Mankiw argues in favor of Social Security privatization
President Bush has perfected the art of pushing his priorities and misleading the country to a point that he gets what he wants. Experts see that the strategy that he used to take America to war with Iraq is being used to privatize Social Security. This is how it works:
As part of that push to convince Americans to accept his proposals, Bush sent Dr. N. Gregory Mankiw - Chairman, Council of Economic Advisers to the Council on Foreign Relations to talk about the issue. Dr. Mankiw is a Professor of Economics at Harvard University (on leave now) and was generally considered as a fairly smart guy but since going to the White House, it has become obvious how shallow his knowledge (or is it that he is just a talking head who is forced to say what others tell him to)? He gave a rather disappointing speech at the Council on Foreign Relations since he had nothing new to say and basically repeated what Americans are sick of hearing now. Not the kind of stuff you expect to hear from a Harvard economist! And funny enough, after trashing President Carter he quoted President Clinton to make his point.
So if you have read Vice President's speech in favor of privatization of Social Security, there is nothing substantive in Mankiw's speech. He basically repeats the same old arguments that have failed to convince anyone, other than the already converted, so far. (Related article: Social Security Reform approach questioned)
Here are parts of his speech that refer to Social Security privatization:
"The greatest fiscal challenge facing the nation, however, is beyond the standard five-year budget window. As the population ages and the baby-boom generation retires, the entitlement programs for the elderly will put gradual but substantial pressure on federal spending. The President has correctly called this "the real fiscal danger." Unless action is taken, budget deficits will rise significantly over the next several decades, reducing national saving and depressing economic growth. (Related article: Social Security privatization to hurt baby boomers)
The President has not yet decided precisely what reforms to Social Security he will advocate. But it is important, as the Nation considers the options we face, to understand the nature of the problem. The fiscal challenge in the Social Security system reflects two factors. The first is simple demographic reality. Compared to past generations, Americans are having fewer children and living longer. As a result, the elderly are representing an ever larger share of our society. In 1950, there were 16 workers paying into Social Security for every person receiving benefits. Now there are 3.3, and that number will fall to 2 by the time today' young workers retire.
The second driving force is that, under current law, each generation of retirees receives higher real benefits than the generation before it. This stems from the indexation of the initial level of benefits to wages, which over time grow faster than prices. A person with average wages retiring at age 65 this year gets an annual benefit of about $14,000, but a similar person retiring in 2050 is scheduled to get over $20,000 in today's dollars. In other words, even after adjusting for inflation, today's 20-year old worker is promised benefits that are 40 percent higher than what his or her grandparent receives today. (Related article: Center on Budget & Policy does not agree with White House analysis)
This current system of indexing initial benefits to wages has not been part of Social Security since its inception. In fact, it was introduced by the Carter Administration in 1977. At the time, some leading experts on Social Security objected to this change, arguing that it would put Social Security on an unsustainable path. In a prescient letter in the New York Times (published on May 29, 1977), Peter Diamond, James Hickman, William Hsiao, and Ernest Moorhead wrote, "the wage indexing method calls for a much larger growth in benefits for future retirees at a time when the country may not be able to afford it. Only a Social Security system without a large deficit on the horizon can have the flexibility to deal with this and other needs. It would be sad if the legacy of a particularly forward-looking President [Carter] were a political nightmare." Despite their advice, President Carter signed into law the indexation regime with which we are still living.
Just as this group of economists and actuaries predicted in 1977, the current benefit structure is colliding with demography to make the system unsustainable for the long term. Benefits rising with wages could be sustained if we had a stable number of workers for each retiree, because economic growth raises real payroll tax revenues and thus makes available more resources to pay benefits. Conversely, the demographic shift of a declining number of workers for each retiree could be accommodated by economic growth if each worker was not required to support a benefit that grew as rapidly as currently scheduled. But the combination of large benefit increases and a growing elderly population puts the Nation on an unsustainable path.
Annual spending on Social Security will exceed the system's tax revenue in 2018, with deficits increasing from there. The Social Security trust fund will be empty in 2042, at which point the system will be insolvent. Under current law, the benefits the system will be able to pay from that year on will be only as great as the revenues coming in. Retirees would receive only about 75 percent of scheduled benefits. In total, Social Security has made promises that exceed its resources by more than $10 trillion in present value.
The United States is, of course, not unique in facing the fiscal challenges of an aging population. Most developed countries face similar or even larger increases in the ratio of elderly to the labor force. But the United States is unusual in not responding to this development with significant reform in recent years. Since 1990, several nations, including Germany, Italy, and New Zealand, have raised the eligibility age for their public pension systems. Australia, Sweden, and the United Kingdom have all undertaken reforms that included personal retirement accounts.
Without reform, the United States will face little choice but vastly higher taxes and the resulting drag on economic growth. Putting Social Security permanently on a sustainable basis through higher taxes alone would involve raising the tax rate from 12.4 percent of taxable payroll to 15.9 percent - a 28 percent increase, equal to $1,400 for a family making $40,000 a year. Delay only makes the tax increase that would be needed to bring the system into balance even larger.
Such large tax increases would have serious adverse effects on the overall economy. Nobel Prize winning economist Ed Prescott has written in a recent paper that a large part of the difference between our economy and those in Europe is that Europeans work less because they are taxed more. Raising taxes to solve the Social Security shortfall would, in essence, make the U.S. economy more like those of Europe. With nations in Western Europe lagging the United States in growth and job creation, that is not the direction we should be heading.
In one of his last acts in public life, the late Patrick Moynihan, the former Democratic Senator from New York and a former Harvard professor, co-chaired the President's Commission to Strengthen Social Security. The commission proposed a number of possible reforms to fix the system. The commission's proposals are consistent with the President's principles for reform. They do not alter benefits for current retirees and those near retirement. They do not raise taxes. And they offer voluntary personal accounts to younger workers so they would have the opportunity to receive the benefits of long-term investing.
Beware of the Sophists
As the nation debates alternative proposals, you should be careful to avoid the sophistry of those opposed to reform. In particular, be wary of those who argue that there is no Social Security problem or that only small changes are needed to address it. The truth is that Social Security faces fundamental financing challenges. Just ask the Social Security Trustees, the Congressional Budget Office, or any other group of nonpartisan analysts. Reasonable people can debate what kinds of reforms are best, but don't let the Ostrich Caucus convince you to put your head in the sand. Some will argue that these problems are far in the future and that there is no need to address them today. Imagine if a financial planner offered the same counsel to his 30-year-old client: “Don’t worry Joe, retirement is 35 years away, you don’t need to save anything.” That planner would be guilty of the grossest malpractice.
The economics here would be understood by any parent who has contemplated saving for his or her child's college education. The sooner you start preparing for that future expenditure, the easier it is, and the better prepared you will be. This President recognizes that his job is to take the long view and to plan for our nation's retirement. He is rightly committed to acting now. You should also be wary of comparisons between a new, reformed Social Security system and current law. The benefits now scheduled for future generations under current law are not sustainable given the projected path of payroll tax revenue. They are empty promises. Unless a listener is discerning, empty promises will always have a superficial appeal.
By contrast, the proposals of the Social Security Commission recognize the need for reform. Under these plans, future retirees receive benefits at least as high as those retired today, and they have the option of investing in a personal account and taking advantage of the higher return that accompanies equity investment. But the plans do not promise more than the System has the ability to pay. Let me conclude by quoting the words of a President. "This fiscal crisis in Social Security affects every generation. We now know that the Social Security trust fund is fine for another few decades. But if it gets in trouble and we don't deal with it, then it not only affects the generation of the baby boomers and whether they'll have enough to live on when they retire, it raises the question of whether they will have enough to live on by unfairly burdening their children and, therefore, unfairly burdening their children's ability to raise their grandchildren."
That was President Clinton speaking on February 9, 1998. President Clinton was most definitely not a member of the Ostrich Caucus. It is time to confront head-on the challenges facing Social Security. President Bush is now developing the specifics of the Social Security reform he will advocate. One thing is certain: His proposal will be a credible plan that puts the Social Security System on a firm foundation for generations to come."
Recommended article: Why Bush wants to privatize Social Security?
- Create a sense of crisis (imaginary, if needed). Talk about worst case scenarios (e.g. weapons of mass destruction, nuclear bombs exploding, terrorist attacks, etc.)
- Make it urgent so that no debate is needed. Debate is bad because it allows people an opportunity to understand pros and cons.
- Just do it, regardless of the consequences. Whether it is hundreds of Americans dead in Iraq or Americans losing their retirement benefits, it is more important to push an agenda than to worry about American people.
As part of that push to convince Americans to accept his proposals, Bush sent Dr. N. Gregory Mankiw - Chairman, Council of Economic Advisers to the Council on Foreign Relations to talk about the issue. Dr. Mankiw is a Professor of Economics at Harvard University (on leave now) and was generally considered as a fairly smart guy but since going to the White House, it has become obvious how shallow his knowledge (or is it that he is just a talking head who is forced to say what others tell him to)? He gave a rather disappointing speech at the Council on Foreign Relations since he had nothing new to say and basically repeated what Americans are sick of hearing now. Not the kind of stuff you expect to hear from a Harvard economist! And funny enough, after trashing President Carter he quoted President Clinton to make his point.
So if you have read Vice President's speech in favor of privatization of Social Security, there is nothing substantive in Mankiw's speech. He basically repeats the same old arguments that have failed to convince anyone, other than the already converted, so far. (Related article: Social Security Reform approach questioned)
Here are parts of his speech that refer to Social Security privatization:
"The greatest fiscal challenge facing the nation, however, is beyond the standard five-year budget window. As the population ages and the baby-boom generation retires, the entitlement programs for the elderly will put gradual but substantial pressure on federal spending. The President has correctly called this "the real fiscal danger." Unless action is taken, budget deficits will rise significantly over the next several decades, reducing national saving and depressing economic growth. (Related article: Social Security privatization to hurt baby boomers)
The President has not yet decided precisely what reforms to Social Security he will advocate. But it is important, as the Nation considers the options we face, to understand the nature of the problem. The fiscal challenge in the Social Security system reflects two factors. The first is simple demographic reality. Compared to past generations, Americans are having fewer children and living longer. As a result, the elderly are representing an ever larger share of our society. In 1950, there were 16 workers paying into Social Security for every person receiving benefits. Now there are 3.3, and that number will fall to 2 by the time today' young workers retire.
The second driving force is that, under current law, each generation of retirees receives higher real benefits than the generation before it. This stems from the indexation of the initial level of benefits to wages, which over time grow faster than prices. A person with average wages retiring at age 65 this year gets an annual benefit of about $14,000, but a similar person retiring in 2050 is scheduled to get over $20,000 in today's dollars. In other words, even after adjusting for inflation, today's 20-year old worker is promised benefits that are 40 percent higher than what his or her grandparent receives today. (Related article: Center on Budget & Policy does not agree with White House analysis)
This current system of indexing initial benefits to wages has not been part of Social Security since its inception. In fact, it was introduced by the Carter Administration in 1977. At the time, some leading experts on Social Security objected to this change, arguing that it would put Social Security on an unsustainable path. In a prescient letter in the New York Times (published on May 29, 1977), Peter Diamond, James Hickman, William Hsiao, and Ernest Moorhead wrote, "the wage indexing method calls for a much larger growth in benefits for future retirees at a time when the country may not be able to afford it. Only a Social Security system without a large deficit on the horizon can have the flexibility to deal with this and other needs. It would be sad if the legacy of a particularly forward-looking President [Carter] were a political nightmare." Despite their advice, President Carter signed into law the indexation regime with which we are still living.
Just as this group of economists and actuaries predicted in 1977, the current benefit structure is colliding with demography to make the system unsustainable for the long term. Benefits rising with wages could be sustained if we had a stable number of workers for each retiree, because economic growth raises real payroll tax revenues and thus makes available more resources to pay benefits. Conversely, the demographic shift of a declining number of workers for each retiree could be accommodated by economic growth if each worker was not required to support a benefit that grew as rapidly as currently scheduled. But the combination of large benefit increases and a growing elderly population puts the Nation on an unsustainable path.
Annual spending on Social Security will exceed the system's tax revenue in 2018, with deficits increasing from there. The Social Security trust fund will be empty in 2042, at which point the system will be insolvent. Under current law, the benefits the system will be able to pay from that year on will be only as great as the revenues coming in. Retirees would receive only about 75 percent of scheduled benefits. In total, Social Security has made promises that exceed its resources by more than $10 trillion in present value.
The United States is, of course, not unique in facing the fiscal challenges of an aging population. Most developed countries face similar or even larger increases in the ratio of elderly to the labor force. But the United States is unusual in not responding to this development with significant reform in recent years. Since 1990, several nations, including Germany, Italy, and New Zealand, have raised the eligibility age for their public pension systems. Australia, Sweden, and the United Kingdom have all undertaken reforms that included personal retirement accounts.
Without reform, the United States will face little choice but vastly higher taxes and the resulting drag on economic growth. Putting Social Security permanently on a sustainable basis through higher taxes alone would involve raising the tax rate from 12.4 percent of taxable payroll to 15.9 percent - a 28 percent increase, equal to $1,400 for a family making $40,000 a year. Delay only makes the tax increase that would be needed to bring the system into balance even larger.
Such large tax increases would have serious adverse effects on the overall economy. Nobel Prize winning economist Ed Prescott has written in a recent paper that a large part of the difference between our economy and those in Europe is that Europeans work less because they are taxed more. Raising taxes to solve the Social Security shortfall would, in essence, make the U.S. economy more like those of Europe. With nations in Western Europe lagging the United States in growth and job creation, that is not the direction we should be heading.
In one of his last acts in public life, the late Patrick Moynihan, the former Democratic Senator from New York and a former Harvard professor, co-chaired the President's Commission to Strengthen Social Security. The commission proposed a number of possible reforms to fix the system. The commission's proposals are consistent with the President's principles for reform. They do not alter benefits for current retirees and those near retirement. They do not raise taxes. And they offer voluntary personal accounts to younger workers so they would have the opportunity to receive the benefits of long-term investing.
Beware of the Sophists
As the nation debates alternative proposals, you should be careful to avoid the sophistry of those opposed to reform. In particular, be wary of those who argue that there is no Social Security problem or that only small changes are needed to address it. The truth is that Social Security faces fundamental financing challenges. Just ask the Social Security Trustees, the Congressional Budget Office, or any other group of nonpartisan analysts. Reasonable people can debate what kinds of reforms are best, but don't let the Ostrich Caucus convince you to put your head in the sand. Some will argue that these problems are far in the future and that there is no need to address them today. Imagine if a financial planner offered the same counsel to his 30-year-old client: “Don’t worry Joe, retirement is 35 years away, you don’t need to save anything.” That planner would be guilty of the grossest malpractice.
The economics here would be understood by any parent who has contemplated saving for his or her child's college education. The sooner you start preparing for that future expenditure, the easier it is, and the better prepared you will be. This President recognizes that his job is to take the long view and to plan for our nation's retirement. He is rightly committed to acting now. You should also be wary of comparisons between a new, reformed Social Security system and current law. The benefits now scheduled for future generations under current law are not sustainable given the projected path of payroll tax revenue. They are empty promises. Unless a listener is discerning, empty promises will always have a superficial appeal.
By contrast, the proposals of the Social Security Commission recognize the need for reform. Under these plans, future retirees receive benefits at least as high as those retired today, and they have the option of investing in a personal account and taking advantage of the higher return that accompanies equity investment. But the plans do not promise more than the System has the ability to pay. Let me conclude by quoting the words of a President. "This fiscal crisis in Social Security affects every generation. We now know that the Social Security trust fund is fine for another few decades. But if it gets in trouble and we don't deal with it, then it not only affects the generation of the baby boomers and whether they'll have enough to live on when they retire, it raises the question of whether they will have enough to live on by unfairly burdening their children and, therefore, unfairly burdening their children's ability to raise their grandchildren."
That was President Clinton speaking on February 9, 1998. President Clinton was most definitely not a member of the Ostrich Caucus. It is time to confront head-on the challenges facing Social Security. President Bush is now developing the specifics of the Social Security reform he will advocate. One thing is certain: His proposal will be a credible plan that puts the Social Security System on a firm foundation for generations to come."
Recommended article: Why Bush wants to privatize Social Security?
posted by eCreativa Media @ 8:30 PM
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