Editore"s Note
Tilting at Windmills

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October 23, 2003
By: Kevin Drum

SOCIAL INSECURITY, PART 2....Every once in a while I feel like writing a post titled "Myths of Social Security." Unfortunately, it would be about 10,000 words long, it would be really boring, and no one would read it anyway.

But sometimes I just can't help myself. Last week Megan McArdle wrote a column about Social Security that basically said it was underfunded and we ought to do something about it. No argument there. I don't have much patience for lengthy arguments about the "solvency" of the trust fund, but I certainly agree that over the long term Social Security needs to be properly funded.

On Tuesday, however, Megan followed up with a column that rehashes possibly the most tiresome conservative trope about Social Security ever invented: it's a Ponzi scheme. Unless we have a continuing influx of youngsters to fund all the old people, the system is doomed.

Megan quite correctly says that the basic problem with Social Security is that as the baby boomers retire they will suck up a larger and larger portion of our national wealth, but then mysteriously suggests that this trend will continue forever until finally Social Security falls "off the cliff into insolvency."

But here's the truth. The graph on the right is straight from the 2003 report of the Social Security trustees and it shows how much Social Security is projected to cost for the next 75 years. The answer is simple: today Social Security allocates about 4% of the total output of the country to retirees, this increases to about 7% over the next 30 years, and then it flattens out.

4% of GDP is not a huge sum, and neither is 7%. As a country, we could afford to spend 7% of GDP on our retirees today if we needed to, and in 30 years we'll be able to afford it even more easily. And if you prefer to think of it in terms of taxes, it means nothing more than gradually increasing the income cap on Social Security taxes from today's $80,000 to about $300,000 by 2035 (adjusted for inflation, of course). It's just not that big a deal.

I'm genuinely mystified by the legions of people who insist on perpetuating the myth of Social Security disaster. What's the point? They can read graphs as well as I can, and they must know perfectly well that long term funding of Social Security is not that difficult a problem. So why the apocalyptic rhetoric?

Apparently it's to scare everyone into thinking that we should scrap the whole idea of Social Security and move to private accounts. Megan makes a brave effort to wave her hands and claim that somehow it's OK to allocate 7% of GDP to retirees as long as it comes from mandatory investments in private accounts instead of from federal taxes, but this is nonsense. We can either afford to divert that much of our output to nonworking retirees or we can't. It doesn't really matter where it comes from.

(And her claim that mandatory accounts increase national savings is purest moonshine. Trading a $200 billion deficit for an extra $200 billion invested in the stock market does us no good at all. If it did, then we could have a real Ponzi scheme in which the feds crank up the printing presses and give us all a bunch of money to invest. By and by, we'd all be rich!)

Bottom line: starting around 2010 or so we need to begin raising the income cap on Social Security taxes. In addition, we may want to raise retirement ages and cut back modestly on benefits in other ways. But we don't need to do anything dramatic, and private accounts are mostly a matter of taste, not something that's likely to change this dynamic in any serious way. After all, once the system got cranked up you'd have workers putting money into private accounts and retirees all withdrawing from private accounts. Net investment: about zero.

The chart above is as simple and clear as it can be. Social Security funding is not that big a problem, expenditures flatten out rather than going off a cliff, and the entire system can be maintained with modest benefit cuts and a gradual increase in the income cap. The folks who pretend otherwise are just trying to scare you.

NOTE: Medicare is a different issue entirely, and a discussion for another day.

Kevin Drum 3:36 PM Permalink | Trackbacks

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