Strengthening Constitutional Self-Government

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Intelligent Design

I thought commenter Eric made an interesting point that is worth quoting at length.  He said:

Means testing social security seems a good idea on the surface. But isn't it ultimately rewarding bad behavior? And haven't we learned that rewarding bad behavior is not a good long term policy?

There are certain harsh realities to life. Is it possible that "people have to take care of themselves" is one of these realities?. Wishing it wasn't this way will not change it if it is.

I think there is one sense in which Eric is right.  There is a way to design means-testing in a way that promote undesirable behavior.  If Social Security benefits were designed to be paid based on assets and cash at the time of retirement, such a means-testing system would clearly and strongly encourage people in their forties and fifties to minimize their income and consume rather than save and invest.  Higher earners would be able to have the purchasing power of the wealthy (since they would be turning more of their income into consumption) for most of their lives and a government-guaranteed retirement.  A means-testing program in which benefits were means-tested to lifetime earnings would actually encourage greater saving and investment from high earners.  A working life of upper middle-class lifestyle would only lead to a retirement of upper middle-class lifestyle if high earners save and invest.

Those who were lifetime low earners would get the "full" Social Security benefit but they would still have to work on the books to get the benefit.  It is possible that low earners might work a little less than otherwise (though the incentive would be no greater than now for the vast majority) and save less in the expectation of the Social Security benefit, but let's put it in perspective: their reward for a working life of less-than-upper-middle-class purchasing power would be a retirement of less-than-upper-middle-class purchasing power.  I'm not sweating the work incentives.

There are major work incentive impacts to not imposing some combination of means-testing and higher retirement ages to Social Security.  The alternative of funding the existing system through taxes would mean some combination of higher payroll taxes on low and middle-income earners and applying the payroll tax to earnings above the current cap in order to give upper income retirees money they wouldn't need under a better designed system.  Higher payroll taxes on low earners would tend to push low earners out of the formal economy and into off the books labor.  Applying payroll taxes to earning above the Social Security cap would, combined with the forthcoming rise in income taxes for high earners and state taxes, push the effective marginal income tax for high earners well over 50% - which would really discourage work and investment.  So you hurt low-income workers and hurt the overall economy in order to supplement the income of upper middle-class retirees.  Makes sense to me. 

Another way to go about it is to say no (or almost no) Social Security for anybody.  The problem is that we seem to have a broad consensus against dealing with the exigencies of (ever longer) old age through rugged individualism (or rugged individualism plus family if you have any, plus charity.)  That is why even more radical-sounding conservatives like Sharron Angle only argue for partially converting Social Security into a program of forced savings and investment rather than just leaving old people on their own.

The practical and political problems of means-testing are among the reasons I think that policy design and policy explanation is as important as the right general principles.  It isn't enough to be in favor of "means-testing" or "privatizing."  These kinds of reforms can be destructive if they are designed poorly.  Supporters of such policies will need specific and concise answers to the obvious objections that will come from opponents, as well as explanations for the disasters that await us if reforms are not implemented 


Categories > Politics

Discussions - 13 Comments

Everyone thinks they are paying into Social Security in order to have a retirement benefit. That's the "deal." Of course, that is a lie, (because Congress spends the money as soon as it comes in) but it is the promise and why politicians are afraid to touch the problem presented by the fact that the system as retirement benefit is a lie. What you guys are proposing is simply welfare for the old via Social Security. Yet offering welfare for the old is an unpleasant idea -- which is why people pay, thinking they are getting an old-age benefit that they have earned. It was supposed to be a program of forced savings and investment, wasn't it? That it isn't is scarcely the fault of those who paid in.

As to Eric's comments, I have one hard question. Poverty is not necessarily the result of bad behavior, is it? I agree that it can be, but do not think that it always is.

Social Security has survived quite nicely for 70 years without means-testing. Means-testing does not address the problems induced in the system by demographic factors and generates perverse incentives. You could count Social Security benefits as taxable income. This would assume you had a defensible income tax code, which in this country is an eschatological concept.

It is an income transfer program and has been since its inception. That is not an unpleasant idea. The eligibility requirements ensure it does not have the ill-effects of means-tested programs for the working-aged.

This book is a must-read on the topic; Regnery is planning to publish it again this winter, I think:

Social Security and Medicare are popular precisely because they are NOT means-tested. Once some people are eligible and others not (based on income), it becomes just another welfare giveaway in the minds of most middle class people. In short, means-testing is a good way to "evaporate" these programs (perhaps that is the underlying motive?). I think what is really needed is some fiscal discipline on the part of Congress (an oxymoron, perhaps).

Kate is correct; there are many routes to poverty, as I mentioned in another thread. Illness, misfortune, and low intelligence are just a few of the causes behind poverty, and none are necessarily related to sloth. Nonetheless, any system of welfare that can't distinguish between these causes will attract too many free-riders and will ultimately collapse. That's just the nature of Man.

AD, I see what you mean.

The Social Security Act (Act of August 14, 1935) [H. R. 7260]

An act to provide for the general welfare by establishing a system of Federal old-age benefits, and by enabling the several States to make more adequate provision for aged persons, blind persons, dependent and crippled children, maternal and child welfare, public health, and the administration of their unemployment compensation laws; to establish a Social Security Board; to raise revenue; and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

As I am reading through the original provisions, the program must have been over-extended from the beginning. Was there any point in time when it was actuarially sound? I have read or been told over the years, "It might have worked if only they had not...." done any number of things that they did subsequent to the original act. How was this ever going to work.

Craig, reading the blurbs about that book, I have also read the same sort of thing for my whole adult life. At a luncheon featuring a debate between a couple of economists, one liberal and the other conservative, I asked a carefully phrased question about the demographics of SS that I can no longer recall and both agreed that it was politically impossible that there will not be "something" for the aged in years to come. Of course that is true: democracy will demand it. "Something" will be done, claimed the liberal guy, as I expect the authors of the "must-read" book also claim.

"How was this ever going to work." should have been a question, although it is probably rhetorical.

We do not face, as does most of Europe and portions of the Far East, policy dilemmas which arise from reproduction below replacement level. The largest American birth cohort on record came into the world in 2007. We face problems from the improvement in the life expectancy of the working-aged population. If your retirement age is on an escalator sufficiently rapid that the ratio of your retired population to your working population is static, we can make this work. The problem is not complicated. The general retirement age is on an escalator now, it is just that the pace is not quite rapid enough.

Hilarious Title,

Craig is right, social security is solvent, all these problems are long run problems.

It strikes me that one take on "Objectivity" isn't to vary your views politically on the basis of "left" "right" but to examine philosophically the idea of time horizons and future projections.

In this world of short term focus you concede that social security is fine, and that global warming is unlikely to occur.

I think folks who believe in global warming should also believe that social security is doomed! In addition you should also believe in global darkening, since as we have left the summer months there is a clear trend towards loosing daylight.

After all 2010 has been the hottest year on record and until recently social security had built up a string of cash deficits going back to 2009. This was the first time social security faced this situation since 1987, and given the mild recovery it is no longer in this situation.(But Chicken Little and Mr. LongRun act as if it is a crisis.) Technically Social Security faced a similar situation in 1983 which is why liberal economists point out that Reagan cut taxes on the rich and raised them on the poor.

The Social Security Tax base makes it a flat/ regressive tax depending on if your income exceeds $106,800. It is flat at 6.2(12.4 counting employer and CBO)

Means testing makes some sense especially on the Republican side as an alternative to raising the tax base(106,800) on social security.

Congress actually spends money somewhat independently on when it comes in, but it is true that congress has in the past spent a great deal of the money that came in to social security.

Over its history social security has paid in more than it has paid out, an interesting excercise would be to step back and figure out how much congress really owes social security, say by charging it the ten year treasury price. Alternatively for times when social security is in the red bill it at the 10 year treasury rate.

This would actually mean that for a good chunk of the Reagan years when social security was in the black you would have average about 10% return on your Social Security. That 10 year treasury back in the 80's got pretty high at near 16%!

But what does it mean that right now we are at 2.5%?
I think it actually means that right now is a good time to take a social security tax vacation. To my way of thinking it is ridiculous for anyone to pay any taxes at this level, and the first tax to go should be the one that is most regressive and that burdens employers and helps keep unemployment up at around 9%.

We don't have to worry about Social Security solvency, because Social Security is only as solvent as the federal government, and we don't have to worry about federal government solvency because the ten year treasury is 2.5%.

If it was up to me I wouldn't worry the least bit about the monthly payouts vs. incoming. sure they went negative for a bit during the recession, but social security is back to being solvent right now. At some point we will raise the tax base on social security and solve the problem, but if anything right now is a time to lower the tax base and slash the rate.

Employers shouldn't be taxed for hiring workers, or paying them a decent wage. It is a powerfully regressive tax that is partially responsible for the widening gap between rich and poor since Reagan.

Think about it this way, most small businesses when they go out to get a loan pay anywhere from 9-17% for working capital, this puts them in a very difficult inventory management position. The inventory that is easiest to manage and account for is variable cost(employment).

You are basically taxing employers who have to borrow money at easily upwards of 10%, because you are scared of a deficit you have to pay 2.5% on.

It isn't just small businesses but individuals as well, most americans have considerable debt at a rate well above 2.5%. A Social Security Tax break would be ideal.

Social Security is completly solvent the question is why?

If at some point you are really worried that social security has been underfunded by the payroll tax, you can always bring it back online, means test it +raise the tax base, preferably when you are worried that we are in a bubble bellow NAIRU, say 3% unemployment and the 10 year treasury is around 8%.

That is while legally there might be a slightly greater sense of causality involving the long run CBO numbers and deficit, I am persuaded that the politics can be more malleable. Taxes can be raised and bennefits slashed when inflation is a concern, and when the governments cost of borrowing is higher.

Forgive me for sounding like the heckler who later on this winter will look at the thermostat in and scoff at global warming(while the official data will make 2010 the hottest year on record.)

But, the ten year treasury yield tells me that we aren't borrowing enough money, which means we are underspending and overtaxing. We are underspending by trimming police and teachers, and government infrastructure that almost certainly has well over a 2.5% ROI. As with Global Warming the long term scare tactic on Social Security may or may not be a farce, but the past and present certainly indicate solvency. In fact I see Social Security as too solvent(akin in part to saying that I think the efforts spent on the Volt and Tesla, and other environmental subsidies represent some level of over-investment in the thesis.)

Social Security is as a flat tax that is also regressive and that really hammers small business, hampers consumer spending and is great for ensuring we don't go under NAIRU (which presently should be something of a joke). I am not really a new keyensian but guys like Krugman and Christina and David Romer, and Robert Reich make strong arguments if you are looking at my map. The bottom line is that in the present and short term the government is underspending and overtaxing.

Social Security is currently too solvent, the tax should be eliminated.

Kate, one alternative is a non-means-tested program in which upper-middle-class workers are taxed at punishing rates during their working lives for the privilege of receiving benefits at the current levels upon retirement and/or having more low earners pushed out of the formal labor market through higher taxes with reduced career prospects later in life. All of this to supplement the income of future retirees who would have greater incentive to save and invest under a different system. It is quite twisted when you think of the consequences of maintaining the current system through higher taxes.

It does beg the question of what high earners would get out of Social Security. Well by applying the progressive price indexing to high earners (where their benefits would be calculated by increases in prices rather than wages), the high earners would still get some benefits, just less than they are currently promised. In return they pay fewer taxes now. They also get Social Security as a form of social insurance. Just because you are a high earner now doesn't necessity mean that your average lifetime earnings will be that high. Anything from family trouble, technological change or a professional mistake (among other possibilities) could bring down your average lifetime earnings. Even under the PPI-for high-earners version of means-testing, Social Security is a hedge against misfortune. PPI doesn't solve the funding problem in Social Security by itself, but combined with increases in retirement age (itself a complicated problem) the revenue should go a long way. There are also other programs of forced saving that can be looked at.

Craig, I'm glad to see that Weisbrot could take some time off from Hugo Chavez apologetics to talk about entitlements.

I've tried to find Dean's work on Social Security and it isn't impressive. As best as I can tell he seems to be acting as a con artist yelling "trust fund" to cover up the reality that the funding shortfall in Social Security will have to somehow be paid out of the general fund.

People plan for retirement (now) including their Social Security income -- what their government has promised them based on what they put in the fund, which is "a system of Federal old-age benefits." Of course, the problem is modern medicine and an excess of success in keeping people alive. Given that, those people who voluntarily put off retirement are fortunate to be able to do so. Perhaps the retirement age ought to be adjusted for increases in healthy longevity in a similar way that payouts are adjusted to inflation? However what does what do to people employed by businesses with mandatory retirement ages of 65 or so? Or what does the lack of income do to people who have built their retirement planning expecting that income? I think that falls in the realm of "bad things that happen to people".

My question to the economists I had in front of me had to do with slower growth in the US economy and the likelihood of the Fed using inflation to reduce the national debt resulting from the "stimulus" bills. Among the bad things that happen to people are the setbacks to pensions and retirement accounts of the last couple of years. Most people have been clobbered and their plans are in disarray and sometimes even gone or nearly so. People whose investments were in real estate have been hit, as well. Funny, but not funny, people who are investing in gold right now are going to be hurt if the economy comes back and those prices fall. They might get hurt anyway by the legislation of gold sellers that is -- bizarrely -- in the Health Care Bill.

Pete, the proposals you offer seem to me to do the opposite of what Eric said, as in they look likely to punish good behavior. Poor planning for retirement gets to have the status quo. Good planning will become poor planning since part of the plan those people paid for will go away -- for them.

Raising the retirement age will help and I get students at the CC who are retraining in their 50s and early 60s to be able to work with their minds instead of their aging bodies. Many of the guys I know who teach at technical colleges or in those fields used to do what they now teach - auto mechanics and electrical work, plumbing, tings like that. They do not expect to be able to retire. Neither can they expect to be allowed not to retire -- somebody still has to pay for health insurance and it is going to be expensive keeping us all alive and working as we get older. Really. No matter what we do.

The payout of Social Security benefits has been bout 4-5% of domestic product for a generation now. About a third is disbursed to those receiving disability and survivors benefits, so old age benefits generally sum to 3% of domestic product. The payroll taxes financing them apply only to income from wages, salaries, and commissions. At one time, and I think still, wage and salary income above a referent value was dispensed from taxation. It is not wretchedly injurious to the affluent.

It might improve overall levels of utility to have a portable pension program supplemented with a negative income tax. The thing is, we have many more severe and acute problems than the challenge of designing the optimal scheme for supporting the aged. Social Security as is presents an uncomplicated problem which can be dealt with with a single modest piece of legislation. The architecture of financial regulation, healing the labor market, and the finance of medical and nursing care are much more challenging.

AD, the current Social Security cap is 106,800. I believe that I have read somewhere that eliminating the cap would address most of the funding shortfall but as far as I could tell, it would raise effective marginal income tax rates for higher earners from over 41 (for those now at the 28% bracket) percent to over 55% (once the Bush tax cuts for high earners are phased out) for others. am including the Medicare payroll tax in these calculations. And that is before state taxes. You could increase the payroll tax somewhat on middle and lower earners and only partially lift the cap on high earners but I don't think low and middle-earners need to pay higher payroll taxes so that higher earners don't have their benefits indexed differently.

I'm not sure how to increase the retirement ages for most workers in such a way that people who work very physical jobs and with low to moderate lifetime earnings can retire somewhat earlier, but some wonks probably have some ideas. If I was a conservative politician who was serious about addressing the revenue shortfall in Social Security in an equitable and politically prudent way that did not require sustained tax increases, I would be talking to them.

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