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November 23, 2004

Puzzling Out the Social Security Problems

Apparently I've discovered the secret to getting noticed: write one post about Social Security and its problems, and the world will beat a path to your weblog. Brad DeLong explains that my post regarding social security is not an analytical insight, while PGL is kind enough to suggest that my comment is not as bizarre as he might like to believe. (Of course, the down side to being noticed is that when the better-known bloggers don't understand your argument, you end up with a horde of people who assume you're a dumbass based on a misrepresentation of your argument, when all it would take is a cursory review of this site to discover plenty of areas to call me a dumbass without misrepresenting me.)

I believe I can now see the problem of social security: it's the young woman/old woman syndrome. Conservatives (yes, it's a huge oversimplification, but work with me) look at social security and see the IOUs coming due in 2017 and see a problem making good on those debts. Liberals look at social security and see the trust fund running out in 2042 and see a problem sustaining the program past that point. Both sides are correct from their point of view: DeLong is absolutely correct that social security itself is in no danger in 2017 as long as the government makes good on the bonds that will be needed to cover it at that time. On the other hand, I'm correct that the $52 billion (and climbing) that will require has to come from somewhere, and trying to fix that issue now will be less painful than putting off the problem. Because we're both looking at different problems, it's hardly surprising that we see different solutions.

The bottom line for me is pretty simple: every year the social security surplus shrinks. We're already deficit spending ourselves into a deep hole, and social security is a big part of the hole that we have, in effect, already dug. We just don't see the hole clearly yet, because we haven't reached it. In 2017, we'll hit the first part of it, as funding for social security will have to come from something in addition to payroll taxes. In 2042, the hole will be grossly apparent, as we won't even be able to sustain social security on the IOUs of previous generations. If we reform social security now, we can reduce the impact of those debts less painfully by reducing the financial outlays required of social security.

Look at it this way: consider the social security trust fund as a credit card. We've been collecting money to pay our social security bill for years, but instead of putting the money away for the day when we have to pay the bill, we've been spending it. That's allowed us to live above our means, but eventually we're going to have to pay back the money. Our options include: paying the money as it comes due, which means we're going to have to find a way to come up with the cash every year but also means we don't have to do anything until those first bills come due. We can default on the bills. We can start putting money away now so we've got at least a little set aside to pay those bills later. Or we can make a deal with the guys we owe money to allow us to pay it off over an extended period.

Right now, our government is plowing ahead towards option one: paying the bills as they come due. I'm not an economist, so I have no idea how long we can go on incurring larger levels of debt before our economy comes crashing down. I'm going to suggest that if we stay on the current glide path, though, that day will eventually come. Granted, if we don't fix a number of other problems, that day's going to come anyhow, but accounting for the social security debt is going to have to be part of the solution. This option might conceivably work if we were willing to shut down large parts of the federal government to cover our social security costs, but that's unlikely. We could also increase taxes, but that is both politically difficult and economically damaging. That doesn't mean that a tax increase won't be part of the solution, but if we can't fix the problem of spending too much, tax increases don't really do much for us.

Option two isn't a real option. We aren't going to default on the bonds, so the question becomes how are we going to pay them.

President Bush is looking at option three: start putting money aside to pay future social security obligations. This will still require us to cover current obligations, but by bringing in money from outside the current system (i.e., from investments rather than taxes), it does gradually ease the burden of taxes if (and this is a big if) the investments do bring in a good rate of return. Privatization of social security means dumping a lot of money into the investment market. I'm not sure that this wouldn't help to create some bubbles. My own objections to privatization I've already summarized, in any case.

Then there's option four, restructuring social security so that we don't have to pay out as much. If some means-testing were implemented with social security, payroll taxes would cover a larger fraction of benefit payments, requiring less of a burden on the general fund. This wouldn't eliminate our requirement to pay off those bonds (nor should it), but it could spread the burden over a longer period. We'd still need some combination of other solutions, but this would at least reduce the pain involved.

I don't know what the best solution is. But I do believe that we're better off trying to figure out how to fix the problem now than waiting until we have no choice.