Comments on: US Social Security

By: Tracy

Tracy — Tue, 07 Dec 2004 08:53:37 +0000

Although I think finance is a topic worthy of study in itself, and often it is appropriate to think about things at the level of finance, I wonder if the discussion of the aging population problem spends too much time at the level of finance and not enough time at the level of things you can kick. When all the baby boomers have retired and us workers are supporting some ridiculous ratio of retired people, it’ll be food and housing and health-care and clothing and the like we’ll be consuming, not stocks and bonds. While we could do some storing of some physical things ahead of time, on the whole food and health-care need to be produced shortly before they’re consumed – I wouldn’t want to live mostly off dried and canned food and I can’t have a heart bypass now since my heart is perfectly healthy, even if we could tell for certain I will need one in 40 years time. And while houses and the like can be built ahead of time, they do need pretty constant maintenance over time which takes labour. So, barring the invention of Star Trek’s replicator, what we consume in the year 2024 will have a lot to do with what we produce in the year 2024 (and the few years before that). Increasing savings would presumably mean a higher capital stock and to the extent the savings fund increased successful R&D, higher knowledge and thus higher productivity. But, since the baby boomers are set to start retiring at about the same time around the developed world, surely the price of financial assets will just fall as as a larger proportion of the population is trying to sell than buy them? And whether the savings are held by government or private individuals won’t make a difference to that? I know the more sophisticated arguers for privatised accounts base them on private investors having more incentive to invest in income-producing things than the government and thus increasing the production each year in the future. But as far as I can tell, either workers or retired people will be enjoying a fall in their share of earnings, regardless of whether we save now or pay increased taxes in the future. Which implies that policies should be focussed around ensuring that there isn’t a fall in absolute incomes. In the case of NZ, breaking the link between wages and pensions is the obvious solution to the pensions problem. Don’t know about the US.

By: Jason McCullough

Jason McCullough — Mon, 06 Dec 2004 18:31:06 +0000

James, I’m not seeing it. Buying stock for retirement investment is laying claim to the production of tomorrow’s workers; so is a government generational transfer program.

By: james

james — Mon, 06 Dec 2004 16:51:29 +0000

Jason, The government (social security) buying government bonds is not the same as say GE buying government bonds. An IOU from yourself to yourself is very different than an IOU from yourself to someone else. Especially if you are the one we makes the laws concerning repayment. All the goverenment is doing is using ss taxes as revenue.

By: Jason McCullough

Jason McCullough — Mon, 06 Dec 2004 10:40:06 +0000

“Jason, you have a definitional problem if you define Social Security as part of the free market.” I don’t think I’m the one having definitional issues. Apparently buying a weighted cross-section of investment goods through a heavily regulated monosopy stock “market” by paying a significant toll both on entrance and staying in the market is a-ok, but doing the exact same thing at one-tenth the cost by buying government bonds is communist or something.

By: John Quiggin

John Quiggin — Mon, 06 Dec 2004 01:22:13 +0000

“You also note the different between the social risk premium v. private side (aka the Clinton idea). Besides an old paper by Kent Smetters on this score – what other literature addresses this important point?” Blows own trumpet Grant, S. and Quiggin, J. (2002), ‘The risk premium for equity: implications for the proposed diversification of the social security fund’, American Economic Review, 92(5), 1104–15.

By: Sebastian Holsclaw

Sebastian Holsclaw — Mon, 06 Dec 2004 00:12:07 +0000

Jason, you have a definitional problem if you define Social Security as part of the free market. Abb1, there are all sorts of programs where a huge section of the populace is ineligible. Take welfare in general, for instance. Even among Republicans, there isn’t a large constituency to eliminate it—though there was an appropriate push to encourage you not to live your whole life on the dole.

By: pgl

pgl — Sun, 05 Dec 2004 23:55:38 +0000

Very good throughout – and I especially liked the part where the higher expected return from stocks is offset by the extra risk COMBINED with the insightful (oft said by economists and never recognized by policymakers in the US) that individuals will shift their private accounts away from stock to bonds aka the “wash”. You also note the different between the social risk premium v. private side (aka the Clinton idea). Besides an old paper by Kent Smetters on this score – what other literature addresses this important point?

By: Jason McCullough

Jason McCullough — Sun, 05 Dec 2004 22:35:28 +0000

“Why should a poor or middle-class worker have their money diverted to older middle and upper-class workers?” Why should a worker be able to buy capital, and then used the increased output due to that capital’s to lay claim to younger worker’s production? The strange things “free market” people get up to these days.

By: Nicholas Weininger

Nicholas Weininger — Sun, 05 Dec 2004 19:26:53 +0000

How common, internationally, is the practice of indexing state old-age pensions to earnings growth rather than consumer price inflation?

By: abb1

abb1 — Sun, 05 Dec 2004 16:46:49 +0000

Why should a poor or middle-class worker have their money diverted to older middle and upper-class workers? How to kill a social program: 1. make the middle and upper-class ineligible 2. kill the rest.

By: Boffo

Boffo — Sun, 05 Dec 2004 15:44:23 +0000

Oops, correction to previous post (must proofread more carefully): intention does NOT mean outcome

By: Boffo

Boffo — Sun, 05 Dec 2004 15:41:17 +0000

Re: Bush in his second term While the truism is that presidents in their second term act with an eye on their historical legacy, as Giles says, intention does mean outcome. In other words, Bush may be more beholden to history than to the electorate, but who is beholden to him? Instead, presidents lack the leverage over Congress (not to mention other political actors) they enjoyed in their first term. This was quite clear, for example, during Reagan’s second term even before Iran-Contra further sapped his strength and the Dems regained the Senate. So what does this mean for Bush? I anticipate a scenario much like when Reagan announced that welfare reform would be a priority for his second term—the agenda was taken over by Congress. So, even more than what Bush would do with such a proposal, our focus ought to be what Hastert, Frist, House Ways and Means, and Senate Finance would do. As we’ve seen only weeks after the election with the intelligence bill, the balance of power seems already to be shifting.

By: fantazia

fantazia — Sun, 05 Dec 2004 14:27:09 +0000

Chickens, eggs, and not counting them before they are hatched, Brett. Government policy based on the Singularity solving everything is all very well, but where’s the harm in making the (admittedly flighty) assumption that we won’t be transcending into Godhood in the next two decades when planning our affairs?

By: Brett Bellmore

Brett Bellmore — Sun, 05 Dec 2004 14:17:58 +0000

I think it’s rather amusing to project government policy and demographic trends out two, three, or even four decades, without taking into account technological and medical progress. On the technological front, we have the prospect of some sort of self-reproducing technology causing the productivity curve to go briefly “vertical”, by decoupling industrial production from human labor. This could be in the form of widespread “lights out” manufacturing, or the more spectacular promise of molecular nanotechnology. Either way, the ratio of laborers to retirees becomes irrelevant, while the problems of social security are swamped by the question of what to do with all those healthy workers for whom no work can be found. Well, maybe they can be reeducated for more intellectual jobs; It’s beginning to look like education will be as capable of being automated as assembling widgits. On the medical front, we are finally begining to understand the underlying mechanisms of aging, and they look like they can be fixed. Much beyond a decade out, we can no longer take for granted the inevitability of people aging and becoming too decrepit to work. And once old doesn’t equal “unable to work for a living”, what justification remains for intergenerational income transfers? The elderly can work for their living, just like everybody else. Assuming everybody else isn’t unemployed because of countertop factories capable of manufacturing anything they’re given the design for, for pennies a pound. As I say, in an age of incredibly fast technological progress, it’s amazing to see how far out economists will try to push their models.

By: victor falk

victor falk — Sun, 05 Dec 2004 09:02:07 +0000

I think Sebastian makes an excellent point; in Sweden this is a known as the “general welfare principle”. The idea is that if everybody both gives some and gets some, then everybody will support the (Social-Democratic Workers’ Party’s) welfare state. Hence, even a Swedish millionaire gets benefits, such as children allowance, to the tune of thousands of euros a year… It seems to work pretty well; the overwhelming majority of people in Sweden are totally or partially dependent on the public sector for their income, and the social-democrats have been the government party since 1932, with only two brief spells in opposition, 1973-79 and 1991-94…