Economics, Entitlements

More Social Security, not less?

Image Credit: DonkeyHotey (Flickr) (CC BY 2.0)

Image Credit: DonkeyHotey (Flickr) (CC BY 2.0)

Josh Barro’s Bloomberg piece arguing “Don’t Cut Social Security, Expand It” has attracted some attention on the web, including a nice discussion from Reihan Salam here.

In short, Josh argues that a) Americans are undersaving for retirement; b) private pensions aren’t likely to make up the differences; so c) we should think about expanding Social Security benefits rather than drawing them back.

I’m not a strong believer that there’s a true crisis in retirement saving. While every study involves a lot of projections and what-ifs, this paper from SSA projects that among the Gen-X age group, only around one quarter will have a retirement income equal to less than 75% of their inflation-adjusted pre-retirement earnings, while 44% of retirees will have a higher real income in retirement than when they were working. Are there shortfalls among some individuals? Sure. But, as I showed here, working only one additional year on average would raise average replacement rates by around seven percentage points, enough to address a good chunk of the problem.

I also think a lot can be done to improve private pensions to help people save more. For all the problems 401(k)s and other DC pensions have, they can be fixed – such as through automatic enrollment, use of low-cost index funds, default investment in life cycle portfolios, and the encouragement of annuitization.

So where does this leave the “more Social Security, not less” question? I’d consider three points.

First, while Josh rightly states that Social Security is efficient in the narrow sense of administrative costs, it also imposes a big drag on the economy. For instance, good-government types often complain about America’s low saving rate, but what is it exactly that most people save for? Retirement. And it’s widely agreed that the expectation of future Social Security benefits displaces saving today; the only question is by how much. Social Security owes about $20 trillion in benefits that have been earned but not yet paid out, while the entire non-residential capital stock of the US is around $40 trillion. Around 60% of that is owed to people with earnings above the median, that is, the-Americans-formerly-known-as-savers. If the average return to capital is around 8%, that amount – if actually saved rather than “saved” through Social Security – would throw off around $960 billion in extra GDP per year and roughly one-quarter that amount in federal tax revenues.

Likewise, we wonder why Americans retire younger than they used to, as if Social Security offering benefits at 62 and imposing a big effective tax on workers who delay retirement isn’t a factor. To the degree we expand Social Security, we almost certainly shrink private saving and exacerbate the unhelpful behavioral incentives embedded in the current program.

What about Josh’s idea to cut Medicare to increase Social Security? I’d actually do the opposite. Consider this: what am I going to do if you reduce my future Social Security benefits? Very likely I’d work more, retire later, and save more in my 401(k). In other words, there are easily available substitutes to Social Security, all of which have the helpful byproduct of increasing economic growth. How about if you cut my Medicare, say, by reducing reimbursement rates for health care providers? I could top off doctors’ reimbursements out of my own pocket, except that’s illegal. I could set aside more money while working to cover health care in retirement, except that health costs are so variable that personal saving is a really inefficient way to do it. It’s simply much easier to substitute private saving for Social Security benefits than for Medicare benefits, which tells me that Social Security reform should fall particularly heavy on the benefits side in order to generate some breathing space for Medicare.

All that said, I’ve got three words for Josh’s idea for supplemental private retirement savings on top of Social Security: Do. It. Now. (We might have done it yesterday, had it not been for the opposition of people who favored only accounts carved out of Social Security. Like me. What can I say? Sorry.) Supplemental private pensions have none of the downsides of the more-taxes-for-more-Social Security deal, which is almost certain to discourage work, displace private saving, and encourage earlier retirement. So while I disagree with a lot of Josh’s thinking along the way, he ends up in a place I’m very happy to support.

2 thoughts on “More Social Security, not less?

  1. If you read the original designers blueprint for SS they foresaw in the future a period when the outlays would pay out more than the inlays took in.We are in the early phases of that drawdown, they designed the system to be able to handle this time frame.Around I think 2030-2040 when the Baby Boomers start to pass on, the inlays will start to build back up the surplus over time.Those were brilliant men who designed the SS system I trust them more than our politicians today,leave SS where it belongs in a safe haven vault not to be touched by politicians.

    • ” I also think a lot can be done to improve private pensions to help people save more. For all the problems 401(k)s and other DC pensions have, they can be fixed – such as through automatic enrollment, use of low-cost index funds, default investment in life cycle portfolios, and the encouragement of annuitization.”

      this part is amusing to me. You can sock away pre-tax money right now through a wide variety of options including the ones named – so why don’t people do this?

      SS is not about pensions. It’s about insurance. It’s an insurance annuity… never intended to be the only source of income in retirement but has ended up that way because people had choices to save more – but did not.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>