Unfunded Entitlements and Default Savings Plans

Wow.

I had thought one thing I would never see would be Martin Feldstein endorsing a large, unfunded entitlement expansion:

WSJ.com - Saving Social Security: By MARTIN FELDSTEIN: July 15, 2005; Page A10: A recent proposal by House and Senate Republicans marks the start of the legislative process to implement President Bush's approach to Social Security reform. The fundamental principle is to supplement traditional pay-as-you-go Social Security with investment-based personal retirement accounts. Although the new congressional plan is not a complete solution to long-run problems, it's an excellent starting point. By using the Social Security surpluses that are projected between now and 2017, it lays the foundation for personal retirement accounts without diverting the payroll tax needed to fund current benefits...

It also reduces government net revenues without reducing future government commitments to pay money. The message discipline required of practicing Republican economists is very harsh indeed.

The rest of the op-ed is quite good:

Adding voluntary savings through salary deductions to these personal retirement accounts would substantially strengthen this reform.... The key to the success of such a voluntary add-on plan is to combine automatic enrollment with the ability of each individual to opt out... participation rates of 80% or more even when there are no employer matching contributions... the "default option" -- whether you are automatically in unless you decline, or automatically out unless you enroll -- has a powerful effect on what individuals choose to do....

The personal retirement accounts would not replace traditional Social Security but would supplement the more limited pay-as-you-go benefits that would result as the aging of the population leaves fewer workers per retiree.... The automatic enrollment feature would also increase national saving, a high priority in its own right. A higher national saving rate would finance investment in plant and equipment that raises productivity and produces the extra national income to finance future retiree benefits. A higher national saving rate would also reduce dependence on capital from abroad and would therefore shrink our trade deficit....

The aging of the population means that the existing pay-as-you-go Social Security program cannot by itself provide adequate retirement incomes without a very large increase in the payroll tax rate.... Supplementing the traditional pay-as-you-go benefits with investment-based personal retirement accounts financed by a combination of the projected surpluses and voluntary automatic savings would eliminate the need for any rise in Social Security taxes while providing a secure source of income for future retirees.

But funding them by uncapping FICA would be much, much better.

Comments

[Karmakin]

Here's an interesting scenario. When the baby boomers retire, they, of course coonvert their 401ks and IRAs into annunities. Right? Or buy that house, or whatever. The selling effect will lower stock prices. A mass sell-off of sorts. But there was one hole in the story. What would provoke this? With continuing rising stocks, why convert right away? Why not keep on buying and holding?

It's right in the details, and what wall street tends to do. When the BB generation retires, it's going to create a huge demand in the labour market. THat will have the effect of raising wages substantially.

Wall Street will not like that, starting a sell-off and triggering the run for the exits. What should be a minor drop, could snowball into something more signifigant.

It becomes clear that after the BB retirement, wages, and FICA taxes after that, will go up by a substantial basis. Which means that the numbers for discussing potential privitazation are unknown, but probably rosier than expected on the anti front.

[James Kroeger]

Brad DeLong says that this quote from the WSJ op-ed is 'good':

"...A higher national saving rate would finance investment in plant and equipment that raises productivity and produces the extra national income to finance future retiree benefits. A higher national saving rate would also reduce dependence on capital from abroad and would therefore shrink our trade deficit..."

This is wrong, Brad, because current savings levels are excessive. The 'National Savings Rate' tells us absolutely nothing about whether or not the Americans are saving too little or too much.

Let's try to remember that income = savings + consumption. Recall also the indisputable observation that nearly all jobs are dependent upon the spending of others. Combining these two fundamental facts about the economy reveals to us the exceedingly important conclusion that any economy always has more than enough savings if there is any level of unemployment whatsoever.

The only time it becomes logical to argue that more saving is needed in an economy is when all unemployment has been eliminated and hyperinflation is threatening. Only then will an increase in aggregate savings not threaten to increase unemployment levels.

From these fundamental principles, we can see that there really is an OPTIMAL SAVINGS THRESHOLD. It is finally reached when there is no unemployment whatsoever in the economy. Aggregate savings are inadequate if the zero-unemployment-threshold is exceeded (hyperinflation); if there is any amount of unemployment in the economy, then aggregate savings are excessive.

An increase in the National Savings Rate will NOT "finance investment in plant and equipment that raises productivity and produces the extra national income to finance future retiree benefits" because the funds needed for such investments are already plentiful and available for borrowing. If the interest rate is not low enough for firm managers to borrow, then that has nothing to do with savings levels and everything to do with the FOMC's market-trumping power.

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[otto]

"But funding them by uncapping FICA would be much, much better."

But the Democratic party, representing the interests of the liberal professional salariat more than the working class, cannot make that argument.

[malcolm]

Re James Kroeger: It sounds like the Ricardo/Malthus debate on savings and demand is being refought in the 21st century. Of course, Ricardo and Malthus coudn't
read Keynes or Solow or Phelps because the latter hadn't been born yet! Or the Delong and Olney text
cause it hadn't been published yet...

[Bruce Webb]

The current payroll gap per the Trustees is 1.92%. The cheapest solution for almost all Americans would be to simply take that hit now and then watch the productivity numbers roll in. If you are making $40,000 a year you can take every economic number of Intermediate Cost seriously and still backfill the gap with $768 a year or $2.10 cents a day. And every bit of economic growth above 2.0% between now and 2080 carves away at that figure.

"very large increase in the payroll tax rate" my ass. Sure if you accept every pessimistic assumption of Intermediate Cost and accept the fact that nothing at all will be done between now and 2041 you would be looking at raising the payroll tax from 12.4 to 16.66 to fully pay for a benefit that is much more generous than retirees get today (2005 Report: p.16).

Well my tear ducts must have dried up. Because I am not anticipating sub 2.0% growth and nobody I know does either. Bush took payroll tax increases off the table as a non-negotiable point right from the getgo. Because he didn't want anyone multiplying 1.89% (the 2004 figure) times their paycheck and shrugging "okay, if that if what it takes".

Privatizers are fighting to the death to avoid the horrors of boosting taxes for a new hire making $25,000 by $480 a year or $1.31 a day (using 2005's 1.92%). Sorry, you can throw me right in that briar patch, and then watch me laugh and laugh as the economy returns 2.5-3.0% where your model predicts 1.6%.
http://bruceweb.blogspot.com/2004/11/payroll-tax-vs-productivity-what-would.html

[Auros]

Otto: If you figure the "professional salariat" mostly consists of two-income families who make $60k-$90k each, I don't see how that "salariat" would feel negatively disposed towards the idea of ending, or significantly hiking, the cap.

Even if you mkae $120k, killing the cap is only bumping up taxation on $30k of your income, when you're already paying 30-ish percent in income tax on the marginal dollar. I just don't see removing the FICA cap as a big deal for anyone making less than $150k or so. (And honestly, if you make $150k, I find it difficult to pity you over your tax "burden".)

[wkwillis]

Karmakin
The labor supply as a problem is about as real as the money supply as a problem. The government can print money and the government can print citizenship papers.
Of course, there are unpleasant consequences for the 'solutions' to the 'problems'...In the case of the money supply, the problem is inflation. In the case of the labor supply, the problem is educating the children of the new immigrants since their parents don't make enough to pay the school taxes required for those children.