Eddie Lazear: Social Security Crisis Postponed...

Or so Eddie implicitly says. Ampersand writes:

Alas, a blog » Blog Archive » Bush’s Chief Economist Predicts Social Security “Crisis” Will Never Happen: Capital Commerce1 quotes Edward Lazear, the Chair of Bush’s Council of Economic Advisers, answering a question about productivity growth:

I wouldn’t necessarily say 3 percent. But I would expect that we could expect to see high rates, perhaps not quite at the 3 percent level, but somewhere higher than 2 percent. I would expect somewhere closer to 3 percent … If I’m thinking about long-term productivity growth and asking, “Do the fundamentals exist for persistent high productivity growth in the upper 2 percent range?” I think we can still be there, again as long as we continue to maintain policies that are consistent with an open economy.

If Bush’s chief economist is right, then there’s no Social Security shortfall [over the next 75 years].... Predicting the future isn’t simple; the Trustees have to make certain assumptions. One of their assumptions is that productivity increases for the next 75 years will be, on average, 1.7% a year. If they’re right, then the next 75 years will feature the lowest productivity gains in American history....

But what if the next 75 years aren’t actually the worst 75 years in US economic history?... That brings us back to Edward Lazear’s prediction of near-3% growth in productivity. If he’s right, then maybe there won’t be any Social Security shortfall. Higher productivity means, at least in theory, that workers earn more; workers earning more means that, without raising taxes, payroll tax revenues go up...

And he cites me from January 11, 2005:

Brad DeLong's Semi-Daily Journal: A Weblog: Why Oh Why Can't We Have a Better Press Corps? (Why Haven't National Review's Funders Pulled the Plug? Edition): [C]onsider two alternative worlds--one with zero and one with two percent per year productivity growth--and look at the situation halfway through her retirement, when she reaches 73. And let's suppose that in alternative world 1, the world with zero percent productivity growth, her share of the taxes that Social Security collects cover only 90% of her benefits: with zero percent productivity growth, the Social Security system is running a deficit.

Now let's look at what happens in alternative world 2, the world with two percent per year productivity growth. The economy has been growing 2% faster for 11 years. That means that wages and the Social Security tax base are 22% (actually 24%--compound interest you know) higher than in alternative world 1. Instead of collecting revenues that cover only 90% of her benefits, the Social Security system collects revenues that cover 112% of her benefits: no Social Security deficit. No Social Security problem.

Faster productivity growth affects the cost of Social Security (initial benefits go up faster the faster is productivity growth). And it affects the revenues of Social Security (a richer economy pays more in Social Security taxes). But it affects revenues more.

The key is that the indexation of benefits after retirement to the price level, not the wage level, adds a wedge between Social Security's costs and its resources roughly equal to half of life expectancy at retirement times the trend productivity growth rate. Each 0.1 percentage point increase in the growth rate of productivity reduces the long-horizon Social Security deficit by approximately 0.1% of taxable payroll.... Real wage and productivity growth of 3.0% per year (as opposed to the 1.1% per year assumed by SSA) would wipe out the 75-year deficit.

Of course, after 2082 there is still in all likelihood a Social Security problem. And before 2082 there is a chance there will be a problem of Eddie's productivity forecasts (and mine!) turn out to be too high. And there is the question of whether pay-as-you-go is the right way to fund social insurance for retirement (I think probably not). And there is the question of the implications of a pay-as-you-go system for the rest of the government given our current political institutions and the overwhelming fecklessness of politicians, primarily Republican politicians. So that the fact that Social Security is not in crisis does not mean that all is for the best in this the best of all possible worlds.

But it is interesting to note that the crisis is, in Eddie Lazear's judgment as well as in mine, more likely than not to be postponed until the next century.

Comments

[rea]

In 1907, how good a job would anyone have done making predictions about the state of the economy in 1982?

[Cranky Observer]

> Of course, after 2082 there is still in all
> likelihood a Social Security problem. And
> before 2082 there is a chance there will be
> a problem of Eddie's productivity forecasts
> (and mine!) turn out to be too high.

Of course, after 2036 there is the question of whether or not that earth-crossing asteroid hit New York City, not to mention the question of whether or not we have any oil or other portable form of energy storage.

The idea that the United States can make plans for what will happen 76 years from now is a bit silly IMHO.

Cranky

[bigTom]

Well lets just say that productivity growth is say 2% on average. Politicians would likely buy votes by raising benefits (beyond CPI), or decreasing SS tax rates. So if we start out with a sustained period of high prod growth, but then it slackens off, which must happen someday as there has to be some sort of limit to what technology can accomplish. We could still end up with a shortfall in the long run.

And of course Cranky has a good point about the unpredictability (although Apothis will more likely hit the Eastern Pacific (still only 1/45000 chance they say) not NYC. For that reason I prefer programs that automatically adapt to changing conditions. In a limited way defined contribution plans do this, while defined benefits as currently constituted don't.

[Barkley Rosser]

I am glad to see Lazear and you both making sense publicly, more or less, on the social security issue. It is about time.

[DILBERT DOGBERT]

Big Tom, Don't tell me about things hitting the eastern pacific. I want to live in a state of denial about asteroids causing a tidal wave that takes me away even with those 2000 foot mountains between me and the ocean.
I agree with those who think predicting anything 75 years in the future has anything to tell us.

[bigTom]

Dilbert, we should be predicting at least some things 75years away. Granted we cannot do so accurately, but I hope we will still have the moral courage to try to arrange things so the world will be better off in 75 years -even if we aren't around any more. I.E. for things like Global Warming, and resource depletion, we should at least make an attempt to not mess up the future too much.

[Douglass Carmichael]

The argument assumes that productivity increases are shared across the board. If they are hoarded by those above the SS tax cutoff level, then higher productivity still leaves social security underfunded because the folks who could pay are not earning enough to do so, even if the society as a whole is going up by +2%.

[Dave]

But the 1.7% and (close to) 3% assumptions are apples to pears, not apples to oranges, but not apples to apples either.

The 1.7% assumption is based on total economy productivity: GDP divided by total hours worked. The 3% is non-farm business, which excludes some sectors, namely agriculture, government and nonprofits, which have below average productivity.

So Lazear's sub 3% isn't quite as different from the 1.7% as it first sounds.

There's no way you're going to get close to 3% growth in total economy productivity over the long run; according to the Trustees, you've only gotten 3% or greater growth in 3 of the last 10 years, which is the new "golden age". Given the Trustees' definition, somewhere between 2% and 2.5% is about the best you can expect over the long run, and that assumes we don't have another low productivity growth era like the 73 to 95 period.

Brad, I think you do your readers a real disservice when you elide over the difference between the two productivity measures. I know you know the difference between the two; you should trust your readers to understand it as well.

[Barkley Rosser]

Dave,

The magic cutoff is 2.2%. As long as it is above that, the social security trust fund will run a surplus forever, holding demographic assumptions constant. Of course, obviously the further out one goes, the harder it is to say anything definite. The question has been all along, why go around cutting future benefits today on the off chance that there might be a problem 50 or 75 years down the road? Sometime ago,

Brad D. said it was 40% that there might be a problem by 2040, or some such time. He has sometimes said that is enough to justify doing something now, maybe, and this posting hints that maybe something should be done for general budget reasons, getting back to the idea that maybe fica is the only tax that can be increased in the near future, if we lie to people about the situation (they are horribly informed as it is) as part of a deal that involves cutting future benefits as well (or at least the increase in future benefits).

So, now that the top economic adviser to a GOP prez is saying this, will we hear this sort of realism out of the Hillary campaign, or will she continue to push the line of the Wall Street investment bankers that we "need entitlement reform" and that she is the one to do it? Or will we have her and her flacks pull social security off the table and out of the discussion because it really is not a problem, and focus on worrying about funding medicare and medicaid, as she should?

[Matt]

The New Libertarian view

Libertarians want to understand the function of the retirement bond industry in a free market, and it is thus:

The retirement bond industry removes age dependence from the yield curve.

Old folks with cash want a high yield on long term investments, young persons want less yield. The prospect of enjoying benefits from a long term project are less the older one is and the longer the term of the investment.

So, the retirement bond industry lends money at age independent rates compensating older folks with forward payments for lost opportunity. Taking full advantage requires investing over the period of the longest term bond.

The economy, as we know, wants to amortize known stickiness and convolve these into the free market property function operating on marginal cash. As the economy is able to do this, long term volatility is reduced and our outlook is certain for longer into the future.

The 30 year term is the property*age function convolved with the age independent yield curve. The term, 30 years, is an output, a determined variable result of this convoluiton.

We want a better measurment. We really want to look at total debt invested in the yeild curve compared with total equity. This ratio should be stable.

Brad assumes that all the price fixing of socialized retirement bonds remain. So, in essence, he is dictating how much debt we have to carry (doing the calculation in reverse.)

[Matt]

Sorry to hog the thread. I want to try and "hand wave" the effects of price fixing in the retirement bond industry.

The legislature fixes three variables. They are:

Age - It creates an artificial discontinuity at age 65

Pay in - Price fixed, but generally compensated for within an election cycle by adjustments to the income tax

Pay out - Fixed

And it has an inflation operator which, in a money invariant model, appears as convolution operator over the property-people density function.

Folks, the effect of price fixing is to cause the other, large economic variables to adjust themselves in a manner that restores the retirement bond industry to it free market equivalent.

Thus, total debt and equity values are re-adjusted by the economy over time. This is generally inflationary.

And, people in the near the discontinuity, say 40-55 years become disenchanted with the system causing anomolies in the yield curve.

The effect of the inflation operator depends on whether the SS inflation operator leads or lags the CPI. But, in general, the inflation operator will have the effect of pushing or pulling immigration.

Also, the legislature fixes the other entitlement, medicare, in a stongly covariant manner to social security. The combined effects of these on the demographic curve has been proven to be detrimental.

Go back to the d(people*property)/dt differential. If the entitlements create an operator over the density function, then the d*people/dt has a demographic effect whose result is generally unknown to the legislatures doing the price fixing. Compound this problem with age dependent voting.

Progressives cannot just take a linear guess and assume everything else adjusts. Brad knows that. Liberals have to hold the line and keep progressives from price fixing.

Even as a socialist system it is mismanaged.

[Barkley Rosser]

Matt,

Um, you seem to be somewhat misinformed about the functioning of the SS system. It has been some time since 65 was the discontinuity. And even the discontinuities in place, of which there is more than one, do not force one to retire. You are simply way overstating things.