TCS Daily


A Solution at the Stroke of a Pen

By Arnold Kling - April 27, 2006 12:00 AM

"'Mandatory spending' includes entitlement programs such as Social Security and Medicare, which are provided by law rather than through the annual appropriations process...Of course, all government spending can be changed through legislation, so no spending is really 'mandatory.'"
-- Greg Mankiw

Some problems are hard. Iran. Health care. Global warming. The proposed solutions to these problems typically are painful. People do not like painful solutions, and so little gets done. Perhaps this is for the best, given all of the uncertainties involved.

But there is one problem that is easy to solve. The specter of future entitlement shortfalls could be eliminated with the stroke of a pen.

The problem is that Social Security and Medicare payments are on course to rise to unprecedented levels as a percent of GDP. See this chart, which Harvard professor Greg Mankiw points to in his blog post mentioned above. The entitlement burden builds dramatically in the middle of this century, when people now in their 30's and early 40's reach the age at which they become eligible for Social Security and Medicare. This "retirement age," or the age of government dependency as I prefer to call it, has been overtaken by gains in longevity and a slowdown in birth rates. The ratio of elderly dependents to workers is going to rise, and that is going to cause a major financial crisis for entitlement programs as currently structured.

The solution, as I have argued for several years, is to raise the age of government dependency for workers now in their 30's and 40's. This is a painless solution, because (a) it does not affect anyone who currently receives our is counting on government entitlements and (b) it does not really affect people now in their 30's and 40's.

For people in their 30's and 40's today, the age of government dependency is only a promise. As of now, projected entitlement benefits to young workers are only promises that, under conservative assumptions, the government will be unable to meet. If the assumptions pan out, then the actual benefits that young workers receive when they finally retire probably will have to be reduced. It seems to me that young workers are no worse off if their promised benefits are reduced now (by raising the age of government dependency) than if their actual benefits are reduced when they reach their late 60's. In fact, they probably are better off knowing the score now, when they can do something to accumulate personal retirement accounts, then thirty years from now, when it is too late.

With the stroke of a pen, an increase in the age of government dependency for today's young workers would make Social Security and Medicare solvent. If longevity were to hold at current levels, then raising the age of government dependency to somewhere between 72 and 75 probably would eliminate most or all of the surge in entitlement spending projected for later this century. However, because longevity is likely to continue to increase, the age of government dependency needs to be indexed to longevity going forward.

Changing Our Minds

Part of me is optimistic that economic growth will speed up in the coming decades, so that entitlement spending will not be such an overwhelming burden. (See The Great Race.) If that forecast turns out to be true, we can always change our minds about the age of government dependency.

Suppose that we raise the age of government dependency for young workers, but economic growth takes off over the next twenty-five years. In that case, we could revise upward our promised benefits to today's young workers by letting them have the age of government dependency that is in force today. In other words, if economic circumstances warrant, we can make more generous promises to today's young workers.

For now, it seems that the most logical thing to do is to make promises to today's young workers that are consistent with what we expect to be able to afford, given conservative assumptions about economic growth. As the saying goes, it is better to under-promise and over-deliver than the other way around.

A Political Gun to Our Heads

There are some issues where the views I hold are outside the mainstream. However, among economists, both on the left and the right, essentially everyone who looks at entitlement spending agrees that it would be helpful and appropriate to raise the age of government dependency. Yet we are told that this simple, common-sense solution is politically impossible.

What I do not understand is this: what political constituency insists that today's young workers must be promised an unrealistically low age of government dependency? I do not know any young workers who are demanding it. I do not know any old workers for whom it should matter.

Future entitlement spending is a fiscal gun that is being held to our heads for no reason. With the stroke of a pen, we could get rid of the gun. Who are the interest groups that want to keep the gun to our heads, and why do they want it there?

Arnold Kling is a TCS Contributing Editor and author of Learning Economics.
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35 Comments

The constituency you're looking for...
Young black men. They already can expect to get screwed badly by Social Security, due to shorter average lifespan. The interesting question here though, is how the average lifespan of black men who reach 30 compares with whites, Hispanics, and Asians. If not as wide a difference as overall lifespans, your proposal might be palatable. BTW, I could definitely support race and gender based adjustments to either Social Security and Medicare taxes, dependency age, or benefits. That would be the quickest route to dismantling or at least reigning in this dinosaur system. White women would become a lot less liberal on the issue. ;-)

Not in our lifetime
Your concept is good -- In fact, when the social security act was past in 1935, the average life expectancy was about 62 so most people died before they could collect very much from the program. But changing the age for receipt of social security benifits -- or alowing people to invest part of their own money -- will never be implemeted so long as the "honorable" members of congress are more concerned with their own power base and getting re-elected than they are with the economy of the United States. Afterall -- they can always raise taxes on the "rich" or increase taxes on those evil businesses like Wal-Mart or Exxon-Mobile.

Old people want the unsustainable promises to create the illusion that their highway robbery of the
Yes, young people don't want the unsustainable promises. We've mostly written the program off. But old people are corrupted by getting the government's checks every month. They don't want anything to wake them up to the fact that their hurting their grandchildren.

And they're the ones who know the issue and care about it far more than anyone else.

We might actually be able to do something about this problem if it weren't for the soulless opportunism of the Democrats, though.

Just give me my money back
Raising the retirement age isn't a "promise". It's the "house" changing the stakes of the bet. The social security scheme is nothing more than a cynical lottery in which the "house" bets that a higher ratio of people paying into the system will die off before they can collect. It has served the house well until the average lifespan increased. This article is all about bringing the odds back into the house's favor.

Here's a better idea: Allow me to opt in or out, but give me back what I've put in so far and quit forcing me to bet in a crooked game! We all know we can get better returns privately, but we're forced to pony up a large percentage of our income against a "promise" that the house will pay off at odds they dictate IF we don't die before their deadline.

Government should not be in the business of this sick, morbid oddsmaking. If Government wants to mandate that every worker sets aside a portion of their income for retirement the same way States require driver insurance, fine. But the actual mangement of that money ought to be at the discretion of the worker, not Government.

And here I thought this was a conservative website.

It's not that simple.
We can't give everyone's money back, because a lot of it has been given to dead people already. And it doesn't seem fair to throw all the grandmothers out onto the street: even if they ARE getting money they didn't put in, the fact that cynical pols brainwashed them into think that they "earned" it is not entirely their fault. They'll vote for all they're worth against the policy you propose, and I think they're justified in doing so.

What they're not justified in is hanging this albatross around the necks of their children and grandchildren by objecting to any change in the system, even when it doesn't affect them.

Further
I'm in my mid-thirties. I've paid in the maximum rate for several years and I'd opt out at this point and let them keep what they've taken so far. In other words, I'd be willing to pay more than 100K to get out of this program.

Raise the age to 72... hell raise it to 80. It's all the same to me. I'm funding my own retirement. This is just another welfare program for people who can't plan for their own future.

skwilinski post
I see three separate issues here--and a possible solution:

Anybody can make a once-in-a-lifetime election to opt out of the Social Security system even now, so I'm not sure what Mr./Ms. Wilinski's point is. Nobody is stuck in the current system--that is a straw man argument advanced by people who would rather see the elderly left to the tender mercies of their children, or the sundry private or faith-based charitiy groups--groups that wouldn't have the resources to meet large-scale needs in any event.

Another issue concerns life expectancy. According to the Census Bureau, the life expectancy of men (especially black men) is significantly shorter than that of women (especially white women). Raise the retirement age and you'll start the mother of all race-and-gender wars.

A final issue concerns SocialSecurity Disability. Anyone can get sick or hurt unexpectedly. What are they supposed to do for money?

A while back, someone writing in the Wall Street Journal proposed an interesting solution: Index Social Security benefits to prices, rather than wages. I think this needs to be looked at more carefully.



But old people are corrupted ...
I am among the corrupted. I paid into the SS Ponzi scheme at the maximum rate for 36 years, because I had no choice but to do so. Those "contributions" provided for my parents SS benefits, at least in part, because they "contributed" to SS for fewer years. I am now on the receiving end; and, I have apparently become corrupted by receiving the benefits for which I paid dearly for 36 years.

If you want to talk about corruption, talk about the Ponzi scheme which has now begun to experience the fate of every previous Ponzi scheme. I realize that the SSA has no legal obligation to pay my benefits. I will admit to being nervous about relying on a "moral" obligation of an amoral entity.

The constituency you're looking for..
Survival is achieved through exerting physical effort at manipulating the material aspects of what is provided by nature. This is real work that yields a product or service exchangable in the marketplace. Eternally, there are those of the population that disdain actual work and contrive sundry occupations that do not involve real work, but rather the significance of work and other aspects of life. Rarely does the free market find use for significance workers especially those expecting to get paid regardless of the outcome of their ministrations. Only in the government can significance workers find employment albeit paid with taxes collected from working people and companies. Knowing that their career as significance manipulator does not exist in the broad market place outside of govenment and large corporations they seek to enshrine their perogatives of employment and sundry benefits as entitlements by law. The issue of entitlement becomes more acceptable if others can be gotten to see it not for the thievery that it is, an enforced redistribution from the productive to those who don't. Any and all who think "entitlement" is a valid concept is the constituency you are looking for.

Stop the SS Ponzi Scheme Now
Arnold made the very insightful comment that, "Future entitlement spending is a fiscal gun that is being held to our heads for no reason." I agree. However, rather than advocating removing this immoral gun from our head, Arnold advocates that we keep the immoral Ponzi-scheme of Social Security going by rearranging the deck chairs (i.e. increasing the retirement age) on this sinking Titanic.

I disagree with Arnold's proposition. Social Security was an immoral Marxist redistribution of wealth from its inception and it should be terminated now. I am retired and will soon be eligible for Social Security. This means that I am eligible to suck the life-blood of my children and grandchildren from their innocent bodies. This is a morally reprehensible prospect to me and should be to every honorable American. Terminate this monstrously immoral program before any more children and grandchildren are consumed by it.

I can opt out? How?
"Anybody can make a once-in-a-lifetime election to opt out of the Social Security system even now..."

I'd like to know how. I'll put in my papers today!

I personally think you're dead wrong, but I'm really hoping you're not.

citizenship?
Maybe renoucing your citizenship would get you out? I'm not sure. That's not really a good option though.

I suppose you could start a small business and simply not pay... :) You try that and let me know how it works for ya.

My impression is that it's 15.75% of the first 80 some thousand no matter what you do. The only people not paying are tax dodgers and people who recieve their income through capital gains and not wages.

This second option (capital gains) is severely limited. Try setting up an 'S' corp and see what the accountant says about it.

The constituency you're looking for...
I could be wrong, but I think Arnold was asking us to identify a particular constituency of young people who would be against his plan and would exert effort to shoot it down.

I'm Not So Sure
To the extent that congress perceives the unfunded social security liability as real debt, it may thwart their desire to add more benefits and increase taxes. I sort of like the restraint that the preception of debt imposes on them and I'm not sure relieving them of that burden would be a good thing.

Farmboy

opt out?
If you mean that you don't have to accept the SS checks that are sent to you, you are correct.

If you mean that you can decide to stop sending in SS checks, then you are very wrong. The only way to opt out is to get a job with one of the several agencies that congress exempted from SS.

As to relying on children? What's wrong with that? Do you think that most children hate their parents or something?

As to private charities. They would have lots more money if the govt didn't tax so much of it away. I remember back in the 80's, liberals claimed that charitable giving would collapse when Reagan cut the tax rates back. According to liberals, the only reason people gave as much as they did was for the tax write off. Instead of dropping, charitable giving exploded. People with more money, gave more of it to charities.

nope
Even non-citizens have to pay, so long as they work here in the US.

The cut off is somewhere around $94K.

People who work for state and local governments don't have to pay.

Entitlement Interest Groups
Which interest groups most oppose the idea of life span indexed benefits? Please name and list in order of intensity.

For one: The Democratic Party
Think of it: If we jacked up the retirement age to 70+, then most people would have to start saving for themselves if they wanted to retire earlier than that. That, in turn, will take them down the path toward personal financial independence and security via a strong individual emphasis, not a collective one.

THAT would be intolerable to the Dems. Remember, the main reason why SS has survived this long was because FDR was smart enough to frame it as an 'investment' funded by the working people (that's why the cap is in place), not a welfare program. The above scenario however, would destroy that little fiction for too many people out there. That would put the program into further political jeopardy when the next round of welfare reform comes along.

An additional reason why the Dems are a natural group to oppose this is purely emotional: It is one of their crown jewels that they identify with even today. And since that party these days is filled with activists who 'think' with their emotions more than with their brains, well...


Since most young folks don't believe SS will be there for them...
Since most young folks don't believe SS will be there for them, lets make it fair and encourage savings at the same time.

Change the "payroll tax" to 10%, but give everyone who makes less money than a Congressman a tax credit for every dollar put into a retirement account. Only fools and the "rich" will get taxed more to pay for those who can't work and everyone else will save enough to take care of themselves.

Opting Out
I took a tax course (in the 1970s) where we discussed preparing a form called 'Lifetime Election to Opt Out of Social Security' or something like that. Whether that's changed by now I'm not sure. I'll try to research it and I'll post back, probably on Monday.

Good Point

Not so Fast
We've got a while to go before the crisis is upon us. Let's just see if productivity will increase enough to make it a non-issue when the time comes. Perhaps there is a Deus Ex Machina in the offing, some miraculous technologies waiting around the corner that will dramatically increase the national income and the ability of the country to support its retired workers.

Good
Well put and to the point. Control of our money is what they are about. Much of SSI goes to "disabled people" which is one of the reasons it is so broke.
Take those people out of SSI and put them under a different government program that has a real budget and that would fix it. Politicians do not have the political courage to put disabled benefits as a budget item.
Under SSI alcholism, drug addiction, mental illness, and a host of other maladies are covered. Lawyers advertise to insure the needy they will assist them in getting their deserved benefits. What is wrong with this picture? The words lawyer and deserved stick out to me. "If you rob Peter to pay Paul, Paul will always be your advocate." We have too many Pauls.

One big problem with this proposal is The Coming Singularity
It will be but a few years before we are all endowed with the ability to live forever according to the gospel of The Coming Singularity.

So it will scarcely make any significant difference to raise the retirement age to a mere 72 or 75. Best to go right ahead and raise it to 175 for 30 to 40 year olds right now and then start raising it a further 100 years each decade so that by 2100 the retirement age will be set at 1,000 years old.

But on no account raise the retirement age for folks currently 57 years old, because I'm planning to happily collect for at least several hundred years. And I'll deserve every penny of it because I paid my FICA taxes dadgummit.

The unhappiest constituency
The only constituency you're going to be able to find is the disgruntled people who read right wing blogs like this and say "Ain't it awful!" If you haven't noticed, the president's proposals to "reform" Social Security are now dead in the water. Why? An overwhelming majority of Americans don't want to see this portion of their retirements stolen-- as their pensions were.

So then, how to keep everyone happy? Easy. Make payroll taxes optional.

If you elect not to participate, you don't have to. Thus none of your hard earned money goes to support (insert your favorite swear words here-- welfare sluggards, communists, wetbacks, whatever).

If you do want to participate, the only tweaking the current system will ever need is to keep the lock box locked. No federal borrowing. At all. Never. Then the SS and Medicare administrations can fund retirements, medical assistance and survivors' benefits out of the money in the cash box.

This could help save Social Security (JOBS)
Many say we will see $3.50/gal this summer. If you factor in Iran, who knows how high it could go. Everyone knows America MUST get off the oil. After September 11, 2001 I expected our President to call on Americans to GET OFF THE OIL. I was expecting a speech like the one JFK gave that motivated us to reach for the moon. As you know, this never happened. Eventually I realized that the only way this is going to happen is for us to do it ourselves. To that end I created this idea and have been trying to make it a reality..

The EPA is offering a research grant opportunity that I believe is a perfect fit for this idea. I have sent an e-mail to a hand picked list of university professors who have experience with government research projects. I’m looking to form a research team to apply for the EPA grant, conduct a social-economic experiment and surveys to determine to what extent the American public will support it, project the economic potential of WPH, and identify logistical, social and political obstacles as well as opportunities.

All government grants are awarded based on merit of the proposed research. I believe WPH has merit but your help is needed to verify it. You can help by posting your feedback. Let the professors and the EPA know what you think about WPH. Do you think this idea is worth pursuing? We need to know if Americans will support a plan like this.

Do you have any ideas to improve the plan?

Share any and all of your thoughts.

Tell your friends and family about this Blog post and ask them to post their thoughts on WPH

http://wepayhalf.org

Thank you

Craig

Not how it works
If a great many people opted out of SS, it would not be able to support current retirees.

There is no "lock box". Never was. Never, in reality, could be. The government spends the SS surplus because it must. There is nothing else it can do with it.

When you hear such words as "trust fund" and "lock box" bandied about with regard to SS, know that these are fictions constructed by politicians to connect with gullible and ignorant constituents who think that government finance is somehow similar to their own household budgeting and dispersal process.

You comments betray a lack of familiarity with the system or with economics in general.

Thank you Ms. Rand
When you grow up, you will find that life isn't nearly so neatly packaged.

The party line on Social Security
"You comments betray a lack of familiarity with the system or with economics in general."

Dear nameless, I would respond that yours illustrate the proof of the saying that if you repeat something often enough, people will begin to think it's true. Your analysis is doctrinaire, and wrong.

The fate of the lock box was decided in Congress at the beginning of the nineties. The "fiscal responsibles" felt that the moneys dedicated to maintenance of the Fund should be retired, to serve no function until the day they were needed for disbursements. They called this bokkeeping entity where the funds resided a "lock box".

The "big spenders" were eying this huge sum hungrily. Not forming a part of the General Fund, it was exempt from spending. But if the lock box were picked, all these funds could silently be spent on pork barrel projects and wars of choice. And taxes would not have to be raised one iota.

If you didn't look to closely at the details, no one would notice. After all, the money was just being borrowed temporarily, until its owners had need of it. Bankers do this all the time. Who could possibly object.

Now, starting around 2019, the federal government will have to begin putting those borrowed funds back in, as outlays will at that point begin to exceed income. Will it be painful? You bet. But it will be necessary, to avoid the revolution that would occur if the depositors found out that their funds had been stolen by the directors.

An easy fix
Right, we just get off the oil. We could start by walking to work.

How many miles do you live from your workplace? Couldn't you just get up a little earlier each morning? And food. Certainly there must be locally grown food you could live on. Maybe there are local beef producers who could sell you a steer to butcher and drag home.

I think we are dependent on transportation, and the internal combustion engine is the prevailing model. But if that becomes no longer feasible we could make the switch to bicycles, and would no longer even have to control Iraq. Much less find a route that we could pedal there.

Sorry, no
That is just not how it all works. The government is not a private corporation with a board of directors. It is a unique institution and there can be no accurate analogy drawn with private financial entities.

The government is the SOURCE of money. They can't just hide it in a back room somewhere - that would be no different than simply contracting the money supply. They can't put it in a bank, that would be no different than expanding the money supply, with a subsequent contraction when the money was withdrawn. They can't invest it in stocks and bonds, we don't allow the government to own private corportations in this country for good reasons. The government must spend every penny it has because not to do so changes the fundamental definition of what that penny represents.

The government is fundamentally different from a private individual. They are the SOURCE. The only reality the "lockbox" concept had was that the money would be used to retire public debt. That's about $7 trillion. The looming entitlements liability is some $50 trillion or more. Once you pay off the $7 trillion, then what?

Furthermore, the problem with that scenario is that it would lead to a contraction in the economy and, the only hope we have for meeting our future liabilities is an explosive growth in productivity generated by a rapidly expanding economy. Fortunately for us, that productivity boost DOES appear to be occurring.

You have fallen into the parochial trap of equating money with wealth. Money is merely a way of distributing and apportioning the wealth of society. Wealth creation is, therefore, the fundamental imperative for creating a prosperous society. It doesn't matter if the government's books are balanced, it only matters that the national income is outpacing debt accumulation. Anything that stands in the way of wealth creation is bad penny-wise-and-pound-foolish policy.

AARP for another

Economics lesson
I can only guess that you're being intentionally obtuse. To put payroll taxes away in a lock box until we need the cash is retiring the money, not expanding the money supply. When we borrow and then spend it, we increase the amount of money in circulation.

And I'm of the opinion that we have expanded the money supply by too much already, both in the sphere of easy consumer credit and rampant deficit spending. That's why those senators still having their wits about them back in 1991 or so tried to sway the crowd toward keeping the money unspent. They knew their colleagues too well.

However I do think I ken your method of wealth creation. If a banker takes in one dollar and then lends six, he has created five dollars of wealth. It's this kind of thinking that may have doomed our national savings account.

When the rubes get mad enough, they'll come at you folks with pitchforks. Unless you figure out a way to get their wealth back to them by the due date.

Wealth Creation 101
What you're hoping will happen is that you can fling some business school sand in my face, and the economics jargon will so baffle me as to convince me I'm too dumb to understand such things... so I'll go away.

But it's all very much simpler than that. Follow the money.

First it comes out of someone's paycheck. He doesn't mind because he thinks it's going toward our collective retirement plan. But it only pauses for a nanosecond in the SS Trust Fund, before it gets plucked out for immediate use.

It likely gets funneled into one of those cost-plus, no-bid, open-ended military procurement contracts so beloved by the people who really run the government. So it ends up in Halliburton's hands, and thus into the Vice President's own pocket. He is, of course, still getting fully comped by Halliburton for his extraordinary services.

See? Economics isn't so hard when you keep your eye on the pea and not on the shells.

I apologize
...for imagining that I was communicating with a rational human being.

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