deals only with the poor will end up being a poor program. ... " Loading a large chunk of the burden of fixing Social Security onto America's upper middle class may be the first step in the creation of a mid-21^st-century political majority for the phasing-out of the program as a whole.

Viewed in this way, Bush's embrace of a program to make the distribution of income more equal can be explained as a Trojan horse to eliminate Social Security in the long run. That must be what Bush is thinking, right? It's not that he's suddenly worried that the working poor don't get a large enough share of America's wealth, right?

But quite possibly wrong. It's also possible that the White House is just desperate to somehow generate forward motion on Social Security, and that it hopes that a fiscally progressive policy change will be popular. Bush's recent press conference did not illuminate much, and the information released smelled as though the administration did not fully know what it was doing: The headline numbers made sense only if Pozen's proposal to cut disability benefits was also part of the package, but Bush expressly said disability benefits were not to be touched.

So what, exactly, are the pieces of Pozen's proposals that Bush has signed on to? Will the next step be a proposal for income tax increases to cover the rest of the funding gap? Is there a second round of benefit cuts coming—possibly targeted at the poor? When it comes to the administration's ideas for Social Security, we're back where we started. No one knows.

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Related in Slate

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: In March, Jacob Weisberg explored how Bush might respond to defeat on privatization. In February, William Saletan suggested that biology might solve the Social Security debate. That same month, Steven Landsburg argued the program's "problem" wasn’t really a problem at all, while Chris Suellentrop decoded Bush's message to seniors. In January, Suellentrop wondered why the president wouldn’t look at the numbers. In 1996, a committee of panelists discussed making Social Security secure. That same year, Michael Kinsley delivered a "prejudiced primer on privatization." In 2001, he looked at Social Security's magic tricks.

Brad DeLong is a professor of economics at U.C. Berkeley and a research associate of the National Bureau of Economic Research. Click here to read his blog.
Photograph of Robert Pozen by Ira Wyman/PictureDesk International.

Comments

[jerry]

Nice article, congratulations and thanks. And it led to a Steven Landsburg article I actually agree with. Odd. Thanks again.

Slightly offtopic. I use Firefox for its tabs. Your blog would be easier to identify if it had a favicon.ico all your own.

[san fraser]

Bush has wanted to get rid of Social Security since his earliest political days. Now he has a real incentive, as if the public gets treatment instead of incarceration for drug addicts, the multi million prison complex loses. Debtors prisons would fill the bill. And for others, the promises made to the religious groups would be met with federally funded religious poorhouses.We are, after all, a capitalist society, and helping people help themselves is not productive and does not generate capital.

[san fraser]

Bush has wanted to get rid of Social Security since his earliest political days. Now he has a real incentive, as if the public gets treatment instead of incarceration for drug addicts, the multi million prison complex loses. Debtors prisons would fill the bill. And for others, the promises made to the religious groups would be met with federally funded religious poorhouses.We are, after all, a capitalist society, and helping people help themselves is not productive and does not generate capital.

[san fraser]

Bush has wanted to get rid of Social Security since his earliest political days. Now he has a real incentive, as if the public gets treatment instead of incarceration for drug addicts, the multi million prison complex loses. Debtors prisons would fill the bill. And for others, the promises made to the religious groups would be met with federally funded religious poorhouses.We are, after all, a capitalist society, and helping people help themselves is not productive and does not generate capital.

[Ben Hyde]

"It would be *very* nice to have minions who constantly scanned" ... see also pubsub.com

[pgl]

Now that was fair and balanced. It's about the nicest thing written about the Pozen plan that was also accurate. Yes, Rich Lowry et al. are praising this plan - but their praise misrepresent what the plan does. Somehow, however, I suspect Luskin will find some way to attack your very balanced presentation.

[bakho]

Nice job of explaining Pozen. However, the vast majority of Americans are only confused by the Bush non-proposals. Americans certainly are not going to understand the Pozen details. Americans hear, "Middle class benefits cuts." Done listening. Bush does a great job of selling something people think they understand (tax cuts, war in Iraq) but don't. However, it is much harder to sell something people truly understand (radicalizing SS).

Anyone that favors Bush SS had better stay on good terms with Mother-in-Law. She might be forced to move into the house. Yes, even those that don't think they will benefit financially from SS recognize that SS has other benefits, such as allowing the elderly to live in their own homes.

[bakho]

Another criticism of Pozen: stuff happens. People develop serious medical conditions and go bankrupt. The assumption that those with higher incomes will be better off in retirement is based on the AVERAGE higher income person being better off. In reality, there will be winners and losers. This is why it would be better to leave SS benefits the same, but impose higher taxes on those benefits that go to the wealthy that would fold back into SS. If something happens and someone goes bust in the rest of their savings, SS will still be there. With the Pozen method, the SS benefits are cut in advance. Then if something happens, the benefits are not available. The Pozen plan is closer to an investment program than to an insurance program.

[ChasHeath]

Good article. Particularly the bit about clawback and the vanishing defined benefits from the top down.

[Ralph]

Anybody else catch the Democratic House response on CSPAN to the President's new PPI proposal on Thursday night, April 28. Minority Leader Nancy Pelosi, Deputy Leader Steny Hoyer, and ranking member Charles Rangel delivered a good response at a press conference during the House session today, May 3. Nothing really new but their forthright condemnation of partial privatization and the means-tested welfarization behind the Bush-Pozen PPI plan was very encouraging. As you know the Senate Democrats are very solidly against privatization but their were some fears that the House Democrats are not as solidly united. Rangel interestingly expressed doubts that the Republicans were united behind Bush. He said there doesn't seem to be any leadership in the House on the issue and he characterized Ways and Means Chairman Bill Thomas as off on his own personal quest to come up with a SS package for the House.

[pi]

This idea that we have to make social programs universal to maintain their political support really bothers me. It is the Democratic version of "starve the beast." I.e., let's forsake what is logically good policy for something we think the masses will likely support because they aren't too bright and can't be trusted to support good policies, especially good redistributional policies.

Let's not forget that there are costs to pursuing suboptimal policies. And let's not be too sure that the masses are stupid and selfish.

For example, we give free lunches to poor school kids. I think that is a good policy -- it doesn't cost that much and it helps people that really need help. According to Professor DeLong and others who think programs have to be universal to survive politically, we shouldn't limit free lunches to poor kids. Otherwise middle class people won't support them. So, all kids should get free lunches. In fact, what about adults? Shouldn't the government buy everybody a free lunch so that political support for free lunches for poor school kids will be ensured?

But, that would be a suboptimal policy. The taxes needed to finance the policy would go way up and, while I do not believe the dead weight costs of taxation are huge at current tax levels, I don't think they are zero either. To raise that extra tax $1 of tax revenue we probably incur an extra 25 cents of dead weight loss. That's fine if the $1 is going to something with great social benefits like a lunch for a kid that might otherwise go hungry, but it's not so fine if it's buying lunch for someone who would have bought his own lunch anyway. For them, it's just raising the cost of lunch by 20% with no corresponding benefit.

And why do we think that hiding a moderate amount of redistribution from rich to poor in a program that buys almost everybody a free lunch would be more appealing to people who don't like redistribution? If people are selfish, they are selfish. If it doesn't bother them that a school kid is going hungry, why won't it bother them that are paying more for their lunch than they would without the program? They won't want to support a program that doesn't benefit them.

Cutting the benefits of the relatively well off seems like a reasonable start to fixing social security -- even if Bush (aka the worst president in the history of our country) is possibly in favor.

[walons]

Seems like prof. DeLong has discovered what many reasonably well off liberals have discovered to their dismay: they ARE the wealthy, their benefits may be cut. That can't be right, can it?

[tante aime]

Sing ... Sing a Song

Of interest to me is the Alaskan Permanent Fund, that "socialist" reinvestment of publicly-owned oil royalties into a permanent income generating and yet principal preservation fund, dispersing now well over a *billion* dollars to the individual citizens of Alaska since 1979.

I was one of the lucky Alaskans who received the first round of those royalty checks, $1000, and with similar annuities to follow for many years thereafter, just for living there year around as an Alaskan citizen. Sweet!

Then if you want to understand what Wall Street is up to using George Bush as it's Privatization Pinocchio, look at chart #3 regarding the Alaskan state oil revenues:
http://www.fdic.gov/bank/analytical/stateprofile/2004_summer/SanFrancisco/Ak/Ak.xml.html

Clearly, no matter how fast P/E ratios rise, and thereby the stock prices, given the relatively flat to negative corporate earnings, the net fees available to investment managers will, over the long trend, decline in direct proportion to the decline in net savings of US citizens, which represents their last shreds of disposable income, now approaching only 0.5% of gross national incomes, and also in direct proportion to the decline in industrial GDP after production expenses and dollar depreciation, now gouging a half-trillion dollar trade abyssal trench.

In other words, being a stock broker today, or banker, corporate fund manager buying into the stock market is more and more insane, given the huge number of stock options soon to be leveraged as baby-boomers retire and blend their investments out of growth and income stocks and into principal preservation treasury bonds.

Increasingly, brokers have to hedge and derivative play their holdings, more and more betting on the come, and less and less holding real asset or royalty values. Share prices now *exceed* the value of the underlying assets, and are many times forward-looking earnings. It's a giant Ponzi scheme that needs new cash, fast, a "fully stationary dual vortex structure", one in Wall Street, and one on Capital Hill. A great sucking noise.

So then we get El Pinocchio lying about privatization, instead of proposing a new form of Common Fund for SSTF.
http://www.commonfund.org/Commonfund/Archive/News/inventing_the_short_term_fund.htm

With these great income and principal preservation fund pools, why are we suffering this hogswallup from Bush?
Because his handlers know to divide is to conquer. To scatter the SSTF to the four winds, and the market rags, and the individual mutual funds, stock swindles, what a racket, they'll bleed privatized funds dry and cash out.
Compare your favorite mutual fund results to the pools.
How would you like to make 20% on your retirement fund?
http://www.apfc.org/investments/AssetAllocation.cfm

Wasn't it Benjamin Franklin who said, "We must all hang together or surely we will all hang separately."

The Alaskan Permanent Fund has only $26 billion to invest, yet pays Alaskan citizens ~$1000 a year in royalty checks. The Department of Defense sucks twenty times that amount, $450 billion a year, down the rathole of aerospace, gone forever, and a hand out for more.

That same huge tax burden, invested in a common fund, would provide every American citizen with a royalty check every year AND yet still allow funding for a trimmed-down and on-call military and domestic militia for homeland defense purposes only.

"The Red States are coming! To arms! To arms!" The White House Republican NeoSocialists just want your do-re-mi!

"Herr Bush, is it to be at every meal, or merely at dinnertime, that you intend on leading us all through this rare and wonderful new world of... stagflation?"

[Auros]

I just saw it and came over to cheer. Yay! Hopefully they'll improve the ratio of sane people to Landsburgs.

[Auros]

@ Pi: You should read the Decembrist article Brad lined to from Wilbur Cohen's name. "There would be real daring, real opportunity to make big changes if liberals went not necessarily for "soak the rich progressivity," but for a clear message that our well-being as a society is measured by how we treat the worst-off, and a moral agenda of targetted, rather than universal, programs. In both his 2004 campaign and in what appears to be the beginnings of its 2008 rerun, John Edwards has been the closest to this potentially liberating insight."

(I happen to think he picked poor examples -- education and health care are probably the two most obvious places where universality is a must. But sidelines to those, such as the school lunch program, Head Start, etc... Certainly targeted programs are worth considering.)

@ Jerry: The Landsburg article starts out making sense, and then devolves at the end into a claim that the Bush program would encourage saving. Brad has disputed this: "I would also bet that there's at least a 20% chance that it will shrink national savings significantly--that people will regard their private accounts as relatively close substitutes for their 401(k)s and other assets, and so reduce the amounts they commit to funding their other retirement savings."
http://delong.typepad.com/sdj/2005/03/national_saving_1.html

Landsburg then goes on to assert a couple of points of free-marketeer dogma -- "Second, it will give people choices, and choices are good. And third, it will give more voters a stake in the capitalist system, making them more likely to vote for the sort of pro-growth policies that will improve the quality of life for us in our old age and our grandchildren."

"Choice" in the US healthcare system has been a disaster, as has been extensively discussed recently in the left blogohemisphere; and really, how many of us want to take the time to think about investment choices? How many of us who can't afford a clever advisor are likely to beat the market?

The latter claim is all too reminiscent of the WSJ "lucky duckies" meme, about how we need to tax the poor more, so they'll understand that taxation is bad and vote for Republicans.

[Jack]

pi, one problem with your argument is that there is a continuum between the well off and the poor. Maybe it would be a waste to give Warren Buffett a social security cheque but that isn't how a policy of reducing the payments to wealthy achieves, at least not if it is going to save a substantial amount of money.

Instead it becomes a tax on those who are just above poor and there is no real way of getting around that. That's never how it is presented and why such policies appeal to left and right alike.

[anne]

Excellent article, Brad :)

Robert Pozen has been distorting the Social Security argument as a crisis monger for quite a while. There is no crisis in Social Security other than that created by those who wish to end this wonderful program. There must be no middle class benefit cuts, and need be no middle class benefit cuts. I find Robert Pozen's scare mongering disgraceful, for there is no Social Security problem that can not easily be resolved and no resolution is necessary for years.

[anne]

http://www.pbs.org/newshour/bb/social_security/jan-june05/ss_4-29.html

ROBERT POZEN: The Social Security system now has a huge deficit, so we have to figure out how to constrain benefit growth and do some other things. This is a fair and reasonable way to do it because we're protecting the benefits of low-waged workers who are almost entirely dependent on Social Security for their retirement income and we slow the growth of benefits of higher-wage and middle-wage workers who have IRAs and 401(k)s that are tax subsidized and they help them supplement Social Security in terms of retirement income.

[Bruce Webb]

Brad, you are killing me here, good article otherwise, and rhetorically not pushing the argument farther than the public can accept, but really:
"As everyone knows, Social Security has a problem: The current level of dedicated Social Security taxes is very unlikely to bring in enough money to fully pay the benefits currently specified by law beyond the middle of this century. Social Security taxes will have to go up, Social Security benefits will have to be cut below currently projected levels, or other tax revenues will have to be earmarked to pay Social Security benefits."

Do you really believe that Low Cost is "very unlikely"? Or did the actuaries simply slip up on their calculations? Low Cost = 2.1% Productivity in 2005, 2.2% in 2006-2008 = Fully Funded Trust Fund. From the very beginning of this debate I have been afraid I was missing something, that someday the adults would pat me on my head and explain in simple terms why Low Cost is not really Low Cost, that number X in column Y was so widely off the mark that result Z ($68 trillion Trust Fund in 2080) was a number that only simpletons with mistaken notions about economic reality could present. (Which if you think of it is not particularly flattering to the career actuaries at the SSA).

I trust the SSA actuaries' arithmetic, I can read the newspaper and see real world productivity numbers, but obviously I am missing something. Can someone take pity on me and after all these months point out what that is?

[anne]

There is no Social Security problem. None. When we give this away we harm Social Security. Please, there is no such porblem.

[anne]

There is every reason to believe that we we grow at 2.2%. Then, there will be no problem for Social Security for generations to come.

[rea]

"It would be *very* nice to have minions who constantly scanned the internets for things of interest to me."

And here I always thought professors had grad students to serve as minions . . .

[Quiddity]

Brad: Why did you write "let's first review how Social Security works. People contribute to the program through Social Security taxes—12.4 percent of their wages, up to a maximum payment of $11,260 a year taken from them and their employers."

If you consider the employer contribution to be part of wages (I do not BTW), then the correct percentage is 11.68%.

Why did you write 12.4% instead of 11.68% ?

[Beau]

What get's me is how shamelessly the Bush admin is revealing their intentions WRT Pozen. They've asked others to come forward not for the sake of discussion but rather so they can test ideas on the public without taking political risk. If Bush really has political capital worth spending why doesn't he lay something concrete on the table and call it the Bush plan instead of finding fall guys to do his dirty work for him.

[anne]

Bruce Webb:

'Do you really believe that Low Cost is "very unlikely"? Or did the actuaries simply slip up on their calculations? Low Cost = 2.1% Productivity in 2005, 2.2% in 2006-2008 = Fully Funded Trust Fund. From the very beginning of this debate I have been afraid I was missing something, that someday the adults would pat me on my head and explain in simple terms why Low Cost is not really Low Cost, that number X in column Y was so widely off the mark that result Z ($68 trillion Trust Fund in 2080) was a number that only simpletons with mistaken notions about economic reality could present. (Which if you think of it is not particularly flattering to the career actuaries at the SSA).'

A 2.2% economic growth rate will indeed allow Social Security benefits to be paid fully for generations. Productivity growth alone should be 2.2%. There is no problem for Social Security.

[PW]

Nice face, too.

[Roman Berry]

Bruce Webb, thank you for posting exactly what I had in mind. That "as everyone knows" part of Brad's article really bugged me. Surely Professor DeLong knows better.

[anne]

We have come to a point where reporters ignore or sneer at an assertion that there is no problem with Social Security. So, many supporters of the system increasingly compromise the argument by agreeing there is a problem and going on. There is only a problem if over the coming 15 to 20 years, we find productivity and economic growth have faltered. Productivity growth alone is above 4% these last 4 years. After 10 years of fine productivity growth, why should we be the least pessimistic? Population growth is fine. We can easily grow at the historical rate of the last 50 years, and that insures full Social Security benefits for far far longer than 40 years.

[demisod]

Dumb question from a non-economist: Some of the optimistic evaluations of SS's future are based on the economy outperforming the trustee's projections. However, that assumes that wage growth will maintain the same relationship to overall economic growth and productivity that it has in the past. Given the increasing competition in the labor market caused by gloablization, isn't it possible that GDP can grow, productivity can grow, but the growth just goes to profits or a very small number of high wage-earners, rather than broad-based wages and benefits? Couldn't GDP surpass the trustee's projections but the wage base grow at a much slower rate, within the pessimistic forecasts?

[liberal]

pi wrote, "This idea that we have to make social programs universal to maintain their political support really bothers me."

It might bother you, but a look at legislative history would seem to indicate that it's a reasonable strategic position to take.

"It is the Democratic version of 'starve the beast.' "

Hardly. The negative effects of an inefficient SS are there, but they're not going to wreck the country. "Starve the beast" will, on the other hand, wreck the country in the long run by turning it into a banana republic.

"For example, we give free lunches to poor school kids. I think that is a good policy -- it doesn't cost that much and it helps people that really need help. According to Professor DeLong and others who think programs have to be universal to survive politically, we shouldn't limit free lunches to poor kids."

You couldn't have come up with a less apt example. It's much easier to get people to support programs for children than for adults, because of the assumption that if an adult is poor, it must be her own "fault", and because of the universal tendency to want to protect children.

A better example would be what happened to AFDC. That's a welfare program, not a universal social insurance program, and it was severely cut in the 1990s, even though Clinton was in power, and even though it benefits children.

Not that AFDC was a perfect program; my point is regarding the politics.

"And why do we think that hiding a moderate amount of redistribution from rich to poor in a program that buys almost everybody a free lunch would be more appealing to people who don't like redistribution? If people are selfish, they are selfish. If it doesn't bother them that a school kid is going hungry, why won't it bother them that are paying more for their lunch than they would without the program? They won't want to support a program that doesn't benefit them."

I think your reasoning is invalid, and the empirical evidence is against your claim.

[tegwar]

Pi-- On School lunches. Yes, there's the free lunch program for the poor. But you omit- reduced price lunch programs for the slightly better off. You also omit the entire school lunch program. As in the whole freaking thing is subsidized. Any schoolkid- rich, poor, middle class- gets a cheap (ideally healthy) lunch partially on the gov't dime. The worse off are able to get extra help to make sure the system works for them. Everyone's getting some help, those who need it more get more. Sounds like a damn good idea and not terribly dissimilar from Social Security in that way.

It's not about reverse beast starving or even fundamentally about protecting a program politically by ensuring a sizable constinuency through inefficiently spreading out benefits across the population (vs. concentrating the impact). It's about recognizing that far more than the worst off are inadequately served by the status quo.

[anne]

Demisod

"Couldn't GDP surpass the trustee's projections but the wage base grow at a much slower rate, within the pessimistic forecasts?"

Interesting question. Corporate profits are near a record as a proportion of GDP. Profits could increase as a proportion of Gdp from here and limit wage growth to an extent, but the growing imbalance would bring a steadily increased push for wage increases by workers. Could your conjecture prove right over time however? Possibly.

[anne]

Remember, the proposal is not a transfer of Social Security benefits away from the rich, but a trasnfer of benefits away from middle income households. Low income households however receive non of the trasnfer. Low income retirees receive no added benefits.

[anne]

http://www.nytimes.com/2005/05/03/opinion/03tue1.html

Hitting the Middle Class, Again

As he moved into the home stretch of his 60-day Social Security road show last week, it became clear that President Bush had saved the worst for last.

Mr. Bush endorsed a proposal that would take a huge bite out of the Social Security retirement benefits for the middle class, claiming that would close some 70 percent of the system's financing gap. That figure is almost certainly overstated. Under the proposed reductions, young workers who now earn about $36,000 would face a 16 percent cut; those earning about $58,000 would face a cut of 25 percent, and those earning $90,000, 29 percent. People not yet in the work force would face even larger reductions.

Mr. Bush says these cuts would enable the system to continue paying benefits at the current level to the 30 percent of recipients who now make less than $20,000. But fully two-thirds of retirees rely on Social Security for more than half of their income. Moreover, the Bush plan gives the false impression that the wealthiest beneficiaries would bear the most pain. That's not the case. The wealthier one is, the lower the percentage of retirement income coming from Social Security, so even a big cut has little impact. By 2075, an average worker's benefit cut would equal 10 percent of pre-retirement income; a millionaire's reduction would be only 1 percent.

Worse, if Mr. Bush succeeded in creating private accounts, these newly proposed cuts would be only the first whack at retirement benefits. Workers who opened private accounts would also see their government benefits reduced by one dollar for every dollar invested - plus interest, computed at 3 percentage points above inflation. That would occur even if a private account performed miserably. In the end, the Social Security checks would be minimal - or nonexistent - for millions of Americans....

[liberal]

Quiddity wrote, "If you consider the employer contribution to be part of wages (I do not BTW), then the correct percentage is 11.68%.

"Why did you write 12.4% instead of 11.68% ?"

I presume Brad did that because it's easier to follow, since 12.4 = 2*6.2. And it's not that harmful a substitution, being as it comes from a second order effect (x/(1+x) = x + O(x^2)).

As for whether the employer contribution is part of wages, of course it's nominally not part of wages, but most evidence points towards the *tax incidence* of labor taxes as falling almost completely on the employee, regardless of who actually remits the tax.

PS I like "uggabugga," albeit I don't visit that often.

[Sarah]

Good article. I also noticed one earlier this week in "Les Echoes" which was very well written and interesting. Très bien fait!

[Sans Serfs]

This is my first posting here.

The analysis being done here about the benefit "cuts" being proposed by the indexing scheme are hilariosly biased:

1. There are no "cuts" in any sense versus benefits being paid today. Some benefits are effectively frozen, only increased by CPI, instead of wage inflation.

2. The "cuts" are being analyzed as a percentage of today's promised benefits, without accounting for the lost income that everyone who has analyzed this issue thinks will come from a necessary increae in the payroll tax for 12.5% up to around 18% or higher in the future.
In other words, its unfair to compare the indexation proposal to a "do nothing and assume everything will be OK" proposal. You need to compare it to a program of increased payroll taxes that would be self-sustaining.

3. It's a good thing to reduce people's dependence on the government for retirement - not a bad thing. Why do people here feel otherwise? Scary.

I hadn't read this site before and am disappointed with the level of critical thinking here.

Sorry.

[piotr]

I think that Brad could mention redistribution aspect of Social Security system and how Pozen's plan would impact it.

Because SS is a complex bundle of benefits, the redistribution aspect is a bit hard to calculate, but if we look just at the retirement portion, we see that a person earning 250% of average wage gets 166% of the average benefit, which means that extra 150%
give extra 66% of benefit. This suggests that 55% of the extra contribution form a tax that funds the benefits of the less fortunate.

This raises the question: what is the rationale of levying such a tax, ca. 55% times 12% = ca. 6.6% on the wage bracket 36-90 but not on the bracket 90k-infinity? Besides jokes, I can see only one: higher wage bracket gets a higher income tax bracket that equilizes that difference, and perhaps even more than equalizes.

Now, in Pozen's plan, 90% of the contributions on wages in 36-90 bracket form a tax redistributed to the lower income people. This makes it a tax of 11-12%. This is, ladies and gentlemen, a tax increase of 4.4-5.4% restricted to 36-90 wage bracket. What can be the rationale of such a targeted tax increase?

I disagree with pi that we need "mean-test" all benefits. Such mean testing creates a very erratic curve of marginal taxation, creates spots of very high marginal tax rate and the attending inefficiencies -- evasion, enforcement etc. But I will conceded that this claim is at least debatable.

What is not debatable is that we should avoid regressive tax rates, declinining as the income goes up. If we convert SS to a basically fix benefit, then there is absolutely no rationale not to fund it by a tax levied on all income.

I heard libertarians claiming that the only fair tax is fixed per capita tax. Pozen is a step in this direction, quite deliberatedly so.,

[Jennifer]

Sans

Politeness matters, though you are no doubt far smarter than us :)

[piotr]

sans posted a large pile-up of nonsequiturs.

1. Suppose that you offer to returned a bank all money you have borrowed, but with no interest. Fair for them -- what, not fair? Why? Simple -- you promised to return them more. Same with promised benefits. You can plead insolvency and renegotiate the loan or benefits, but this is a CUT.

2. "everyone who analyzed the issue thinks that increasing FICA tax from 12 to 18 percent will result in a loss of income [substantial?]"

I presume that "lost income" means slower GDP growth. As we all know, GDP in highly taxed Norway is decreasing and in libertarian Somalia is rocketing up. Not so? In truth, there is a myriad of variables that may increase or decrease the GDP growth. GDP growth in not summum bonum anyway: offer people 1% faster GDP growth for 5% chance of being totally destitute when they are old.

3. Why is it a good thing to "reduce people's dependence on the government for retirement"? It is not a dependence like "vassal dependent from his liege" but like "I can rely on". I cheerfully depend on my local government to provide bike paths on which I can commute to work (and streets for motorized folks). A libertarian buzz-phrase.

Perhaps obtaining the SS benefits will become conditional on acknowledging Jesus Christ as a personal savior or some such, but this is a very different fight.

[anne]

Molly Ivins and Brad DeLong:

http://wvgazette.com/section/Columns/2005050318

May 4, 2005

Social Security plan doesn’t add up
By Molly Ivins

ATTENTION, all campers! “Progressive indexing” is just another word for “cutting Social Security benefits.” Do not be fooled by this idiot locution. Just as sure as “extraordinary rendition” now means “shipping the guy to another country so he can be tortured,” progressive indexing means cutting benefits. Got it?

In another interesting development from President Bush’s news conference, if you make more than $20,000 a year, you are wealthy. That’s what the president said — “wealthy.”

Would you hire this man as an investment consultant? Bush said, “I know some Americans have reservations about investing in the stock market, so I propose that one investment option will consist entirely of treasury bonds, which are backed by the full faith and credit of the United States government.” These are exactly the same treasury bonds that currently guarantee Social Security and have been described by Bush, including in the very same press conference, as a cabinet full of “worthless IOUs.”

He continued, “Options like this will make voluntary personal retirement accounts a safer investment that will allow an American to build a nest egg that he or she can pass on to whomever he or she chooses.” Nope, under that option, what you get is not a nest egg, but a rotten egg.

Brad DeLong, the blogging economics professor who specializes in this subject, ran the numbers. “The safest long-term investment the U.S. Treasury offers is the 20-year, inflation-protected TIP. ... What Bush is not telling you is that, under the Bush plan, if you divert $1,000 from your Social Security to private accounts, that amount is clawed back — charged to an account associated with your normal Social Security benefit, that amount is then compounded at 3 percent per year plus the rate of inflation, and then after you retire, deducted over time from your normal Social Security benefit.

“If you are 45 and if Bush’s plan were available today ... follow George W. Bush’s advice, divert $1,000 into your private account, invest it in TIPS, and at the 1.85 percent per year interest rate you will indeed be able to collect an extra amount worth $10.11 a month in today’s dollars when you retire at 65. ...

“But the clawback would reduce your normal Social Security benefit by $14.16 a month. You’re $4.05 a month behind.”

That’s why privatizers never mention the clawback.

Basically, you have to beat 3 percent plus inflation to come out ahead, and the only way to do that is to gamble in the stock market....

[AJ]

Professor Delong,
You are also in the The Hotline, although they put you down as a USC Professor....
http://nationaljournal.com/pubs/hotline/h050504.htm#11
This requires subscription, or a proxy, like through UC.

[Bruce Webb]

demisod raises an important point, and one that was fully captured during the "No economist left behind challenge". You can present economic models that posit productivity growth above Intermediate and Low Cost numbers and that still keep real wages stagnant. As Anne points out unlikely over the long term. And requiring that we abandon the whole notion that the market sets wages, totally discounting that at some point employers will dangle some cash to attact better workers from competitors.

But I can grant you that and still ask how a private account salvages the situation. Diverting 2% or 4% of a stagnant wage does not get you anywhere.

Present some numbers that show that 6.5% returns on 4% of a flat wage gives you an inflation adjusted better result than current promised benefits. Then we can talk.

And sans serf. Did you really mean to say that you were "without a slave" as opposed to "sans serif" which means "font without curlicues" or perhaps you meant "sans clue" because the following shows that you have not been paying attention:
"without accounting for the lost income that everyone who has analyzed this issue thinks will come from a necessary increae in the payroll tax for 12.5% up to around 18% or higher in the future."

Well I for one have been analyzing the issue, or at least reading the Reports of the Trustees of Social Security, and they simply don't support your numbers. The current payroll gap is 1.92% and that assumes the bleak numbers required under Intermediate Cost. So an immediate fix would require 12.4% plus 1.92% which equals 14.32% not "18% or higher". Only if the economy performs down to Intermediate Cost over all the years between now and 2041 would we require a hike to the levels you suggest and not until that date. Plug slightly better numbers (like 66% of 2004) and that gap vanishes.

"I hadn't read this site before and am disappointed with the level of critical thinking here. Sorry."

Well I am sorry too. Sorry that you have not made the slightest effort to gain an independent knowledge of the numbers at play here. Read the Reports, educate yourself and then come back. And lose the talking points. Be prepared to return real numbers.

http://www.ssa.gov/OACT/TR/index.html gets you PDFs and HTML of Social Security Reports from 1997 to date. Have you read them? I have.

[anne]

The purpose of Social Security is just that, income security or insurance as we grow older; "social security."

Private saving accounts do not harm Social Security as long as they are added to the program with absolutely no loss of benefits. Sweden is an instance. Of course, adding on benefits to the program will be costly and there is Medicare to consider which is also an essential program.