----- Original Message ----- From: "Erik Reuter" <[EMAIL PROTECTED]> To: "Killer Bs Discussion" <[email protected]> Sent: Wednesday, January 19, 2005 10:16 PM Subject: Re: Kotlikoff's PSS plan
> * Dan Minette ([EMAIL PROTECTED]) wrote: > > > If it were, then we wouldn't have fixed things in the early '80s. > > We did not fix things in the early 80's. Not perfectly, sure. But, going back to get more data, I realized that I greatly overestimated the state of SS in the early '80s. I did this by attributing all the federally held federal bonds to SS. I found a new source at: http://www.ssa.gov/OACT/TR/ which gives both recent and historical reports. From the '81 report, we see that SS was expected to be in the hole by 1983....given the system in place at the time. On page 18 of the report (according to Acrobat) they list the retirement trust fund as a % of yearly expenditures from '50 on. Some highlights of this are 1950: 1156% 1960 180% 1970 101% 1975 63% 1980 23% This reflects a true, immediate crisis. Within 4 years, they were anticipating the need for either deficit spending or a reduction of benefits in the range of 5%-18%...and this with the baby boom just finishing getting into the job market. (In 1981, the baby boom would have been about 18-35 years old). The plan that was put in place resulted in a very significant increase in the trust fund. It also was projected, at the time, that the trust fund would stay in the black for the next 75 years. That was a tremendous difference from dipping below zero during the next year ('81 report on '80 data, with the deficit being in '82). After almost 25 years, we find these assumptions a bit optimistic. Further, they didn't adress what would happen after about 2058, and we need to now. So, we are looking at steps to eliminate the chance of going in the hole in '43 or so, and how to stay out of the hole for the rest of the century. I agree with you that we should take the steps now. But, I hope you can see that, after going through a real immediate SS crisis in the early '80s, why I would consider this a needed mid-course correction. > So what is your proposal to fix the current account? > > That was obviously a rhetorical question. The best economists in the > world don't have a clue how to fix the current account. It is basically > cross-fingers time. I agree that it may very well be too late. I think that not having had the Bush tax cuts and having let the dollar slide would have helped over the last 4-5 years....but I won't argue with it being cross-finger times. > On the other hand, there are a number of good plans to improve SS. There are, and I agree that now's a great time to pick a good one. > > I think they should be addressed by rescinding Bush's tax cuts. Maybe > > they have to be phased out to keep from jarring the economy. > > So do I. But I'm also realistic. Its not going to happen in the next 4 > years. Maybe there is a slim chance they will be allowed to expire, but > I doubt it. Fair enough. > Bush won the vote. That limits the opportunities on the table. Take what > you can get. It depends on what he offers. I reserve the right to say his plan is a step backwards. But, several plans that you did mention have some very good features. I believe we can pick a good plan that will require relatively little pain on the part of my or your generation. > > I think Social Security could become a crisis in 30-40 years. We > > can take modest steps now to make sure that SS will be maintainable > > virtually forever. Indeed, given your economic assumptions, we should > > be able to start cutting SS taxes as a fraction of GDP within 40 years > > by implementing some rather modest changes. > > No, you're not listening. That is NOT "given my economic assumptions". Actually, I'm trying very hard to understand your posts. I consider them worthwhile. I think I just catagorized you assumptions about the growth of real wages as ecconomic assumptions, and your assumptions about people being short sighted as political assumptions. I was specifically referring to the real rise in wages of 1.5%/year. Take the plan that I suggested. By changing the maximum benefit now from being normalized by wage increases to being normalized by inflation, and by keeping this as an absolute maximum benefit, we'll have everyone making about 55k or more having increases tied to inflation. That corresponds, assuming the same shape of salary distribution, to just over 30k/year in today's money....which is close to the mean salary. I'm not saying that my rough numbers are better than the plans you put forth, but they do illustrate how modest the changes have to be. Just doing compound interest, we should be able to...one way or another, reduce the increase in benefits from 1.5%/year to 1%/year and arrive at close a 21% reduction in benefits in '45 or so smoothly. Plus, we'll have accumulated savings...which should allow a very smooth transition. Obviously, there are many ways to accomplish this. The reason I sketched out what I did is that it: 1) Transitions to SS being scaled by inflation 2) Improves the progressive nature of SS. As things stand, a top married wage earner should be able to get about $50k/year from SS retiring in 2020 if his wife (her husband) didn't work. I agree that government doesn't need to supply that type of income. With my suggested change, the long term scenario is for most people to need to count on themselves to keep the lifestyle they have become accustom to. Also, I'm not really opposed to the idea of investments for up to $1000 year taken from SS tax and benefits, as long as the progressive nature of SS is not undermined. I consider that to be a modest change > > The word is that tax reform will be on the table in 2006 or 2007. Now is > the time to work on SS. In some sense, I think we may be talking past each other. I see your main point as being: We need to act now, so that the folks who retire in 2045 will not demand and obtain benefits that are such a large fraction of GDP that it will overwhelm the economy. And if that doesn't break the economy, the next generation of retiree's demands will. You also think that switching over to an investment basis would be the best way to do this, given the political climate. (If this misses your main points, I'm sure you'll tell me. :-) ) My point is that, unlike '80 when we already in deficit spending on SS and were looking at exhausting the trust fund within a year, significant running deficits within 5 years, and overwhelming deficits in the future; we are facing the likelihood of exhausting the trust fund in roughly 40 years. With 40 years to work with, we can make a very modest change every year and still address the problem. We agree that this is a good time to face this problem. I think it's because doing it now will be relatively pain free...we don't need to reduce SS benefits, we just need to slow the increase in benefits after inflation. IIRC, I got the idea of utilizing a change from wage indexing to inflation indexing from you. I sketched it out the way I did because I think that those with an average yearly earnings of $10k/year should have an real increase in benefits with time, while those with an average yearly earning of $90k/year don't need a real increase. I'm sure a real professional could incorporate those ideas into a plan that would be far better than what I've sketched out. Finally, let me ask a couple more questions to see if I understand you correctly. First, I see that we have two separate issues that are now being mingled: 1) The need to slow the rise in real benefits by 2050, one way or the other. (We could theoretically raise taxes, of course, but I agree with you that we shouldn't solve this with taxes.) 2) The possibility of switching part of SS from pay-as-you-go (with a trust fund for the demographic bulge) to investment, with the government turning future obligations into explicit debt in the process. This, as long as the government addresses the debt, should have a side benefit of increasing the savings rate. Switching to investment accounts for future workers will not solve #1. Future promised benefits will have to be reduced, no matter what decision is made with regard to #2. I believe that you said a partial switch to an investment mode would illustrate the need to do #1, but I don't think you believe that this switch would eliminate the need for reduced benefits. The second point is that I see a plan that gradually switches us from wage based increases in SS to inflation based increases in SS being a realistic type of solution. If my sketch doesn't work, we could use a number of means to have the required decrease in the projected benefits by 2045. Plus, once the switchover is accomplished, SS as a % of GDP should start to decrease. I think we both agree that this would accomplish the desired goals. I see us disagreeing on whether we would have the political will to actually do this. Dan M. _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
