Social Security and The Left

Paul Krugman and the NYT Editorial Page have now joined the chorus of those, mostly on the left it seems (see, e.g. Kevin Drum and his commenters), who have discovered that the social security "crisis" is a myth created by George Bush to distract us from other "real" problems.

Excuse me, but the public's belief that there is a problem with social security was not created by George Bush. He is using it, of course. But he did not create it. In fact, the people now saying the problem is a myth had a lot to do with creating the "myth" in the first place (if that is what it is).

Another irony in this debate lies in the fact that the criticism of the social security "crisis" is to some extent rooted in a "belief" that Bush is underestimating the growth rate of the American economy over the next four decades. Yet these are the same people who so readily criticize Bush for overly optimistic estimates of the growth rate when it comes to his claims that increases in tax receipts as a result of increasing growth will pare the deficit despite the Bush tax cuts. No doubt Bush is using different growth projections for different purposes. But, it seems, his adversaries are doing much the same thing.

A third irony is that confidence in the current status of social security is premised on the assumption that the government will pay off the bonds held in the social security trust fund once expenditures begin to exceed receipts (in 10-20 years, depending on which growth projections one uses). Yet the these same people bemoan the effect on the economy of having to pay off exactly the same kinds of debts today.

The fact of the matter is that neither side is being straight about any of this. Rather, both sides are using the "fear factor" to score what amount to political points on each other over the issue of privatization. Bush probably is exaggerating the extent of the crisis in order to "sell" partial privitization. On the other hand, his critics are almost certainly downplaying the extent of the problems in order to defeat it.

But, shouldn't we be debating privitization on it's own merits? In this regard I ask myself, where do we want to end up in, say 50 years? Do we want a system where we force people to save for their own retirements? Or do we want a system where we force people to pay the retirement benefits of their parents? In the abstract, at least, the latter seems clearly preferable. If that's the case, then the questions we ought to be debating is whether can we get there and how could we do it? You don't here much of that from the Left right now, though. They're too busy denying that there is a problem.

But, there is a problem. Maybe it's not the problem that the Bushies are trumpeting. Maybe it is not, as Krugman argues, the only or even the biggest problem. But it seems silly to deny that there is a problem.

Here is what I think is true about social security. For the next 10-20 years, social security tax receipts will exceed benefits paid by some margin, with both the extent and duration of the surplus depending on what happens to real GDP growth and longevity of retirees. Nobody seems terribly worried about this phase of this process. But, it is important to keep in mind that even here there is a significant cost: by forcing current wage earners to pay benefits for current retirees we are limiting -- in many cases eliminating -- the ability of current wage earners to save for their own retirements. After this surplus phase, benefits paid will exceed receipts by some margin (assuming no changes in benefits or eligibility), with both the magnitude and duration of the shortfall again being dependent on future real GDP growth and longevity of retirees. At this point, the social security administration will begin to redeem the US government bonds accumulated in the social security trust fund during the years of surplus. I agree with Krugman that it is unlikely the government will default on that debt. But, having said that, the hard question is where will it get the money to pay those debts? It can only come from one of four places: increasing taxes; refinancing the debt (i.e. borrowing from other investors to pay social security benefits); printing more money; or cutting benefits (in order to slow the pace at which the debt to social security has to be re-paid). The burdens of the last two of these options (reduced benefits and the inflationary impact of printing more money) would fall primarily on the then-current retirees. The burdens of the first two (increased taxes and increased on-budget national debt) would fall on then-current wage-earners, limiting even further their ability to save for their own retirement. In short, I think the left is in denial (or is at least allowing political antipathy to anything Bush to blind it to the obvious): within a relatively short time (i.e. 10-20 years) social security will precipitate a crisis. No, it is not a crisis of bankruptcy. But it is a crisis of huge unfunded debt by the federal government.

So, where does privitization fit into this? Will it "save" social security? Of course not. Social security, considered alone, does not need saving, at least not any time soon. Will it avoid the crisis of unfunded federal debt? No. In fact, in the near term, it will accelerate it by accelerating both the date at which social security trust fund redemptions will begin and the rate at which the trust fund will be exhausted. But, what it will begin to do is to break the cycle of relying on current wage-earners to pay benefits to current retirees and thereby limiting or even eliminating their ability to save for their own retirement. And that, it seems to me, would be a very, very good thing.

What is the right answer? Should we endure the status quo despite its long-term problems because fundamental change is too hard, too expensive in the near term? Or should we begin to transition to a better, fairer and more stable system despite the pain that will come from that transition? I don't know. But I wish we could have the debate on those terms, rather than arguing about whether or not the social security system is "in crisis."