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« Classiness, Pure Classiness, From Other Blogs. | WILLisms.com | Reform Thursday: Social Security- Chart Three. »

Answering Professor Bainbridge.

UCLA Corporate Law Professor Stephen Bainbridge, who says he is "open to persuasion (and remain ideologically inclined to favor private accounts)" asks some good questions about Social Security reform on his blog:

"1. Would we achieve significant actuarial improvements in the health of the Social Security system by (a) changing the method by which the benefits is calculated from being based on wages to one based on prices (see Tyler Cowen's post for details) and (b) increasing the retirement age? Social security was designed for an era in which most folks would live to receive benefits for months rather than years. Why not deal with that problem directly? (Glenn Reynolds has a solution that goes somewhat in the other direction.)"

1(a): Switching from wage indexing to price indexing would take care of a significant portion of the shortfalls. Understand, though, Social Security has not always been based on wage indexing, though. At one point benefits were based on price indexing. So there is not anything about wage or price indexing that is written in stone.

1(b): Increasing the retirement age would also solve a significant portion of the problem, but not all.

These fixes, both, are not permanent, however, nor are they necessarily the optimal choices.

First, prices may rise faster than wages some of the time, and vice-versa. In recent years, wages have risen faster than prices. That may not always be the case. Still, it is very LIKELY that wages will continue to outpace inflation, given recent history. Nonetheless, changing the way benefits are calculated is most susceptible to demagoguery by opponents of reform. They can claim that benefits will be cut, and at some level they would be correct. Changing the way benefits are calculated, however, with the addition of personal accounts, would be politically feasible as it would not reduce benefits. Price indexing plus personal accounts would simply shift some of the burden of paying out benefits away from the U.S. government and toward the market.

Second, life expectancy will continue to climb (is a 5,000-Year-Old Woman impossible?) and make an increase in the retirement age irrelevant several years from now. Eventually, to match the way Social Security started (with average life expectancy and the retirement age pegged at roughly the same number), we could see the retirement age at 75, 80, 90, or even 100. That just does not seem reasonable at all.

And can you imagine the politics of that? It would be a massacre at the polls for those who supported such ideas on their own as a way to fix the problem.

"2. If we can achieve significant savings and ensure the health of the system with the changes mentioned in # 1, is there a non-ideological reason for introducing private accounts? Even proponents of private accounts concede that the transition costs will require trillions of dollars of government borrowing. Do we conservatives really want revenge on FDR and the New Deal at that price? Personally, speaking as a small government fiscal conservative kind of guy, I'd give up personal accounts if any money thereby saved was spent on deficit reduction or, better yet, an income tax rate cut."

We can ensure significant savings, but the solutions proposed in #1 do not solve the entire problem over the long-term. Only personal accounts do that, by making the system self-sustaining. Changing the way benefits are calculated and raising the retirement age would be a mere temporary patch, as the 1983 reforms were. If we want to keep revisiting the issue of Social Security every 10 or 20 years, we can reform the system without personal accounts. If we want a solution that will endure, personal accounts are the only way to go.

On transition costs: As Alan Greenspan noted today in his testimony ( full-text here), and as has been stated time and time again by the President and other supporters of reform, the transition costs are already there. The government owes them no matter what. It's either less now or more later. Greenspan said as much today. The government will have to borrow quite a lot to fix the mess, either way. Doing it sooner rather than later is the best way to minimize those costs.

Here is just one exchange by Senator Bennett and Chairman Greenspan:

"SEN. BENNETT: ...if we do nothing, as some are suggesting, we've still got to find several trillion dollars of additional cash. And so when we say, gee, if we do the private accounts we're going to have to find some cash, that's a transition cost, the point is, if we don't do anything, we have to find some cash.

MR. GREENSPAN: It's the same cash."

As far as being willing to give up personal accounts for deficit reduction or an income tax rate cut goes, personal accounts would be, essentially, a tax cut. Rather than payroll taxes going directly into government coffers, the money would go toward creating personal wealth. Also, tax reform and Social Security reform are not mutually exclusive. Real tax reform comes next year, and will likely have greater success if Social Security reform passes this year.

And, over the long-term, introducing market forces into Social Security is the only way to address the fairly hefty portion of the federal budget deficit caused by Social Security. Afterall, most spending in the federal budget is entitlements, not discretionary spending. Cutting out pork, having a negative growth rate in discretionary spending, those measures are drops in the bucket when it comes to reducing the deficit. Social Security is one of the larger entitlements, and it will only continue to grow over the years, strangling the budget. Reforming the system with personal retirement accounts is the best way to reduce (or at least slow the growth of) deficits over the long-term.

Furthermore, the injection of otherwise socialized capital into the market will help the economy grow, increasing revenues to the government, with which it can take care of deficits.

"3. Why aren't conservatives talking about other entitlement programs, such as Medicare, which reportedly is scheduled to go broke long before Social Security does?"

Some people are talking about Medicare, but the point is well-taken that more people ought to be talking about it. Politics is just about making priorities. You don't decide not to fix Social Security because Medicare is broken, just like you don't ignore your broken arm just because you also have the flu. You don't not do something because something else needs attention. Sometimes you need to rack up some relatively easy wins first, before moving onto the most difficult problems. Mostly, in addressing why Social Security reform before Medicare reform, it's a matter of understanding the problems in and solutions for Social Security, while Medicare is not so simple.

Medicare reform is far more difficult, because the primary reason for its costs rising is the rapidly rising cost of health care. There is very little the government can do about that. In fact, much of the rise in medical costs are due to the miracles of science and medicine, which did not exist years ago. It is very difficult to project what kinds of medical procedures will exist in the future, because medicine is advancing to rapidly.

The solutions for Medicare are not as clear-cut as the solutions for Social Security. Because Medicare reform is more rife with jargon and technicalities, and there is no grassroots support behind changing the system, Republicans would first need to gain the public's trust on Social Security reform before tackling Medicare. The prescription drug benefit, over the next few years of implementation, ought to give seniors some reassurance that another round of reforms in Medicare would not hurt them.

If you think the opposition to Social Security reform is intense, just wait until Medicare reform comes up.

One last point, made by Bainbridge:

"...Greenspan supports creating private accounts, but believes that they will not contribute to ensuring the long-term solvency of the system."

This is not quite correct. Personal accounts alone will not ensure the long-term solvency of the system, if everything else is left the same, but once up-and-running, after the transition, they will be the only thing that can give the system permanent solvency. Greenspan made this point very clear, that "by themselves" the accounts do not create solvency. Any reform passed will not consist of personal accounts, alone.

Critics of reform would say, "well, you have to cut benefits, then." Yeah, of course. You slow the growth of benefit increases (or maybe even cut benefits) paid by the government, but the personal accounts more than make up for that cut. Critics like to harp on the "cut benefits" part of that, but for a retiree who cares exclusively about getting his checks, there will not only be no reduction in benefits, it is almost assured that the retiree under the reformed system will get far more than he would have under the current system.

Posted by Will Franklin · 16 February 2005 03:07 PM


I tried to find a relevant quote from an economist I heard recently on NPR (of all places) regarding Greenspan's comments to Congress on proceeding with reform, but cautiously because the market's reaction to the increase in government debt required during the change-over period is unknown. I haven't found the quote yet, but the gist of the economist's remarks was that the market has already priced the government's indebtedness for Social Security. The form of the debt, whether unfunded and unrecognized (as currently) or recognized (which is a by-product of reform), doesn't matter to the market because it sees through the form to the substance. Debt is debt.

His point was that economic theory suggests that the concern over increasing the national debt while the system is converted to one that borrows from the future to a pay-as-you go system is an economic non-issue (because the current figures for the national debt are so understated.) He said it a lot better than I am -- that's why I was looking for the quote!

Oh, by the way, he wasn't implying that Greenspan didn't know that. It's just that Greenspan knows that sometimes the market reacts to things irrationally (from an economic theory standpoint) in the short term.

Posted by: Mary Geddie at February 18, 2005 05:21 PM


I have seen those same comments numerous times. As you said, debt is debt. It's just a matter of either pretending it isn't there, or acknowledging it.

And good point on the market in the short term versus the long term. In the short term, the market may see a headline that says "Government To Borrow 700 billion Dollars Over Ten Years" and react somewhat negatively. But after that, it should be clear that: 1) this is not new or additional debt, rather it is more like "paying off the mortgage" early; 2) it is actually a step in the right direction regarding creating a more sane fiscal policy over the long haul.

The market likes fiscal sanity.

Posted by: Will Franklin at February 19, 2005 02:38 PM