May 31, 2000 / New York TIMES
RECKONINGS / By PAUL KRUGMAN
Truth in Advertising
>Oh no, not another column on Social Security! But the mailbag suggests
that the issue needs one more go-round, because some readers still think
Social Security is just a pension fund -- one that compares unfavorably
with private retirement plans. And it's true that lately it is being run
more like such a fund than before. But the many decades in which it was run
on a pay-as-you-go basis hang heavily over the system's prospects, and any
honest plan for reform must come to grips with that legacy.
>For most of its existence, Social Security was basically "unfunded": it
didn't invest the contributions workers paid in, it simply paid them out to
retirees. This hand-to-mouth operation worked because the nation's working
population was steadily growing; so each generation, when it reached
retirement age, could count on being supported by a much larger generation
of workers. For those who worked in the system's early years it was a
terrific deal.
>But baby boom was followed by baby bust. In the decades ahead, a huge
number of retirees will need to be supported by a rather small number of
workers. Pay-as-you-go would require either slashing benefits, sharply
increasing required contributions, or both.
>Of course officials have known for a while that this was coming, and they
actually -- surprise! -- took some responsible precautions. In 1977
required contributions were increased without a corresponding increase in
benefits, and as a result the system has been steadily accumulating a fund
that will greatly delay the date at which it runs out of money. But the
fund still isn't big enough, and the increased contributions mean that the
implied rate of return for today's workers is low compared with what they
could get if they were free to invest their money for themselves.
>The reason for that low return, once again, is not that the Social
Security Administration is a lousy investor; it's that today's workers must
over-contribute because previous generations of Americans didn't put in
enough to finance their own retirement. It's a legacy of the pay-as-you-go
past. <
For the rest, see the New York TIMES Op-Ed archive at:
http://www.nytimes.com/library/opinion/krugman/053100krug.html
COMMENTS: This article makes the error of assuming that US social security
is a "pension" or an investment. I would say that SS is instead more like
an _insurance plan_. No-one expects a market-competitive rate of return
from investing in fire insurance. Similarly, SS does not and cannot offer a
market-competitive rate of return. It's a cushion for those who can't
afford to risk their incomes by speculating on the stock market and other
financial markets.
This is especially true since SS doesn't simply redistribute from the young
workers to the old retired. The official name of the program is "Old-Age,
Survivors and Disability Insurance" (OASDI), all of which are financed by
the Social Security trust funds. Private pensions don't help survivors or
the disabled. Looking at the OASDI budget, disability insurance payments
are about 1/6 of the old age and survivors' benefits. That's nothing to
sneeze at or to ignore without thought.
Another problem is that, like all the pundits, PK talks only about
demographics. Even if we focus simply on demographics, the shrinking ratio
of children to adult workers should release resources that can be used to
support the aged, as when elementary schools are remodeled to offer adult
continuing education. Further, the rise of the labor force can be
encouraged by more liberal immigration laws, which bring in young and
motivated workers. In fact, these days the US is enjoying the benefits of a
large wave of immigration.
But the key point is that it's _not_ just a matter of how many young
working people there are to support the old retired ones (which is itself
more than demographics, since the initial working and retirement ages is
determined socially). Inputs to the OASDI trust fund come from wages and
salaries (up to the cap), so that the funds available for retirees (plus
survivors and the disabled) depend on the tax rate on wages and salaries
and the height of the cap. That means that with a constant tax rate, a rise
in wages raises the inputs to the fund. This wage increase in turn depends
on the rate of growth of labor productivity and the ability of labor to
reverse the effects of capital's offensive that began in full during the
late 1960s, so that wages rise in step with productivity -- or faster....
The pundit's discussion ignores such issues as the race between wages and
productivity, but the issue of productivity should be crucial. In theory at
least, a very small number of young workers could support and large crowd
of retired geezers if labor productivity is very high. A rising ratio of
retired to the workers could be dealt with easily if labor productivity
grows quickly enough.
This tells us that even within the mainstream framework, we should ask how
labor productivity growth should be increased. Is the current SS surplus
being invested in infrastructure, education, and public health? Those kinds
of investment would encourage labor productivity growth in the long run.
The current SS surplus is "invested" by helping the budget of the
government as a whole run a surplus. The problem is that in general since
the Reagan years, the federal government has cut back on such kinds of
investment.
This is a problem with the whole government rather than with the SS system,
but we can't avoid the privateers' question: would the SS surplus be more
wisely invested in the stock market, which would finance real investment,
promoting labor productivity which would allow the geezers to survive? No.
The problem is that the stock market almost always involves the sale and
purchase of "used stock" (which simply redistributes existing shares from
one person to another) rather than the sale of "new stock" which finances
new real investment. Further, even if new stock is issued, that doesn't
automatically raise labor productivity. New funds can go into advertising,
marketing, and the like, which simply promise to redistribute profits
between businesses. Finally, new stock could finance investment overseas,
as with Disney's investment in Euro Disneyland or the general trend toward
investment in low-wage countries. It seems much more direct to get the
government to refocus its attention on education, infrastructure, and
public health.
This whole issue gets us to a point that the "Social Security crisis" is
overblown if not non-existent. The yelling about crisis that sparked
comments by folks like George W. Bush that encouraged PK's column is based
on the SS trustee's excessively pessimistic predictions about the growth of
the labor force and labor productivity. As Doug Henwood points out, they
assume that the future of the US is much more bleak than the average for
the period since World War II. It wouldn't just be the SS system that's in
trouble. Slow productivity growth of the sort the Trustees predict would
put a major fly in the stock market's ointment. That's because a slow
growth of labor productivity limits the growth of profits -- unless capital
intensifies its offensive to push wage growth below that of productivity.
For more on this topic, see LEFT BUSINESS OBSERVER (at
http://www.panix.com/~dhenwood/AntisocInsec.html) and an on-line article by
Richard duBoff of Bry Mawr college (at http://www.njfac.org/us21.htm). My
very small contribution can be seen at
http://clawww.lmu.edu/~JDevine/ec120/SSFut.html.
Jim Devine [EMAIL PROTECTED] & http://liberalarts.lmu.edu/~jdevine
