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May 03, 2005

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Jim Glass

"I asked Jason Furman of the Center on Budget and Policy Priorities to calculate the benefit cuts under the Bush scheme as a percentage of pre-retirement income..."

Note he didn't ask for a calculation of the value of SS benefits net of contributions -- or the result would have been a negative number from the start, and the conclusion would be we could help the middle class most by killing the program outright today.

And the higher up in the middle class one is, the more one would be helped.

Social Security is anti-poverty insurance!

No, no, it's a pension for the middle class!

Well, whatever will buy a vote this week, it is. A floor wax ... a desert topping!

Problem is, as anti-poverty insurance it sucks because it incurs the huge cost of financing transfers to Warren and Bill and all the non-poor of the nation, which is rather inefficient for an anti-poverty program.

And as a pension program it just sucks -- who would voluntarily sign up for a pension plan that guarantees negative return on investment by formula, with the formula 25% underfunded on top of that?

It polishes the floor like a desert topping, and tastes on your desert like floor wax!

But ya do gotta love the sight of progressives lining up to defend a program that taxes Warren Buffett's Dairy Queen employees to pay Warren a pension on the grounds that it must be so, otherwise the program couldn't survive to help the Dairy Queen employees as it does.

Harry Arthur

Jim, as always exactly on the spot.

I'm just wondering what is so "progressive" about the fatal attraction the "progressives" have for this ridiculous, out of date, early 20th century poor excuse for a retirement "program" that, as you correctly state, guarantees a negative rate of return for the majority of today's work force.

Monty Python couldn't have come up with a funnier plot than does the good professor. Except that it really ain't too funny, is it?

Joe Mealyus


Unless I'm missing something (and probably I am) he's suggesting that 1) a worse deal for the wealthy makes it less progressive; 2) the heart of the Republicans' canny scheme is to make the welfarization of the program transparent; and 3) this transparency would inevitably facillitate demagoguery, since the unpopularity of welfare programs results from (e.g.) politicians telling "tall tales about Social Security queens driving Cadillacs".

If 1) is true doesn't this mean Social Security must be heavily welfarized in the first place? And if Krugman (and the Democrats) want Social Security to be chiefly an income restribution program (which despite the various "insurance" claims that Jim Glass mentions, seems to be the underlying truth), isn't it their duty to to at least attempt to convince the public, no matter how effective the Republicans have been at convincing them otherwise, that income restribution is a good thing?

Appalled Moderate

To the extent Krugman does not recognize that progressivity is baked into the Social Security formula (up to the upper limit of the payroll "taxable wage base), he is being utterly dishonest. To the extent you all do not recognize that the paytoll tax cutoff at $90,000 is inherently regressive, you are being intellectually dishonest.

Krugman has a point -- a plan that reduces benefits for someone who makes $70,000 through his career, in order to spare the fella making $190,000 from $7,500 per year in taxes (or $15,000, depending on how you think of the employer portion of social security) hits the middle class harder than the wealthy.

The Kid

In today’s OpinionJournal Robert C. Pozen counters the Krugster nicely:


Judging any reform plan relative to scheduled benefits is misguided. The schedule represents the benefits we have promised but do not have the money to deliver. That is why Social Security has a long-term deficit with a present value of $3.8 trillion.
[Snip]
Let us take as an example a medium-wage worker who will earn $47,000 in 2012 when progressive indexing will first be implemented ($36,500 in 2005). The critics have already proclaimed that such a worker retiring in 2045 at age 65 would receive 16% less under progressive indexing than scheduled benefits--$16,417 rather than $19,544 per year. Is this reduction from the schedule a "benefit cut"? If Congress does not enact Social Security reform, the system will default in 2041 and benefit levels will automatically be reduced by roughly 27% for all workers by 2045. So judged relative to payable benefits, the $16,417 received by the median-wage worker in 2045 would actually be an increase in benefits. That sum represents $2,150 more in Social Security benefits than the $14,267 that the system can afford to pay in 2045 absent major reforms.

There’s an intergenerational war coming between those who are collecting Medicare and Social Security and those whose incomes will be highly taxed to effect the monetary transfer. In today’s WaPo, Health and Human Services Secretary Mike Leavitt seems to point to the Kervorkian solution by saying that “Encouraging new Medicare participants to write living wills could end up saving the government large amounts of money.” He provided no details and was last seen running away…

Patrick R. Sullivan

Not to be outdone--shell game wise--Dean Baker offers:

"At this point, low earners ($16,400 in 2005) and maximum earners ($90,000 in 2005) will be receiving almost the same benefit, even though a maximum wage earner will have paid more than five times as much money into the Social Security system...."

And concludes (as does Mad Max apparently) that this is evidence of 'regressivity'!

Harry Arthur

AM, no problem with your first two points.

However, I believe you may not be considering that Bush's most recent ideas on SS reform include means testing benefits which will arguably address the regressive nature of the cap, at least to some extent.

My understanding of why we haven't previously gone down this road was that we were under the illusion that this program was something other than a wealth transfer program and that every participant should receive a positive return on their "investment." The percentage return would be less for those in the upper income levels and more for those in the lower levels, hence at least the illusion of progressivity, though admitedly at the benefit end if not at the contribution end.

Regardless, the system as it currently exists has serious problems that will only get worse with time. For my part I'm totally convinced that privatization is essential. And I'm not averse to a progressive privatization "scheme" that might even subsidize the contributions of those at lower income levels. The key in my mind is personal ownership and recognition of the actual long term liabilities "on the balance sheet".

Harry Arthur

It seems that one man's progressivity is another's regressivity depending upon which side of the coin you look. As I rethink my last post I've come to the conclusion that the choice of terms is largely irrelevant, except as a debating point, given that the result is that virtually all of today's workers will experience negative returns on their money and those who "contribute" most will be affected most negatively.

That can't be a good result regardless of the label we decide to use. And we haven't even discussed the hugh negative return for certain demographics such as African-American males who will die young enough (statistically) to receive zero return.

Personal ownership is key.

Tollhouse

We already have an equivilant negative stereotype for SS recipients, the Blue haired Slot machine junkies hanging out at a casino or playing bingo at the Legion hall.

As for illusions, it's brings to mind the old Soviet joke, "We pretend to work, they pretend to pay us", except now, "We pretend to have earned it, they pretend we can afford it."

Jim

To Appalled Moderate: The $90,000 cutoff is not regressive. You cannot consider the tax schedule apart from the benefit schedule. No one receives benefits based on any earnings above $90K, and in fact, the benefit schedule is already progressive: Benefits do not go up in proportion to what people pay in. To put it another way, people lose money on those SS taxes on income in the $50-90K range.

As for Krugman, doesn't his "logic" imply that he should be against increasing progressivity in taxes? After all, that will make the wealthy want to reduce taxes, ultimately making the system less progressive.

Appalled Moderate

The way I understand the Prsident's proposal is this:

If I make over the taxable wage base, my marginal tax rate on each pay raise I get is 0%. Theoretically, I can put the money I save in my own private account.

If I make under it, my marginal tax rate is 15%, but I am buying even less benefit than I used to get with those additional dollars, as a result of the means testing.

Is this fair? Strikes me, if you are going to means test the benefit, you need to combine it with a the eleimination of the taxable wage base cap to avoid the perception that the middle class is funding the 0% payroll tax rate through benefit cuts.

Tom Bowler

An observation: Here is a bit from the Bush press conference.

"A variety of options are available to solve the rest of the problem, and I will work with Congress on any good-faith proposal that does not raise the payroll tax rate or harm our economy. I know we can find a solution to the financial problems of Social Security that is sensible, permanent, and fair."

I'd say the $90,000 cap is on the table.

Jim Glass

Jim beat me to saying...

"To Appalled Moderate: The $90,000 cutoff is not regressive. You cannot consider the tax schedule apart from the benefit schedule. No one receives benefits based on any earnings above $90K"

I'll add this: FDR and SS's other guardians since his day have always opposed breaking the link between taxes and benefits -- i.e. funding SS with taxes that earn no benefits, such as income taxes or payroll taxes on wages over $90k today -- for exactly the same reason that they've always opposed means testing the rich out of benefits. Because to the degree you do it you turn SS into a rich-pay-for-poor welfare program and sap its general political support.

Yet the only way the $90,000 payroll cap can be viewed as "regressive" is if in your mind SS benefits should be funded with taxes collected from the rich that earn them no benefits -- breaking that link. Which might seem "progressive" enough.

But the problem then is, once you break the link and separate benefits from the taxes paid to earn them, you have no justification to stop there. Instead of just funding some SS benefits progressively from the rich, why not fund them all progressively from the rich? And get rid of that damned regressive payroll tax entirely? After all, it's regressive from the very first dollar. Surely that would be the progressive thing to do!

Now float that idea -- progressively replace all the payroll tax with income tax or other taxes on the rich -- and you'll immediately get Democrats everywhere saying: "No! no! no! It's part of the plot to kill Social Security! We need the payroll tax to be tied to benefits to make workers think they are getting their own money back, and keep them politically committed to the system rather than see SS as a rich-pay-for poor welfare program. Just like FDR said in 1937. You can't separate taxes from earning benefits!"

Except when it's the convenient doublethink of the moment. ;-)

Democrats are really manufacturing a conundrum for themselves here. They are digging bunkers in concrete to defend against every conceivable change in SS. Yet change is coming, with the certainty that 2+2<>5. So the more they bet on blocking change the more they are going to lose.

Crank

The Krug says that if the program is made more progressive, that will erode its popular support. Yet, somehow, that same insight eludes him entirely when it comes to taxes. Isn't the big Democratic push to raise taxes to fix Social Security? Yet, raising taxes does the same thing as cutting benefits: it lowers the expected return from the program compared to just investing the money yourself, and raises the number of people for whom Social Security is a net negative even compared to putting the same amount of money into low-return investments like money market funds.

Crank

Um, guess I should have read Jim's comment before posting.

Forbes

Jim Glass has raised a lot of the points of contention. Let me add a few others (and pardon me if I repeate him).

SS was originally a method to raise taxes during a depression, with the distinct selling point that it would provide a safety net to those too old to return to work and had been wiped out during the depression--life expectancy was barely age 65 in the '30s. It was also sold to younger workers, that paid the tax, as an old age savings/pension plan.

The problem with SS is its inherently unsupportable economics based on ever changing (in the negative) demographics. It's a Ponzi scheme based on intergenerational income transfer.

And as JimG points out the Democrats are defending their status quo position against reform from all perspectives.

It's a safety net! So it's an anti-poverty program. Ah, but not everyone suffering poverty is eligible for benefits--that's welfare.

And a safety net is something you don't expect to use, but eveyone paying into SS expects to receive benefits--except not everyone receives their benefit, especially those that die before reaching age 65 (nominal death and survivor benefits excepted).

So it's a universal entitlement for all wage earners who reach age 65--a mandatory pension plan. Except it's not mandatory, as many government employee plans are exempt, or have opted out (and they get better benefits). And it's not a pension plan because you have no right to the assets paid into the plan, by you, or on your behalf--and with no ownership rights, no right to bequeath to heirs.

It's a plan so horrible that no one would propose such today, but the Democrats want no changes--except, apparently, to raise taxes in order to maintain the status quo, and postpone the reckoning day of SS's insustainability onto some future generation.

Makes a great campaign bumper sticker: "Democrats: Doing nothing today so those not aborted can pay for it when it's their turn"
/snark off

In order to fix what has changed, we need to reverse the lengthening of life expectancy and the decline in the birth rate. I await the Democrats' response to these issues, given their preference for the status quo position regarding SS.

And forgetting what a horrible deal SS is for future retirees, asking today's 20-somethings to accept a program that will require ~25% benefits cuts at their retirement is worse than irresponsible.

Please, Democrats, I ask you to decide, is it old age welfare, is it a universal entitlement, is it a pension plan--but it can't be all three, and work at the same time.

Jeff

Oh, my. Once it loses it luster as a middle class entitlement, Social Security will lose public support and be ripe for the plucking.

But he's right, of course, pointing out the obvious political truth that has kept the program in business for 75 years. To ignore this calculation is beyond naive.

But I don't think you are ignoring it. Policies on the right tend to co-opt poor and middle-class support by offering the promise of future wealth. So those folks will vote against their self interest--but only because they imagine they will be the beneficiaries. But when you ask people to give up their old-age umbrella, you uncover the other half of the equation: people aren't willing to gamble that much. Better keep social security in case things don't work out.

The GOP embarked on a losing venture by trying to gut social security. They sacrifice all the more by making it a game of vast political capital. Dems are gonna win this one. How much the GOP loses is up to the GOP.

Jeff

Incidentally, I'd be interested in hearing if anyone disagreed Dionne's column today in the Post.

Harry Arthur

Jeff, I'll read it and let you know.

Unfortunately you may be right that the "do nothing" crowd may "win" the debate now but there is a reckoning coming somewhere between 2017 and 2042/52 when the SS system will no longer be running a surplus as it is now.

My only question is will y'all stand up then and take credit for the inevitable mess that results from doing nothing now when we could have actually fixed the problem with significantly less pain than it will take in the future?

Somehow I doubt it. I'm guessing that when that moment occurs that somehow your take will be that those conservatives screwed the little guy again. Say it ain't so.

Jim Glass, Forbes, et al, "get it" IMHO. I can only hope that somehow this reality will work its way into the thought processes of the twenty and thirty-somethings who will bear the brunt of our failure to act.

Harry Arthur

Interesting SS calculator here that ultimately links to this Heritage Foundation site on the subject.

You young folks might want to plug in your numbers, but be prepared for a shock.

Of course it's all nonsense since it's on a right wing wacko web site. Or is it? Just keep repeating to yourself, "everything is fine" ...

Joe Mealyus

HA: "The problem with SS is its inherently unsupportable economics based on ever changing (in the negative) demographics. It's a Ponzi scheme based on intergenerational income transfer."

Actually it's just an intergenerational income transfer. It's just one way by which the process of retired folks consuming goods produced by working folks can be actualized. And the negative demographics will be a problem for any society, regardless of the basis of its superannuation scheme - more retired mouths to feed is more retired mouths to feed.

Joe Mealyus


Jeff: "...pointing out the obvious political truth that has kept the program in business for 75 years."

Yes, but is the obvious political truth that SS be *in substance* a middle-class entitlement or that SS *maintain the image* of a middle-class entitlement? It's hard not to think that many SS defenders give lip service to the former, while the true goal is the latter.

Forbes

Alright, here's the plague on everyone's house tidbit, or the elephant in the livingroom, if you prefer. The SS surplus that will be spent in the unified federal budget between now and 2017 is approximately $2.2 trillion. I'd say there's enough blame to go around on that one, whatever your political party--as this little spending dance has been going on since the '60s.

Do any commenters, especially those who prefer to trash the President or the Repubs, care to offer solutions to the old age safety net/middle class entitlement/pension retirement plan--the problem SS fails to solve--as an alternative to the Dem politicians "do nothing" plan?

Perhaps the Repubs have just mis-diagnosed the problem, and through your eyes, we can see the clear solution.

I await substantive responses.

Harry Arthur

Forbes, I hope you're very patient.

Harry Arthur

Joe, I am actually not responsible for the quote. I believe it came from Forbes, not that I am in disagreement with its essence. As for the negative demagraphics, actually Japan and Europe have a much larger problem there than do we. Of course ours exists largely due to the "boomer" generation but theirs is much more the result of negative population growth, and in the case of Japan, a very closed society.

The solution is children and intelligent immigration, both of which are at least as charged political topics as is SS.

Harry Arthur

Surprise, Jeff, there's much to disagree with in Dionne's article and at least a few things with which to agree. But, hey, even a broken clock is right twice a day.

Miracle Max

Never have so many labored so hard to miss so much (of the point). I elaborate on my site, if anyone cares to visit.

Jeff

My only question is will y'all stand up then and take credit for the inevitable mess that results from doing nothing now when we could have actually fixed the problem with significantly less pain than it will take in the future?

No. Fact is, any program that's solvent for over a decade is in robustly good health. The Democrats left the country in fine fiscal shape, and the GOP has quickly transfered that wealth into the coffers of the already wealthy. Dubya's tax cuts are why we're in this pickle, not--despite his overheated panic--because of Social Security.

Yes, but is the obvious political truth that SS be *in substance* a middle-class entitlement or that SS *maintain the image* of a middle-class entitlement? It's hard not to think that many SS defenders give lip service to the former, while the true goal is the latter.

It's both. In fact, it's possible that rhetoric and reality line up. Savvy liberals at midcentury knew that conservatives would forever despise SS, and so they bought off the middle class--who very much wanted to be bought off. That's what known as successful policy making--pleasing the people you represent.

Perhaps the Repubs have just mis-diagnosed the problem, and through your eyes, we can see the clear solution.

It's priorities, Forbes. If you want to conduct extremely costly wars for fun and fund tax cuts for the well off, it costs money. What this GOP doesn't seem to fathom is that you can't do it all. Here's a thought: let's roll back the unneeded tax cuts. It's not as if the magical economic boom has actually happened, after all.

The Kid

Jeff -
Clinton left with a budget surplus, but the national debt increased because the official budget does not account for all expenditures. His last budget - the one his predecessor inherited - had whopper (15%) increases that would have balanced had a recession not hit. Had Bush not won, Gore would have been hit with a deficit. With a Rubin in the background, he probably would have introduced targeted tax cuts that would not have had the stimulative effect that Bush’s did – they would not have had the psychological impact that folks on your side don’t understand. And Hamid Kharzai would be working in his family’s restaurant in Baltimore, Saddam would have escaped sanctions and tied the knot with OBL, and we wouldn’t be arguing about Social Security because we’d be asking France, Japan, and Germany for ideas on getting our economy to perform as well as theirs.

Steven J.

FORBES -

For one Dem plan, try Diamond-Orszag.

Ken

"But I don't think you are ignoring it. Policies on the right tend to co-opt poor and middle-class support by offering the promise of future wealth."

And they tend to deliver. With policies from the right, the rich get richer and the poor get richer too.

"So those folks will vote against their self interest--"

Only if you think rising incomes and standard of living is against their interest...

"but only because they imagine they will be the beneficiaries."

And since that happens to be the truth, it seems like the system's working.

"Actually it's just an intergenerational income transfer. It's just one way by which the process of retired folks consuming goods produced by working folks can be actualized. And the negative demographics will be a problem for any society, regardless of the basis of its superannuation scheme - more retired mouths to feed is more retired mouths to feed."

But the rules of Social Security actually produce "more retired mouths to feed". Social Security has a cutoff age, not a cutoff percentage of the population, so according to the law, we'll feed as many mouths as there are above that age. Under a different system, people would retire later and there would be more workers supporting fewer retirees.

Patrick R. Sullivan

"Never have so many labored so hard to miss so much (of the point). I elaborate on my site, if anyone cares to visit."

Where Max shows how missing the point can be raised to an art form. For those not wanting to spend the time, it comes down to the sunk cost fallacy.

Jim Glass

"For one Dem plan, try Diamond-Orszag."

Raise taxes, cut benefits, and assure the loyalty of the middle class to SS by making them lose even more through it.

But as to it really being a "Dem plan", which part of it are the Dem politicians like Pelosi, Reid, Kennedy et. al., willing to openly and publicly embrace?

Raising taxes? Cutting benefits? Making the returns to the middle class even more negative?

Paul Zrimsek

The point, I guess, is that all this time Max has been saying there's no problem, what he's actually meant is there'll be no problem once we start sending 30% of GDP to Washington.

Miracle Max

The required historic rise in taxes is over a 75 year period. For the time being, getting back to 20% (from about 17) would be sufficient. In ten years we could take another look and start arguing about the "crisis" in 2062.

Jim Glass

"all this time Max has been saying there's no problem, what he's actually meant is there'll be no problem once we start sending 30% of GDP to Washington."

Don't forget the state capitals. Medicaid. Another >10% of GDP for state government spending.

One thing the fans of all this additional taxation never mention is the public finance 101 demonstration that taxes carry a deadweight cost at the square of the tax rate. Raise taxes from 30% of to GDP to 40%, this goes from 9% to 16%, an additional loss of 7% of GDP. (Understating things, as it is marginal tax rates that matter and they are higher, but never mind that now.) What does a loss of 7% of GDP do to, say, the unemployment rate?

Of course, a number of the commentators over on Max's site might consider this a feature -- introducing the "leisure" enjoyed by workers in the French and German labor markets into the US...

Jim Glass

Max:

"The required historic rise in taxes is over a 75 year period."

Starting early in that 75 years -- with a 63% income tax increase (or the equivalent)in 25 years, say the SS trustees, that's by 2030, and rising steadily from there.

"For the time being, getting back to 20% (from about 17) would be sufficient. In ten years we could take another look and start arguing about the 'crisis' in 2062."

2062. ;-)

The "crisis" is going to hit for SS by 2030. Here's why. Just think of paying benefits out of limited gov't general revenue funds as deficits and the need to raise taxes surge straight up.

SS benefits have always been sacrosanct until now because of their dedicated funding. But SS reaches into general revenue in 2018 or thereabout -- and it is dedicated funding no more.

At that point everyone else living off of general revenue -- from the Agriculture Dept to Defense Dept. to those running real welfare programs that actually help the truly poor -- is going to want that money for themselves. It'll be real political competition for those bucks, nothing sacrosanct.

And the competitors for that money will have a real political argument: "Why should our budgets be cut to pay SS (and Medicare) benefits to Bill Gates and all the other millionaires in America? They don't need it! And why should working peoples' taxes be increased 63% to pay benefits to millionaires??"

Now, at that point, are liberal, progressives really going to say "Shut up, cut your budgets and raise your taxes so we can keep making these payments to the rich. Because it's the liberal, progressive thing to subsidize the rich. Otherwise they won't support Social Security any more".

You know, I don't think that kind of posturing will come so cheaply to the liberals in 2030 as it does in 2005 -- since they'll actually have to pay real money for it then.

So by 2030 Congress will do exactly what it did the last time it had to raise taxes to fund a SS financing shortfall, in 1983: cut benefits and increase the means testing it started in '83 -- only doing both on a proportionately much larger scale in line with the much larger shortfall. Which on top of the '83 round of benefit cuts and means testing for the young will do exactly what the liberal progressives saying right now shouldn't be done: turn SS into a means tested welfare program.

They are begging for it. Karl Rove couldn't ask them to do more. Of course, Karl shows the ability to think ahead a little bit ...

But what will be the liberal progressive alternative in 2030? Cut real welfare so we don't have to cut welfare for 75-year old Bill Gates?

2062. ;-)

Miracle Max

The PF theorem is that deadweight loss is proportional to the square of the tax rate. So a rate that goes from a-squared to b-squared multiplies something else, NOT GDP. So your 7% of GDP is pure hokum.

Jim Glass

Max:

"The PF theorem is that deadweight loss is proportional to the square of the tax rate. So a rate that goes from a-squared to b-squared multiplies something else, NOT GDP. So your 7% of GDP is pure hokum."

I said it was a simplified example -- which is why I provided a link to a detailed explanation of it from a central bank, deceptive misleader that I am! -- and that in fact the actual estimated quantitative numbers for loss in terms of GDP that I've seen in published papers tend to be a lot larger.

(Do we remember the 10% "luxury tax" that Congress in its wisdom applied on boats some years back, which put an entire industry out of business? The "something else" that was proportionately multiplied there totalled up to a increased deadwieght loss way more than 1% (10%^2) of the initial price of those boats. So maybe the "pure hokum" of the 7% figure is how it underestimates things?)

I also said that the fans of these tax increases never, ever, mention the deadweight economic loss of taxes that rises, yes, in proportion to the square of the tax rate. So a rise from to 40% from 30%, compared to one of 30% to 20%, gives a proportionately 40% greater loss.

Is this because the loss is so small it's just not worth mentioning? Really, I'd think if they believed the loss to be that small it would be quickly mentioned to be dismissed.

Pervasive silence on the subject I take more ominously.

Miracle Max

Simplified example, yeah, to the point where your order of magnitude is pure hokum. I haven't read the paper, but I'm quite sure they don't infer an aggregate deadweight loss from an average tax rate. That's not the theory. There are an assortment of marginal tax rates applying to assorted sub-groups, as you know. We could trade citations with different estimates, if we bothered to take the time.

The average person has no clue what deadweight loss is. If you told them, they might not believe it anyway, so it is hard to blame politicians for not expounding on it.

If you want an ominous silence, there is the silence that applies to the parallel deadweight loss from lack of public goods. There is also the loss to social welfare for lack of sufficient income or wealth redistribution. Calculating these is more difficult than the tax side, but they are just as real.

There are two sides to the story, not one.

Patrick R. Sullivan

"getting back to 20% (from about 17)"

I've drawn a picture for you, Max:

http://flyunderthebridge.blogspot.com/2005/05/why-bother-to-think-about-numbers-you.html

Note that the blue line (revenue) rarely even hits 20%, much less being the norm. The SIX DECADE average is a little over 18%. To raise it to 30% is a 67% increase.

Here's your opportunity to show you're a member of the Reality Based Community: start offering some schemes to reduce spending to 19%.

Harry Arthur

Patrick, I liked your other chart - "The Trust Fund; It's Just Make Believe" - better.

If only Bill Clinton could have had a third and fourth term we wouldn't be in this mess, right Jeff?

Miracle Max

Patrick's facility with two dots and a ruler is unmatched.

Harry -- we may get a chance to test your prediction.

Harry Arthur

If the republicans in the Senate don't start showing some serious spine we conservatives may stay home and let the Bill & Hil chips fall where they may. Perhaps then we can return to the good ol' "save Social Security first" days.

Forbes

I think Max has finally given away the game when he suggests getting the federal claim on GDP up to 20%, from 17%, and then we just postpone the reckoning day for SS for another 10 years. (So we're gonna hack off 3 pts. of GDP for SS--where FICA taxes are what, one-third of federal revenues (6% of GDP)? So we're proposing to increase FICA taxes by 50%?)

My, my, now that's a responsible proposal that I can endorse--simply because it's unlikely I'll live past 110!

Yeah Max, don't let anything like the facts get in the way. A plan designed to address a 70 year-ago problem is still in place, while the assumptions upon which the program was balanced--life expectancy and birth rates--have fallen apart. A plan, that taxes labor to address old-age poverty, is still in-place when our old-age plan recipients are the wealthiest age cohort.

I'd go on--and I did read the post on your site--but let me offer a Democratic proposal. Let everyone opt to whatever plan they want. If workers want to stay 100% with FICA taxes and the SS benefit, let them stay. If workers want to opt out by 50% (or even by 100%), with proportionate reduction in SS benefits (benefits based on wages subject to FICA taxes), then let them choose to due so.

(I always wonder about the concept of choice that Democrats champion so proudly--it doesn't seem to cover anything other than abortion.)

Patrick R. Sullivan

"Patrick's facility with two dots and a ruler is unmatched.'

So, it's true. When your world ends, it goes out with a whimper.

Miracle Max

Forbes -- You didn't read carefully enough. Never said I would use FICA. I'd use income taxes and the estate tax. Maybe a securities transfer tax.

It's true SS is paternalistic. That's not a bug, it's a feature. It's to keep people from hectoring us in their old age after their investments in edible paper go south.

Letting people opt out undermines the insurance aspect, since those with less need (plus the foolhardy, as above) would opt out and reduce the redistributive capacity of the program. From an insurance standpoint, it's like somebody whose house did not burn down asking for a rebate on his fire insurance premiums. Once you've reached adulthood and are semi-conscious, you have some notion of your life chances. People of course make mistakes in this vein, but on average I believe -- but can't prove -- that they are more right than wrong. Those who rationally calculate little need for SS will opt out, leaving a system crippled by adverse risk selection.

Which is of course what some of you want. It's the "I got mine" creedo -- what made America great (not).

P -- you're a legend in your own mind.

In commemoration of the likely socialist victory today in the UK, cheerio.

Patrick R. Sullivan

"I'd use income taxes and the estate tax. Maybe a securities transfer tax."

Well, prior to JFK (the Prez, not the Pretender) we had incomes tax rates of up to 91%, and estate taxes that were sometimes over 100%, and everyone can see for themselves on my blog how much revenue that produced.

So, I guess you're thinking a securities transfer tax will bring in 12% of GDP without any offseting effect on your income and estate taxes. Three words: Surreality Based Community.

Joe Mealyus

MM: "Letting people opt out undermines the insurance aspect, since those with less need (plus the foolhardy, as above) would opt out and reduce the redistributive capacity of the program."

I'm obviously the only one, but I think that the most interesting aspect of Krugman's column and points like this is that two ideas are obviously being commingled - SS as insurance, and SS as income redistribution, or welfare - and it's difficult to avoid the nagging feeling that the first idea is merely a prop to bolster the second. Even to the point where both Krugman and Delong (in Slate) raise the idea of Bush plotting to destabilize SS by both increasing its welfare aspect and by making its welfare aspect simply more apparent. (Delong backs off this point, quite a bit).

It's as if the argument is "we need SS, not because it does anything (we like) that regular welfare doesn't do (provide "insurance" for being poor in your old age), but because we can make it popular."

I actually think there are things which make this sort of income distribution (to the elderly poor) a good idea, but I wonder if the lefties are really pursuing a winning strategy here. Is the majority of the middle class truly blind to the welfare aspect and the current level of welfarization? No matter how cleverly it's dressed up ("FDR" is just another tearful Indian surveying a littered highway), this may ultimately sink it at the polls. It seems to me especially telling that left-wing intellectuals aren't at all focused on selling the true virtues of SS (except Max, perhaps) to the public, but are focused on how to best avoid it.

Miracle Max

P -- to know how much either tax produced you would need a microsimulation tax model. Something tells me you don't have one.

Joe -- It is true you can find political arguments justifying a universal program for its anti-poverty impact, but there are also tons of commentary on the non-welfare functions of SS.

The option of so-called progressive indexing highlights the difference.

Patrick R. Sullivan

" to know how much either tax produced you would need a microsimulation tax model. Something tells me you don't have one."

No one has one that produces 30% of GDP, and you know it.

Max

P -- as usual you have no idea what you're talking about. A MS model can be calibrated to produce as much tax revenue -- on paper, of course -- as you like, among other uses. Also as usual, you dodged the question you were challenged on, which was the reliability of an estimate of the revenue effect of a given tax provision -- tax model v. whatever mud pies you have on your site.

Jeff

If only Bill Clinton could have had a third and fourth term we wouldn't be in this mess, right Jeff?

Actually, I am a huge Clinton critic. I thought he was a poor president and--watch closely, this is how you do it--sold out his values on the environment and the poor. (The kind of admission it seems only Andrew Sullivan has the courage to make on the right, despite Bush's incompetence.) But Clinton, whatever his failures, recognized that he had some responsibilities to leave the country in decent shape. Bush will leave a car wreck.

Forbes

Geez, Max, great ploy, dismiss my critique by saying I didn't read you closely enough. The fact that the FICA comment was inside parentheses is all anyone needs to see that the suggested implication came from me, and not you.

But I appreciate your honesty regarding the desire to significantly raise taxes for the fatherland. From a strict political perspective, and opposed to what you suggest many of "us" want, many of us don't want a paternalistic government--thank you very much. (I must be missing that page in my copy of the Constitution.) A one-size-fits-all solution that relies the argument of paternalism-as-a-feature for the foolhardy and the unconscious is wholly unconvincing.

Since you seem to admit that most of us make the right choices in life, why don't we design an old age welfare plan for the very few of us who are foolhardy and unconscious--rather than treating us all as if we were.

And why should adverse selection enter into any of this? Benefits are calculated on the basis of FICA wages, and have nothing to due with impoverishment. (Or do you have plan to change benefits, to go along with your tax hikes, as well?)

And in fact, the status quo--discouraging people from providing for their own retirement--encourages the exact mindset you decry: "I've got mine" Yeah, "I've got mine and I've spent mine, and now the government must provide for my well-being because that's the responsibility of a paternalistic government." Such an approach will encourage hectoring from the elderly, when the government takes on responsibilities (providing for one's own well-being) that are rightly that of the individual.

And your insurance arguments are even worse. Because there's no insurance--it's a life annuity, with no cash value and no death benefit, that only pays off upon reaching age 65 (soon to be 67). Such a product could only be sold with gun to your head, or government fiat.

Your fire insurance analogy is backwards. Fire insurance is a safety net against a specific, rare occurance, and not protection due to its certainty--as is the case with old-age and retirement. And as a home owner, I would find it unrealistic to buy insurance that covered fires only after age 65--and then it wouldn't pay for the value of the home destroyed, but rather, it supplied an annual amount equal to the rent of substantially inferior housing.

Something tells me that your plan, as an ardent socialist--after raising income taxes, wealth taxes, and best of all, securities transfer taxes--to turn the US into East Germany, won't find broad support, irrespective of your microsimulation model. Most people, having reached adulthood, recognize that the problem with socialism, is socialism, and not the idea that it would work only if smart Americans were in charge.

Cheers.

Harry Arthur

Jeff, it's the end of the world. In retrospect I don't think Clinton was so bad. I totally disagree that he "sold out his values on the environment and the poor". Welfare reform has certainly been very successful moving people from welfare to work and I can't see how you can fault him on the environment either. In fact, he had the potential to be a great president but for his zipper. I know Hillary Care was a flop but every president has one or two of those. At least he and the republican Congress managed to keep spending under control - a pointed criticism I have repeatedly made on this site about Bush, so you needn't have bothered with the "watch closely, this is how you do it" comment.

Forbes, couldn't agree more that my retirement is my responsibility and I should own it. I'd even be willing to compromise with the "nanny government" philosophy just a little if SS were mandated but privately owned. At least we'd have half a loaf. I'm still looking for the constitutional provision that provides for governmental responsibility for my retirement program. Must be in the tenth amendment somewhere since from what I can tell at least, no politician has ever read that one.

Miracle Max

Forbes -- East Germany, no, West Germany, si. Otherwise I'll leave you the last word(s).

Les Nessman

"East Germany, no, West Germany, si."

So you admit to wanting to turn the U.S. into West Germany? Yikes. No thanks.

Harry Arthur

M&M, West Germany? The best that can be said for their lagging economy is that they have more time off than we do. But that's the worst that can be said also as I would submit that their productivity is but a fraction of ours. I could also be wrong but it seems to me that their economy is barely growing if it's still growing at all which is also but a fraction of our growth. Their retirement demographics have got to be even more horrible than ours and I would be seriously surprised if our SS benefits are anything close to what are provided in Germany, West or East, meaning, of course, that they will have a much worse time paying for their retirement program than will we ...

Did I miss something?

Jeff

Okay, the Krugman dialogues continue. Anyone care to take factual issue with Paul's current piece? Anyone?

Miracle Max

United Germany, still absorbing the benighted East, has GDP per hour worked of 93% of the U.S. So it is a fraction. West Germany before unification would have been higher. Even now, they spend less on health care and live longer. (Doesn't everybody?)

They do have a bigger age problem than the U.S. (Most EU countries and Japan do.) Here's a report that I haven't read: http://www.oecd.org/document/33/0,2340,en_2825_293564_34824801_1_1_1_1,00.html

Forbes

GDP per hour? Give us a break with the perverse numbers. How about GDP per capita? Since Germans work about nine fewer weeks (1444 hours vs the US's 1815 hrs [OECD--2002]) per year, the gap is a bit larger than your description. They work less, have higher unemployment, have more on the public dole, higher taxes, create fewer jobs--yes, we should emulate a poorer performing economy, so we can have a lower standard of living. The challenge for EU countries is they need to emulate the US, and not the other way around, as we've been economically racing ahead for 25 years.

Though, different strokes for different folks, and some may prefer the trade-offs of the European social welfare state--and nothing is stopping you from moving there.

Paul Zrimsek

Note, Forbes, that Max was replying to Harry Arthur, who specifically claimed that German productivity is a fraction of that in the US. While GDP per hour may be a perverse number in some contexts, when you're talking about productivity it's pretty close to the same thing. Since productivity growth here in the US was an economic bright spot during Bush's first term, Harry might well be content to admit error on this one.

Harry Arthur

M&M, I didn't notice a comparison of our current rates of growth. I would think that would be a fairly good measure of future economic prospects.

You did mention the age problem. I'd suggest it's due to a combination of the "baby boom" happening after WWII and what I'll call the "non baby bust" of the last several decades. But then Europe has many immigrants now from various muslim countries so I guess they're fixing their age problems?

Also, don't think it's quite fair to compare the pre-unification West German economy to our current economy without at least attempting to norm for the ensuing world-wide recession and 9-11. Or did I take you out of context and were you actually comparing "then to then" and "now to now"?

Miracle Max

I don't have time to do the numbers, but the right way to compare growth rates would be over the business cycle, peak to peak. No doubt the U.S. is higher. How much is the question. How to incorporate population is a question. More people will raise GDP. Offhand I would say it's to a country's credit if more people want to get in.

GDP per capita runs afoul of differences in dependency rates (kids and elderly), hence the relevance of GDP per hour worked.

Europe's unemployment rates are needlessly high because of their tight-assed central bank policy, not only because of their welfare states.

Harry Arthur

Paul & M&M, I'm actually quite adept at admitting error. In this case I'll say what my kids say when they're wrong - "My bad".

Maybe I need to retake Econ 101. I guess you can grow productivity to a point, which would tend to hold down job growth even with a moderately growing economy. We sort of did that during the latest recession ourselves with our somewhat "jobless" recovery.

I am of the impression, however that our rate of growth is a multiple of Germany's and that our unemployment is a fraction, hence my observation that their economy is not one we'd be advised to emulate. Whether this will sustain over time and whether our business cycles are closely enough aligned to make a valid comparison is a fair question and your note about how to properly measure the comparisons is a valid concern. Apples vs apples?

M&M, you said "Europe's unemployment rates are needlessly high because of their tight-assed central bank policy, not only because of their welfare states." Probably, but I'd also suggest that their heavily unionized work force and arguably excessive regulation probably play a role as well.

My concern with Europe in general and Germany in particular, is their immigration is predominantly from Muslim countries. That should be good for their age problem but it seems that the immigrants are not assimilating into the population as is normally the case, thus boding ill for the future preservation of German culture and national identity. France and the Netherlands are in much worse shape. Nor does it appear they are even assuming some sort of "EU identity" which might be adequate if that were the case.

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