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Posted at 9:21 AM ET, 11/19/2010

The progressive case for Social Security reform

By Ezra Klein

Kevin Drum notes that the strategy to privatize Social Security has always relied on conflating privatization with solvency (the two are not related, and privatization actually worsens the immediate shortfall), and that progressives might want to think about cutting that off at the knees by dealing with Social Security's solvency at a moment when privatization is decidedly not on the table:

Right now, we have multiple deficit reduction plans on the table that provide reasonable starting points for discussion; none of the plans involve privatization, and a bipartisan deal would put a stake through privatization for good; it would remove a distraction and allow us to devote our attention to more important things; and it would be good for the country and good for Social Security beneficiaries to shore up the program permanently and put the doom mongers out of business. Better now than when President Palin is in office.

I'm not against that, though the devil is obviously in the details when it comes to how you do it. As an aside, President Mitch Daniels or President Chris Christie would both stand a much greater chance of privatizing Social Security than President Palin.

By Ezra Klein  | November 19, 2010; 9:21 AM ET
Categories:  Social Security  
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Comments

Ezra, please don't use the phrase "President Chris Christie" again. It makes me feel like Obiwan when Alderaan blew up.

Posted by: MosBen | November 19, 2010 9:34 AM | Report abuse

MosBen,

oh come on now. Christie is light years better than the clowns that were McGreevey or Mr. Carla Katz, right? I'm thinking if you'd enjoy the kind of state bankruptcy then California is the place to go. They're already 3/4 of the way there.

gotta admit I kind of smiled when I read it.

I also think privatizing social security is a mistake. given our fiscal choices facing us Medicare/Medicaid is the 800+ pound gorilla in the room and growing while SS is not nearly as concerning.

Posted by: visionbrkr | November 19, 2010 9:39 AM | Report abuse

A bipartisan deal in the current lame-duck session or under the coming GOP House majority? One that doesn't involve effectively destroying the program? Yeah, right.

Posted by: paul314 | November 19, 2010 9:48 AM | Report abuse

If California could secede, or stop subsidizing the rest of the country, it wouldn't have budget problems

I agree that Medicare/Medicaid is the 800+ pound gorilla in the room and growing while SS is not nearly as concerning. Actually, it's not so much Medicare/Medicaid as healthcare costs. If we could reduce per capita spending to the level of any country with a higher life expectancy and higher satisfaction with healthcare than us, we wouldn't have budget problems.

Posted by: fuse | November 19, 2010 9:51 AM | Report abuse

fuse,

If California didn't have Silicon Valley then they'd be in a financial wasteland the likes of Mexico even if no subsidization occured. Same goes for my state of NJ without pharmecuticals.


Medicare/Medicaid costs are growing just as others are growing. To say Medicare costs are not an issue when in the 60's they estimated the cost to the taxpayer at $9 Billion and it was in fact $61 billion shows how badly they estimated cost. Now those figures are inflated from there and its budget busting even for the federal government and the revenues they take in. Medicare issues are just hidden by the federal backstop and the premise of a captive market in Medicare/Medicaid.

Also patients may be happy with medicare because of price-fixing but doctors sure aren't. The AMA just had their monthly or quarterly "kinipshin" (sp) on the doc-fix. If that ever didn't get passed you'd see what would happen if or when we price fix doctors to levels they feel are unsustainable. You'd see doctors run away from seniors at levels much greater than the 40% that currently don't accept medicare that many studies show.

plus we'd see the luxury car market tank too!

Posted by: visionbrkr | November 19, 2010 9:59 AM | Report abuse

--*If we could reduce per capita spending to the level of any country with a higher life expectancy and higher satisfaction with healthcare than us, we wouldn't have budget problems.*--

And if pigs could fly, the moon would be made of green cheese.

It's never going to happen. NEVER. No matter what you do, or try to do.

"If we could reduce per capita spending... "

You think there's a magic switch somewhere that some right winger is keeping secret to benefit his rich buddies?

It's crazy. But it's the kind of crazy that Klein likes to foment as part of propaganda ploy to keep big government stepping on the necks of his fellows.

Posted by: msoja | November 19, 2010 10:07 AM | Report abuse

>>If California didn't have Silicon Valley then they'd be in a financial wasteland the likes of Mexico even if no subsidization occured. Same goes for my state of NJ without pharmecuticals.>>

So? If you take off the top end, the average is always lower.

Posted by: fuse | November 19, 2010 10:09 AM | Report abuse

@msoja: if we adopted the healthcare system from any other developed country, our costs would plummet. At least you don't dispute that, or that they have better (or at least as good) outcomes. We don't do it because our costs are someone's profits and they lobby quite well.

Posted by: fuse | November 19, 2010 10:13 AM | Report abuse

fuse:

Their health care outcomes are not better. In many major industrialized nations the death rates from cancer are much worse than ours. Experts aren't sure whether this is due to earlier detection here because of massive testing, or because of better treatment options, but it is a fact.

Among all the major industrialized nations of the world, there is only about a 3.5 year difference in life expectancy in general. Take out Japan, the world leader because of their fish consumption perhaps, or genetic factors, and the difference is statistically insignificant.

Posted by: 54465446 | November 19, 2010 10:30 AM | Report abuse

fuse,

the point is that if California feels like they can tax their way to sustainability (as many liberal states do) eventually they'll find a way to force businesses to other states. There's only so much taxation that people can take. My own state of NJ has seen a large migration out of state and almost no one retires here. There needs to be a balance that I don't think we're going to see with California over the next 5-10 years. I hope I'm wrong for their sake but now with Governor Christie I see more businesses moving back to NJ and growing here than even with Governors Katz (oops Corzine) and McGreevey.
-------------------

We don't do it because our costs are someone's profits and they lobby quite well.

Posted by: fuse | November 19, 2010 10:13 AM | Report abuse

you really need to get over insurers profits. (i assume you're speaking of insurers). that's a complete red herring. 50% of those covered by employer sponsored plans are self insured meaning IBM, HP etc are keeping their costs/profits and 50% of those that are fully insured are non-profits. And those that are for-profit and fully insured make about 3% profit. I supposed you'd prefer they go the way of a MEWA and not be able to pay claims costs that are rising because of the true driver of costs, doctors/providers?

Posted by: visionbrkr | November 19, 2010 10:36 AM | Report abuse

54455446,

also add in our greater incidence of obesity and if that was standardized to other industrialized nations and I'd expect our life expectancy would be greater than the rest of those socialized countries.

Posted by: visionbrkr | November 19, 2010 11:04 AM | Report abuse

"@msoja: if we adopted the healthcare system from any other developed country, our costs would plummet. At least you don't dispute that, or that they have better (or at least as good) outcomes. We don't do it because our costs are someone's profits and they lobby quite well."

Americans, on average, have much better access to expensive high tech medical care than people in other countries (e.g. per capita MRIs in U.S. vs. Canada), and despite not a whole lot of extra bang for the buck Americans don't like their access to such technology restricted. I believe Ezra has commeneted in the past that increased supply drives costs (because the demand side doesn't receive price signals via cost insulation).

Arnold Kling has a good discussion of this in his book Crisis of Abundance.

As for profits, where are they?

Insurance companies have low margins.

Hospitals have low margins.

Pharmaceuticals tend to have high margins, to be sure, but then it's hard to have low margins in a business where the government provides you with monopoly power.

http://blog.mises.org/9380/do-patents-save-our-lives/

Doctors are fairly well paid too, but good luck trying to slice their compensation by fiat. They are far more sympathetic players than faceless organizations like hospitals and the much maligned insurance companies.

Profits aren't nothing, but profits provide useful signals and shouldn't be counted entirely as a negative. At the end of the day, it's not so much the profits, but willingness of the voters in other countries to accept restrictions on access to technology and certain types of (expensive) care, and a greater ability of governments to enforce cost controls (which often fall prey to politics here).

Posted by: justin84 | November 19, 2010 11:09 AM | Report abuse

I don't see the republican party as it is now, ever leaving up on the idea of privatizing social security. It is my belief that the huge national debt that the last three republican presidents are responsible for, was part of a hidden agenda to stop the benefit of social security and other social benefits that the government applies. It was also aimed at organized labor and fare pay, unemployment benefits and social welfare.
It was no accident that Bush introduced us to stimulus and left the country in shambles. Two hundred years ago Bush and his administration would of been tared and feathered, or even hung by the neck on the gallows.
The special interest idiots aren't hanging around confronting everyone at the voting stations because their not getting anything in return. Some of these politicians can turn your regular greedy little pervert into a movie stars or set them up in big time business funded by multi million dollar government grants that pay their employee's a poverty level wage....
Its a shame that the greedy and lustful politicians have sold us out to special interest and greed. Some day the republican supporters that aren't in the special interest will realize the idiots that they have been backing are nothing but common criminals, thieves and cheats.

Posted by: kimkimminni1 | November 19, 2010 11:10 AM | Report abuse

Welcome to the I99 corridor...

Posted by: kimkimminni1 | November 19, 2010 11:15 AM | Report abuse

Welcome to the I99 corridor...

Posted by: kimkimminni1 | November 19, 2010 11:16 AM | Report abuse

54465446,

Also consider that in many cases, life expectancy for American ethnic groups exceeds that for home countries.

As of several years ago, Asian-Americans have life expectancies of 84.9 years. In Bergen County, Asian-American women have a life expectancy of 91.

http://health.dailynewscentral.com/content/view/0002418/42/

The U.S. is weighed down by poor health choices amongst a subset of the population which results in chronic disease.

"The primary cause of the disparities between racial and geographic groups is early death from chronic disease and injuries, an analysis of data from the Census Bureau and the National Center for Health Statistics showed...The differences were attributed to a combination of injuries and such preventable risk factors as smoking, alcohol, obesity, high blood pressure, elevated cholesterol, diet and physical inactivity -- particularly among people from 15 years to 59 years of age. They were not due to income, insurance, infant mortality, AIDS or violence, said the study's lead investigator, Christopher J.L. Murray, director of the Harvard Initiative for Global Health."

Insurance didn't play a role in life expectancy. A far more effective way to ensure the health and well being of individuals would be not to mandate insurance coverage, but to mandate healthy life decisions regarding eating and exercise (not that I'm in favor of such a mandate).

Posted by: justin84 | November 19, 2010 11:20 AM | Report abuse

"Two hundred years ago Bush and his administration would of been tared and feathered, or even hung by the neck on the gallows."

This is probably true, but for excessive taxation and interference in the private sector (and possibly the wars) - not for threatening Social Security.

Posted by: justin84 | November 19, 2010 11:23 AM | Report abuse

Retirement income should be largely privatized.

The proper way to provide for income at a future date is to save. These savings not only are a source of future consumption, but as they are invested in new capital, there will be additional production to meet the needs of future retirees.

Pure transfers eliminate the need to save, and so rather than storing up wealth to be consumed later, wealth is simply taken from current producers.

A system where people provided for their own retirement via saving with charity filling in the gaps would probably work very well in a rich country.

From a Hayekian perspective, another workable option would be forced savings combined with a safety net for those who weren't able to save enough.

Posted by: justin84 | November 19, 2010 11:32 AM | Report abuse

"the point is that if California feels like they can tax their way to sustainability (as many liberal states do) eventually they'll find a way to force businesses to other states. There's only so much taxation that people can take. My own state of NJ has seen a large migration out of state and almost no one retires here. There needs to be a balance that I don't think we're going to see with California over the next 5-10 years. I hope I'm wrong for their sake but now with Governor Christie I see more businesses moving back to NJ and growing here than even with Governors Katz (oops Corzine) and McGreevey."

Yeah, I've seen that a bit myself. I always felt that NJ is beyond the point where it can be saved, but I hope Christie can prove me wrong.

Unfortunately its still a tax abyss.

Posted by: krazen1211 | November 19, 2010 12:16 PM | Report abuse

justin:

If you are speaking of savings INSTEAD of SS, then for once, you and I part ways. I think Social Security is far more effective to the vast majority of the population than any savings and side investments would be. Our financial acumen as a nation is too small and the risks too large. Furthermore, the Fed has guaranteed inflation and you can't fight the Fed. The people who get hurt the worst will be the savers, not investors like you and I.

I believe that there is no real crisis in SS, (unlike Medicare and Medicaid) and any problems can be addressed by taking the earnings cap off.

Posted by: 54465446 | November 19, 2010 12:25 PM | Report abuse

I wonder if privatization is really off the table, as you assume. Yesterday, I heard Mike Pence clearly advocate at least partial privatization for those under 40. He trotted out the same old stuff about how it will stabilize SS and increase the return to taxpayers--he called it a Better Deal, an improvement on the New Deal. The point is that just because they're not talking about it now, don't assume that if, God forbid, they take back the Senate and/or the White House in 2012, it won't come back in some modified form--maybe as an alternative to conventional SS, rather than a replacement, or as part of a plan to allow workers to divide SS contributions into payments to both the old form and to a private account, or some other arrangement, phased in over a decade. Zombie ideas never die, and they will never, ever give up on this.

Posted by: jsf1 | November 19, 2010 1:09 PM | Report abuse

fuse said, "If California could secede, or stop subsidizing the rest of the country, it wouldn't have budget problems"

Here are the numbers for California as of 2005 (http://www.taxfoundation.org/research/show/22685.html):

$289,637,000,000 federal taxes paid to Washington
$242,023,000,000 federal spending received
------------------------------------
$ 47,614,000,000 difference

fuse is correct. If California only broke even, it would be running a budget surplus. But like most blue states, it sends far more in taxes to DC than it receives. In contrast, most red states receive far more in federal spending than they pay in federal taxes.

Posted by: DavidinCambridge | November 19, 2010 2:45 PM | Report abuse

"If you are speaking of savings INSTEAD of SS, then for once, you and I part ways"

How about savings plus a safety net?

If a household earns $40,000/yr on average and saves 12.4% each year for 42 years and earns an annual real return of 3.5% (4% stocks / 2.75% bonds - hardly heroic assumptions), it will have $459,333 in real dollars. Put that into an annuity calculator (5.5% expected return, 2% inflation, 35 year* annuity and inflation adjusted), and I get a payout of $1,898 per month.

http://www.freeannuityrates.com/annuities/calculators/immediate-annuity-calculator.php

That's $22,776/yr, or 57% of pre-retirement income.

What does Social Security provide? I calculate $1,501.09 per month, $18,013.04 per year, and 45% of pre-retirement income.

http://www.ssa.gov/OACT/COLA/piaformula.html

So given the worst investment returns over a 40 year period in American history, the saver still manages to clear Social Security's payout by 26.4%.

Of course, there are other benefits to Social Security, such as setting a floor on retirement income and disability and all that. On the other hand, if a household makes $50,000 and a portfolio of bonds and stocks earns a 5% real return, that household can get a 35 year inflation adjusted annuity worth $4,231 a month vs. $1,767.75/mo with Social Security.

Furthermore, a household that can save thousands each year doesn't need to have a huge paycheck from the government in retirement.

Old age insurance might be appropriately limited to topping off the accounts of those who had incomes so low that they weren't able to save enough, were unable to find work for long stretches, or who retire during a severe market downturn.

"Our financial acumen as a nation is too small and the risks too large."

If you really wanted to be paternalistic you could restrict choices (e.g. no individual stocks or bonds, only certain funds with low expense ration, no trading only quarterly rebalancing or annual rebalancing, etc).

"I believe that there is no real crisis in SS, (unlike Medicare and Medicaid) and any problems can be addressed by taking the earnings cap off."

A few points on this.

Through savings, people obtain a property right and they don't have to be concerned about their retirement being a Congressional political football, or having retirement ages hiked on them, etc.

In addition, since a pure safety net would require far smaller outlays, it would attract far less politcal attention (particularly from right wingers now that the majority of it is privatized).

Finally, I'd like to reiterate that a savings program would mean that retirees would have real assets to consume in retirement, rather than having to take transfers from the prior generation. The increase in savings should boost the capital stock and economic growth, or at a minimum cut the current account deficit.

Posted by: justin84 | November 19, 2010 4:05 PM | Report abuse

*The 35 year inflation adjusted annuity is only meant to approximate a lifetime annuity for a retired person/couple - obviously having one's retirement income run out at 100 would be very problematic for those who live that long.

Posted by: justin84 | November 19, 2010 4:08 PM | Report abuse

--*if we adopted the healthcare system from any other developed country, our costs would plummet.*--

Ridiculous. You can't turn Americans into compliant Brits who have been queuing since time immemorial and wouldn't complain if ordered to, even in the midst of a dentist shortage when they already have rotten teeth. You can't turn U.S. citizens into Canadians who are 90% caucasian and locked indoors next to a fire half the year. Etc.

Lemme ask you this, fuse: Say the U.S. adopts single payer tomorrow. How are costs going to drop? And if less money is going somewhere, where is that where, and who would have been there collecting it, but no longer will be, and what will they do about it? Are doctors suddenly going to feel all giddily socialist and volunteer big pay cuts? Maybe they'll take more patients and work longer hours for the same money. Will hospitals magically be able to stay in business by losing money every year? All the "free" healthcare, who's going to pay for it? Rich people? There aren't enough of them. In fact, there aren't enough moderately well off people to pay for all the health care that would suddenly be in demand were it "free".

And how are people suddenly going to start living longer? Socialist doctors, or doctors who are suddenly paid socialist wages are going to magically become better doctors and start saving people who would have died before? Or will the government have to begin lowering standards at med schools because suddenly it doesn't make sense to go to school for eight extra years, and all the associated baloney, to have some political hack decree that your salary needs to be moderated for the good of the country.

Possibly pills will magically become cheaper, and those horrible, horrible pill inventors can learn what it's like to be food insecure. That'll teach the pharmaceutical industry.

Hey, did anyone here ever wonder what happened to U.S. based vaccine manufacturers? What are there, one or two left? There used to be scores of them. But the government got involved. Remember? I say, do the same for the pill merchants. Show them what caring people we are, demanding that they work for nothing, and plenty of it.

Tennessee tried managed care. Did the costs go down? No, the thing was deemed "not financially viable" and had to be abandoned. Massachusetts has its own socialist experiment going. Have costs there stopped their meteoric rise? No, no they haven't. And they won't.

Good luck, fuse. When it's all gone and you're there wondering where it went, think back, and try to remember.

Posted by: msoja | November 19, 2010 7:37 PM | Report abuse

justin:

Your numbers as always are terrific. You just have a different interpretation of human behavior, than I. The returns you describe are indeed not-heroic but the courage to say invested sometimes is.

Several years back, a friend who has her retirement in FERS showed me an email she got from a friend through work. This was at the point that Fed employees had lost literally 50% or more in the value of their holdings. The email from somebody who thought they had more financial knowledge than they did, suggested that everyone should move their money from the C Fund (the stock fund), to the bond fund for "safety" so they wouldn't lose more. I told her it was the worst possible advice you could get, and to leave her money in the C Fund.

Well you know the rest of the story. Those who rode it out recovered all of their lost moeny. I do wonder sometimes about those poor individuals who heeded the advice to get out at the lowest point and thus lost any chance of recovery.

I do indeed believe in the "paternalistic" aspect of retirement planning. I don't argue with your figures, only with the skill level needed to achieve them.

Posted by: 54465446 | November 19, 2010 8:32 PM | Report abuse

Let's get back to Social Security. It has a different source of income than medicare. It has its own source which is kept separate. As far as I can determine, the social security trust has been completely gutted by the federal government with no intention of every paying back a cent. (It is SUPPOSED to have $2 trillion, plus.) AARP reports to me that more money is coming into social security than is being paid out on benefits. That will continue until 2016. In 30 years adjustments are needed to keep up the current standard of benefits. Curious why benefits have to be cut to balance the federal deficit. Basically the goverment is embezzeling as much of the social security funds as it can, and no one is doing anything about it. What are the retired people going to do who depend on it to live? If this trend continues, we will have old folks starving in the streets. It is not welfare - these people have paid into it their whole working lives. Why doesn't one of the reporters from the Washington Post get on this? Biggest government financial scandal I can remember. The corrupt government should pay social security back. No reason in the world right now to even think of cutting benefits.

Posted by: Ambrita | November 20, 2010 1:55 AM | Report abuse

--*The corrupt government should pay social security back. No reason in the world right now to even think of cutting benefits.*--

That's the big danger of trusting one's assets to an outside entity. It's doubly or more dangerous when that outside entity is a political one. Those incompetent crooks could change their minds about paying SS back and there is very little that could be done about it. The money is gone, spent on decades of buying votes for politicians, some of 'em now long deceased.

Social Security was a bad idea when it was implemented, and it hasn't gotten any better over the years. And, as hard as it might be to unwind it, that's exactly what should be done.

Posted by: msoja | November 20, 2010 11:20 AM | Report abuse

The real Bush tax cut looting:

Let's go after the greatest hidden tax imposed on Americans --- the $10 Trillion 'Negative Externality Taxes' slyly imposed on American citizens by the oil corporations, banks, and weapons makers over the past two years in financial bailouts, wars, and global warming destruction.

Alan MacDonald
Sanford, Maine

Posted by: alanmd | November 20, 2010 7:21 PM | Report abuse

54465446,

My contention is that Social Security isn't really a safety net that cushions a few serious failures, but a massive transfer program that reduces our wealth and increases our dependence on the government.

Wealth is reduced not only because of reduced saving on account of the transfer program, but also because the transfer mechanism (taxation) creates some deadweight loss.

It doesn't take a whole lot of skill to generate modest returns on investment - invest in a broad stock index fund and a broad bond index fund for several decades. Left to their own devices, American businesses will reliably make a great deal of money over long periods of time. As your comment suggests, patience is far more important here than skill.

The one nice aspect of the no safety net (pure libertarian) model is that fear nicely counterbalances greed for most people. It's easier to notch up the risk/reward ratio knowing that your retirement income will never fall to zero. It's no secret that most individual investors who try to chase returns with aggressive investments often fail miserably.

Then again, there are those who will fail, no question. Millions of people, to be sure.

In the pure libertarian model, the solution is private charity. Under that model, my view is that roughly 70% of the population will be much better off, another 20% roughly the same or slightly worse off, and the bottom 10% will be much worse off without transfer payments. Of course, there will be fewer charity cases in that society than there are transfer payment recipients under our present arrangement, and members of society will have more resources to help them.

That said, there will be some people who fail - and some who fail through no real fault of their own - and will fall through the cracks of the private charity system ( though people fall through the cracks of the current system too).

While the pure libertarian model has the virtue of minimizing coercion via its respect of private property and most likely is the system that would maximize overall wealth as well, I'd view a Hayekian safety net as a huge improvement over the status quo and worth supporting (less property coercively taken through taxes, retirement is funded primarily by private property rather than by government fiat for most Americans, more saving and thus greater overall wealth).

Such a safety net could combine forced savings (and potentially forced holdings, if you prefer), and restrict benefits to those who are prematurely disabled, or those whose savings wouldn't keep them above the poverty level at age 65.

Posted by: justin84 | November 21, 2010 7:09 PM | Report abuse

54465446,

On the paternalistic question, people make a lot of choices that may appear to be poor.

Take dietary choices.

The typical American could probably add several years to his/her life expectancy with a better diet. Some people in particular have atrociously bad diets, diets which put them at risk of dying a decade or more prematurely.

How much paternalism should we accept from the government regarding dietary choices? Is there a good reason for us to accept government paternalism for retirement funding, but not on dietary matters?

Posted by: justin84 | November 21, 2010 8:56 PM | Report abuse

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