This Again?

Oy. Here comes The Washington Post lambasting Hillary Clinton for not proposing a plan to "fix" the solvency problem that Social Security will face, years from now, if a series of historically inaccurate projects turn out to be accurate, even while they say nothing about the Republican candidates who likewise have promoted no such solutions. Clinton's position, that she's not going to put anything on the table in the context of this political campaign, is eminently sensible. Nor, the phasing-out of the program itself aside, should one really rule anything out. The Post even includes bonus inaccuracy:

Because Social Security increases are pegged to wages, rather than inflation, economic growth alone won't solve the problem. Fiscal responsibility first is fine; fiscal responsibility only is an irresponsible dodge, as Ms. Clinton well knows.

This is just wrong. Social Security benefit increases are, indeed, partially tied to wage rates but it's still true that the faster the economy grows the more affordable promised benefits become. Indeed, that's the basic premise of pay-as-you-go financing of social insurance schemes. The relatively poor present borrows from the relatively rich future. All the Post would need to do is to look back at past SSA Trustees' Reports and they would see that when the economy grows faster, the outlook for Social Security's finances gets bigger. They would also see that if the SSA updated its projections of likely future productivity growth to reflect the post-1995 return to pre-1973 levels of high productivity growth, that the alleged financial problems would substantially diminish.

It may (or may not) turn out that, in fact, the economy does not grow fast enough to close the financing gap. But this isn't a logical fact about the nature of the program, it's a contingent hypothesis that the Post seems to be subscribing to even though its editorial writers don't appear to understand what the hypothesis is or how Social Security works.

Comments

the editorial page is under the control of fred hiatt, whose checks, in turn, are signed by donald graham, so in the end, i blame warren buffett for failing to convince katherine graham of the dangers of nepotism for this kind of ongoing post-ian idiocy.

Posted by howard | October 1, 2007 12:20 PM

It's also worth noting that the side effect of Bush administration policies, as Krugman has been documenting, has been to slow wage growth relative to GDP growth. The steady increase in share of producitivity growth going to capital holders is both unprecedented in the post-war period, but also poses a danger to SS.

Posted by jayackroyd | October 1, 2007 12:27 PM

Matt,

Anytime anyone raises the alleged Social Security "crisis", point them to this:
http://www.socsec.org/publications.asp?pubid=531

No one knows more about SS than he does--and, when anyone reads his recommendations, it becomes almost impossible for anyone to still maintain the "crisis" rhetoric. There could be a problem if nothing is done, like, ever; but the fixes, at some near point, are NOT hard to swallow.

Posted by Wendell | October 1, 2007 2:23 PM

I strongly suspect that the editorial was written by Robert Samuelson, whom the "Samuelson = 35 years until SS goes broke" time period is named after.

Posted by SLC | October 1, 2007 6:20 PM

While it is true that one's initial benefit on the day of retirement is tied to wage growth, subsequent increases during retirement are indexed only to inflation. So economic and productivity growth quite simply mitigate the costs of social security.

Posted by Bill | October 1, 2007 6:21 PM

Matt,

So what fever of misconception was Hillary's husband operating under when he said that Social Security needs fixin'?

Posted by Eric Lindholm | October 1, 2007 7:35 PM

According to the SSA trustees report, higher wage growth improves the actuarial deficit on a roughly 1-for-1 basis. With a 75-year deficit of 2 percent of payroll, that means that wage growth will need to be 2 percentage points above the 1.1 percent projected rate. The 1.1 percent rate is just about the same as the average since 1960. Who wants to argue that for the next 75 years we'll average 3.1 percent? Good luck.

The Post didn't say economic growth wouldn't help; all they said is that it's unrealistic to pin your hopes on it. Fiscal responsibility might increase long-term growth, but nowhere near enough to fix the problem without some other big policy steps. I'd be very surprised if you'd find a legitimate economist of any stripe who'd disagree with this.

Posted by Anon | October 1, 2007 8:11 PM

Max... Max...? Are you there Max???

Since Max has gone I guess someone else is going to have to say it for him. And Bruce Webb isn't here yet, so I will take a shot at it.

There is no Social Security crisis. The plan since '83 is to have all of us still working kick in an increased share of the tax burden so that the current rich folk can get an income tax break. This is called the Unified Budget. In exchange, future rich folk will get taxed more to pay it back. In even simpler terms: more FICA now to be repaid by more future income taxes.

Yeah, maybe it is stupid. But it hasn't been a bad plan for the wealthy of this country since '83. Since some of these folks and many of their heirs will be the ones who need to repay the debt, they want to renege on the 'pay it back' half of the deal. That is only natural. Those of us about to retire are incredibly stupid if we let them.

One useful aspect of this deal is it points out that Social Security can be paid from any sort of tax. We just chose back in '35 to tie it to wages. It can just as easily be funded by an estate tax or a sales tax on back scratchers. In '83 Greenspan et. al. said that starting about 2017 it will be partially funded with income tax revenue with most of it funded by pay as you go FICA. So be it.

Now the tricky part: 2041 is alleged to be the point in time when the FICA debt (the SS trust fund) incurred between 1983 and 2017 is completely paid back by the general fund via income taxes, corporate or personal. What happens then??? I tip my hat to Sawickey for this insight: we have a choice. Should the trust fund actually be depleted we can 1) just keep on paying a portion (about 25%) of the retiree obligation out of the general revenue or 2) income taxes are cut.

Max proposed and I concur: keep the deal in place and deal with it in 1941 should that in fact be the day of reckoning. The choice then is pay for the geezers or give everyone a tax cut. It is not raise everyone's taxes since that will start in 2017.

The point of this bullshit charade is to avoid the payback starting in 2017. Anyone who subscribes to paying more FICA into this situation is either a fool or a crook.

Posted by Nat | October 2, 2007 12:12 AM

Nat - while Max has foregone posting, we still have Bean Baker over at Beat the Press. And Max gave this Angrybear a new cave over at EconoSpeak. Yes, Dean and this Bear were also all over this WaPo silliness. But hat tip to Matt for his additional points.

Posted by pgl | October 2, 2007 8:54 AM