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March 26, 2005

Barro on Social Security

With an assist from Tyler Cowen, pgl at Angry Bear notes a new Business Week article by Robert Barro, wherein Barro repudiates his previous support for introducing private accounts into the Social Security system.  pgl likes Barro's piece because he emphasizes again the fact that the differential between current internal rates of return from the Social Security program and returns on capital is not prima facie evidence that private accounts dominate.  And he is right -- Barro is cogent, as usual, on this point.  Although they arrive at a similar spot, however, I don't think the boys at Angry Bear entirely endorse the reason Barro no longer favors the private account option. 

Contributions that fund just the minimum cannot go into a meaningful personal account. People would opt for too much risk, knowing they would be bailed out if they fell short. Also, contributions that cover the minimum provide no individual
return and, therefore, amount to a tax that discourages work.

Personal accounts have to supplement the minimum payout. But then why have a public program at all, rather than relying on individual choices on saving? I think there is no good reason to go beyond the minimum standard; that is why I view personal accounts as a mistake -- they enlarge a Social Security program that already promises too much.

What's the minimum payout?  Barro provides an example.

Knowing this, some people will save too little and rely on public support when old. Thus, there is reason to require workers to save for retirement. How much depends on what is viewed as a minimal standard of living; suppose it is $1,000 per person per month. (Currently, a person with the median earnings history gets $1,200 from Social Security.)

Barro goes on to propose some of usual fix-ups...

...baseline Social Security benefits should be indexed to prices. The practice of indexing initial benefits to past wages should be eliminated. Moreover, the price index should be an accurate one, such as the Bureau of Labor Statistics' chain-weighted consumer price index, rather than the standard flawed index. In addition, the normal retirement age should effectively be indexed for changes in life expectancy, going beyond the current plan to raise the age to 67. These three adjustments are all-important.

... and oppose others:

A mistake even greater than personal accounts would be, in addition, to raise the maximum earnings taxed by Social Security above the current $90,000, a proposal that President Bush seems to welcome. This change increases marginal tax rates by about 10 percentage points on a productive group that already faces high marginal rates.

As I noted in a previous post, this last method is the only one that appears to be politically popular (if you believe the polls, anyway.)  This is where I find the puzzle.  It seems to me that Barro's position leads to to the implication that Social Security be means-tested to the extreme.  Figure out what the "minimum payout" should be, and provide it only to  those who, for whatever reason, find themselves with retirement income flows that fall below that level.  In other words, make it look like the welfare system that Barro seems to think it should be.  (That may mean some phase-out of benefit payments so that there are not large jumps in effective marginal tax rates for those just above the minimum payout level.  But this would presumably still look very much different than the system we have today.)

I'm only guessing, but my presumption is that Barro did not spell it out this way because he believes that such an extreme position is politically infeasible.   But if that is so, then it seems quite likely that squeezing the program down to the minimum payout is infeasible as well.  And if that is the case, Barro's reasons for previously preferring private accounts come back into play.

UPDATE: Arnold Kling notices Barro's fiendish plot too.

March 26, 2005 in Social Security | Permalink


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I'm glad to see Barro's new piece.

I agree with Barro's assessment that private accounts are really forced savings accounts. I prefer to allow people to have the choice of savings or consumption.

I also agree with Barro's implicit view that SS should be means tested. This isn't to make SS a "welfare program", rather means testing will make it more like an "insurance program". No one plans on retiring poor, so SS is retirement insurance that protects you against the vagaries of life. If you retire "financially healthy" - you won and don't receive any SS. Just like Fire or Health insurance.

However, I have two possible technical differences with Barro:

1) any means test should be on a sliding scale so as not to discourage Seniors from working. As an example, say the SS payment was $1200 per month, we wouldn't start decreasing the payment until the recipient's total income exceeded $2400 per month (including SS). Something like that ...

2) The payment (currently $1200 per month) should be a "livable" income (Barro calls it "acceptable standard of living"), not just a survival income. I'm not sure how we define "livable", but I think that is a better standard. Out of this defintion we can arrive at how to index the benefits.

I disagree with Barro's comments on the the high income earner facing "high marginal rates". He has never been able to support that assertion.

Best Regards,
P.S. I read your blog everyday, I just haven't been posting comments!

Posted by: CalculatedRisk | March 26, 2005 at 04:48 PM

I admire Barro for his integrity. On the issue of whether there is some free lunch - I think he's right. On policy matters, however, I disagree with his Libertarianism - at least a bit.

Posted by: pgl | March 26, 2005 at 07:38 PM

He may have integrity but he lives in an alternate universe if he thinks we can borrow $2 trillion with "no effect on interest rates or the current account" - He may live in a world of Ricardian equivalency but the people he expects to lend him the money don't. Imagining that they do is fine for a middle aged economist with tenure but not for people who actually have to make the thing work and depend on the consequences.

Posted by: steve kyle | March 26, 2005 at 11:28 PM

The political compromise when SS was changed under Reagan included taxing SS income for very high income retirees.

This was a very effective backdoor way of
making SS means tested without giving up the propaganda benefit of keeping SS from being a welfare program.

Of course, that good solution is now threatened.

Posted by: spencer | March 27, 2005 at 01:44 PM

Switching to the Chain Index CPI (chain-weighted consumer price index)will offer a few surprises.

I've raised the issue of the CI CPI for a few months now, and Macroblog is the only web log that has responded (a previous post).

The use of the Chain Index CPI in conjunction with a Congressional shift to price-indexing may shock SSI beneficiaries.

Posted by: Movie Guy | March 28, 2005 at 08:57 PM

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