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April 23, 2005

Defending Cato

Mark Thoma takes a shot at the latest Cato Institute blast at the anti-privatization crowd, and pgl at Angry Bear asks "Will the Cato Institute Even Offer a Reply to Mark Thoma?".  Probably not, but I'll give it a try.

Out of the gates, Mark takes issue with this statement from Cato:

Yes, if solvency is the only issue at hand – and it does appear to be the singular focus of the Bush administration thus far – then raising the retirement age is a fine idea.

Mark's complaint?

First, the claim that the Bush administration has had a singular focus on solvency is wrong. Privatization does nothing to address solvency as the White House now admits, and no proposal from the administration addresses solvency, in no small part due to the fact that contrary to popular belief, the administration has no proposal for reform on the table. Their singular focus has been on privatization, not solvency, and the two issues are independent.

That's a pretty ticky-tack foul to be calling, if you ask me.  Without jumping into the issue of what the Bush administration has or has not claimed, the passage in question is hardly material to the Cato piece.  And I see no claim in the offending piece that privatization per se addresses the solvency problem.  In fact, the admission that raising the retirement age is sufficient to restore solvency explicitly separates the solvency issue from the privatization issue.

Mark continues:

Second, the claim that the Johnson-Flake proposal solves the solvency problem through privatization is false. The proposal replaces wage indexing with price indexing, a cut in benefits, it covers downside risk which increases the burden on the system, more so with moral hazard factored in, and there is the matter of the 6.5 trillion transition cost that is conveniently ignored in Cato’s analysis. The proposal achieves solvency by cutting benefits, not through privatization (there is another version of the proposal which also achieves solvency by cutting benefits).

I think Mark is misreading what the Cato folks are actually claiming.  This is from Cato's February post on Rep. Sam Johnson's proposed legislation, which is based on Cato's own preferred plan:

Workers who do not choose this option would remain in the current system, but their benefits would be based on a price-indexed formula, rather than the current wage-indexed formula. Workers choosing individual accounts would forgo future accumulation of Social Security retirement benefits, but would receive a tradable "recognition bond" based on those benefits already accrued under the current Social Security system.

The solvency issue is addressed by the change in indexation and the reduction of benefits.  To my knowledge, there has never been a claim to the contrary. (And the recognition bonds, by the way, are all about the transition -- honest people can disagree about whether these represent "costs".)

pgl gets a little closer to the Cato argument:

The most recent “Daily Debunker” from Cato discusses the Johnson-Flake proposal, which sounds to me like an old song: (a) reduce government expenditures by switching from wage indexing to price indexing; and (b) allowing workers to take half of their contributions and invest them anyway they want. Yes, (a) addresses this alleged solvency problem by cutting benefits, but Cato claims that workers will be somehow better off because of (b).

Even though their free lunch claims have been refuted numerous times over the years, the Cato crowd just keeps repeating these bogus arguments.

Close, but still no cigar.  pgl is correct about what the Cato clan believes, but incorrect, in my opinion, in characterizing those beliefs as "free lunch claims."  Their argument, as I understand it, goes something like this: There are many avenues to restoring long-term balance to the system.  Demographics (and delay) make fixes that rely on sustaining a payroll-based pay-as-you-go scheme an increasingly bad deal.  Alternatives that effectively cash out the system over time, coupled with capital-based returns on mandatory saving would be a better deal.  There is no free lunch -- just better and worse diets.

April 23, 2005 in Social Security | Permalink


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It is statements such as these:

5. "Saving" Social Security without individual accounts could require a 50% increase in Social Security taxes or a 27% cut in benefits.

on the Cato web site that led me to note the continued association of private accounts with solvency. It is a whole list of facts, and the only statement addressing solvency is this one which says solvency will be harder without personal accounts. Doesn't that imply personal accounts in and of themselves help with solvency? Do they?

There are other examples of this as well where it seems clear to me Cato is implying private accounts help with solvency.

Posted by: Mark Thoma | April 23, 2005 at 09:54 PM

Just a quick follow up. Underneath that statement is a link to a source:

5. "Saving" Social Security without individual accounts could require a 50% increase in Social Security taxes or a 27% cut in benefits.

Source: 2003 Social Security Board of Trustees Report

[the link is].

To me, the implication is that the linked report makes this statement about individual accounts. It doesn't. The report does not mention individual accounts as far as I could discover. I searched the entire document using IE's Find(on this page) for the words private, individual, and personal and the search came up null in each case. If someone could find that statement in the report for me, I'd be grateful.

Posted by: Mark Thoma | April 23, 2005 at 10:24 PM

Mark -

I agree that the item you reference in the Cato "Quick Facts" piece is sloppy. It is not hard to find such lapses in many "think tank" enterprises that are pushing hard on a particular agenda. But I know from personal experience that the brain trust at the Institute is not guilty of the delusions you and pgl suggest they are. I suppose the response might be that they do indeed know better, but that makes their misleading statements dishonest instead of merely mistaken, which is worse. However, I did not find the comments in the piece you were complaining about to be misleading. They are perfectly consistent with their own proposal for social security reform, which in my reading does not suggest that their is a free lunch and claims that properly constructed privatized accounts are one way to restoring actuarial balance, not the only way.

Here's my bottom line on this. Cato seems to have a pretty well-articulated proposal on the table. I would learn more from critiques of the substance of that proposal from smart guys like you and pgl than I learn from your pointing out the goofy missteps of their marketing gurus.

Posted by: Dave Altig | April 24, 2005 at 07:49 AM

David: Cato did endorse the Johnson-Flake bill and the free lunch spin behind it's claim there is a free lunch. It will have to wait a few days, but I'm sure I can find lots of Cato publications that also make these bogus claims. When I do, I'll post them. I will make sure, however, to note that you have not endorsed these bogus claims as you are too honest an economist to do so. Why you feel compelled to defend Cato - especially by saying they don't make these claims - is a mystery to me.

Posted by: pgl | April 24, 2005 at 03:42 PM

pgl -

As always, I stand to be corrected -- and, of course, I did admit that one of the Cato blurbs that Mark noted was out of line. I may be trying to draw too fine a point on things, but perhaps its useful to separate the scholars at Cato from the marketing machine. I do so because one of those scholars is a former colleague and good friend of mine, who I know to be absolutely unassailable in his intellectual honesty. He, like me, has been a long time advocate of some sort of privatization scheme, but has never suggested that such plans are free lunches.

That said, if you find a pattern of misleading statements, I'll have to back off -- and will duly tip my hat to you and Mark. However, I still think the Cato plan itself is worthy of straight criticism, even if the messenger is compromised.

Can't close without saying thanks to you (and Mark) for engaging in the dialogue with such good will (toward me at any rate).

Posted by: Dave Altig | April 24, 2005 at 06:22 PM

David - go to Under Soc. Sec. reform, there is a section called Rate of Return Issues. Over and over they make this bogus claim. Take the Soc. Sec. calculator. Bogus claim embedded. Geankaplos, Mitchell, and Zeldes in the late 90's documented their claims even back then and then proved them wrong. If you are going to defend them - at least understand what they are claiming - over and over again.

Posted by: pgl | April 24, 2005 at 10:50 PM

Would someone please correct my understanding of this debate?

What I see is a Cato Debunker suggesting that "solvency" should not be the end goal of policymakers. I would hope that all informed persons would agree with such a statement.

They go on to suggest that "mere" benefits cuts are also not sufficient, implying that their more radical proposals in the Johnson - Flake bill, for example, should be considered because they "improve" they system (an unspecified value judgment).

Mark Thoma and PGL seem to argue that CATO is arguing that the Johnson-Flake bill gets to solvency via privatization. I'm not sure why CATO would want to limit themselves to this, since the entire point of the Debunker was to look beyond "solvency", or so I thought.

Posted by: Victor | April 25, 2005 at 09:30 AM

Victor - we can have honest debates as to the other aspects of Soc. Sec. but it is true that Cato is arguing for a free lunch. In addition to showing this simple point (which David seems to be unaware of), I have linked to the GMZ NBER paper, which shows this is misleading. Robert Barro agrees with GMZ as does Gary Becker. You seem to disagree but have yet to explain why GMZ's analysis is wrong.

Posted by: pgl | April 25, 2005 at 01:52 PM

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