Social Security

Matt Yglesias has been blogging a lot on Social Security.
He has two points:
(1) There is no crisis.
(2) Bush's privatization plan won't work.

He is:

(1) Wrong.
(2) Correct.

Respectively.

Dealing with the points in reverse order, privatization won't work because of the transition costs. For the government to invest large portions of current Social Security revenues would in the short term require a alrge amount of borrowing. Currently, Social Security revenues fund social programs (which is what the "trust fund" actually amounts to). If we divert the money to investments, then unless the president shows fiscal restraint good luck on that), we'll just borrow or inflate the currency (print money) to pay for it.

Also, even if this solution works, it will reduce the scale of the problem and not eliminate it. Put another way, let's assume that 20% of a person's SS taxes can be put in private accounts, but that benefits have to be reduced 20% for anyone participating in the private accounts. In effect, if everyone participates, then revenues and outlays will both be reduced by 20%, but any deficits will persist (although they are reduced 20%).

The only thing that private accounts could do is increase the average benefit that the participators get compared to those who use traditional Social Security. Of course, even this would be dependent on how well they invest, and on a number of other factors that influence how the market does as a whole (it should be noted that only individuals can beat the market, on average, people don't by definition). The only way that these private accounts would solve the problem of the SS deficits would be if those who participated in the private accoutnts had their benefits reduced by more than 20%, under the assumption that the higher returns from the stock market would make up for it. In any case, a severe reduction in benefits, not equivalent to the proportion of SS taxes put into private accounts, would be required.

As for the assertion that there is no crisis, that is based on the assumption that because Social Security has run a surplus for the past several decades, therefore there should be no problem getting that money back out of the "trust fund."
As the "trust fund" is simply a bureaucratic fiction where a moral obligation is placed on the general fund to pay Social Security benefits to an amount dependent on what general fund actiities have been funded by previous surpluses, this trust fund does not actually represent an independent cash flow. In other words, paying back Social Security from the trust fund requires the government raise money from taxes, cutting spending, inflating the currency, or borrowing. In effect, this is the same thing that would happen were there no "trust fund."

Of course, Mr. Yglesias realizes this and states that the solution to the Social Security deficits (these will probably start to appear sometime in the 2010s) is to rasie taxes. After all, other taxes were made lwoer by the SS surpluses, so why not raise taxes to pay SS back?

The problem is, of course, that raising taxes has serious economic consequences. In the end, the problem with Social Security is that the program will become a net drain, and at that point the program will require large tax increases. Larger than most people think, I would surmise, as the tax increases will themselves damage the economy.

Of course, Mr. Yglesias is right in one thing. The crisis is not Social Security, but the budget as a whole. If we cut spending on other programs and paid down the debt, we would have more ability to deal with Social Security becasue we would have more borrowing capacity (you have more leeway to borrow when you don't already have a mortgage). Of course, this has nothing to do with the "trust fund."

Ultimately the only real solution to Social Security, or the budget as a whole, is to cut spending. Even raising taxes is a temporary solution if the government can't control itself.

Rather than all of this complicated gobbledygook, it would be refreshing if the Bush administration decided to actually cut spending.

That is all.