The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

June 29, 2016

Pay As You Go: Yes or No?

The Atlanta Fed's 2015 Annual Report focused on the graying of the U.S. economy. Part of the report and a follow-up webcast discussed how aging is driving the depletion of the U.S. Social Security and Medicare trust funds.

Based on current projections from the Congressional Budget Office, the Social Security trust fund is forecast to run dry around 2030 (see the chart); the Medicare trust fund in 2025. Barring a change in legislation, once the trust funds are depleted, benefits will be cut so that outlays match revenues. In the case of Social Security, this reduction will mean a 31 percent decline in benefits. To balance the Medicare budget, certain Medicare benefits will also face significant reduction.

MSocial Security Trust Fund Balance

As my coauthors and I explain in a recent Oxford University Press blog post, our research has found that pay-as-you-go programs for retirees such as Social Security and Medicare, on average, make people worse off, whereas means-tested social insurance programs for retirees, such as Medicaid and Supplemental Security Income (SSI), improve welfare.

These findings are based on comparing the welfare of individuals born into economies with different types of social insurance programs available. We find that, given the hypothetical choice between having or not having Social Security, the average individual would choose to be born into an economy without Social Security. However, when we ask if an average individual would prefer to be born into an economy with or without means-tested retiree programs, we find that he or she would strongly prefer the economy with these programs.

The preference for an economy without universal pay-as-you-go programs like Social Security is consistent with findings in the literature more generally. These programs are large (Social Security was 4.9 percent of U.S. gross domestic product [GDP] in 2013) and have distortionary effects. In standard economic models, the distortions lead to such large reductions in savings and labor supply that they tend to outweigh the programs' insurance benefits.

In contrast, means-tested social insurance programs for retirees, such as Medicaid and SSI, are much smaller. Together, outlays from these programs for the elderly were only 1 percent of GDP in 2013. These programs provide transfers only to individuals with limited income and assets or with impoverishing medical expenses. However, it is in these states of world, when one is poor and/or sick, that such transfers are most valuable, which is why we find that these programs improve welfare.

Researchers have found that means-tested transfer programs for working-age individuals are highly distortionary because they implicitly tax income and assets. However, we find that such distortions are less severe for means-tested transfer programs for retirees, since individuals cannot use these programs to finance working-age consumption and medical care.

Our findings suggest that one potential solution to the sustainability problems plaguing Social Security and Medicare may be to make these programs means-tested as well. Under such a system, the government would still provide protection against the risks of ending up old, sick, alone or poor, but with programs that are significantly less costly.

Of course, saying that individuals would prefer to be born into a hypothetical economy A instead of economy B is not the same thing as saying that current U.S. citizens want to make such a transition. Moving from the current system to one in which Social Security and Medicare benefits are means-tested would not be attractive to wealthier individuals who are already retired or on the verge of it. A compensation scheme would likely have to be devised and financed through taxes or government debt.

Once the cost of compensation is taken into account, we may find that such a transition is too costly to undertake. And as the population ages and the ratio of retirees to working-age individuals increases, the fraction of individuals in the economy who need to be compensated will increase further. This reality adds impetus to dealing with the Social Security sustainability issue sooner rather than later.

June 29, 2016 in Social Security | Permalink


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November 13, 2014

A Closer Look at Employment and Social Insurance

The Atlanta Fed's Center for Human Capital Studies hosted its annual employment conference on October 2–3, 2014, organized once again by Richard Rogerson of Princeton University, Robert Shimer of the University of Chicago, and the Atlanta Fed's Melinda Pitts. This macroblog post summarizes some of the discussions.

Social insurance programs in the United States and other developed countries represent a large and growing share of expenditures relative to gross domestic product (GDP). Assessing the costs and benefits of the diverse programs that make up the U.S. social insurance system is a key input into the design and implementation of effective programs. This conference featured seven papers that dealt with various aspects of this assessment. Although each program is designed to address specific issues and hence needs to be studied in the context of those issues, many of the same basic economic questions arise in each context. For example, what is the rationale for social insurance programs? Do they address inefficiencies, or are they mainly designed to redistribute from one group to another? Who benefits from specific programs? How do programs designed to achieve specific objectives distort economic outcomes? These are the questions that featured prominently in the conference.

A classic question in economics concerns the extent to which markets cannot achieve efficient outcomes without government intervention. It is well known that the so-called "invisible hand" can achieve efficient outcomes in a wide range of standard settings, but do these results extend to situations in which information asymmetries exist? In 1976, Michael Rothschild and Joseph Stiglitz's article "Equilibrium in Competitive Insurance Markets" suggested that in the presence of certain kinds of private information, insurance markets could not achieve efficient allocations. In fact, they argued that competitive equilibrium might not even exist in these settings. In "Adverse Selection Is Not a Justification for Social Insurance," Ed Prescott challenges this result and shows that competitive equilibrium exists and achieves efficient allocations in settings that include information problems such as Rothschild and Stiglitz's adverse selection problem. Key to this result is the presence of mutual insurance companies, and how this presence influences the contracts offered by insurance companies in equilibrium. In the Rothschild and Stiglitz environment, insurance companies were effectively agents with deep pockets that were outside the model.

Providing insurance to individuals in situations in which they face bad outcomes may distort individual behavior and lead to negative outcomes that outweigh the benefits of the insurance. This basic issue was addressed by three of the papers at the conference in three separate contexts. Jason Abaluck, Jonathan Gruber, and Ashley Swanson examined how prescription drug coverage through Medicare influences prescription drug usage; Hamish Low and Luigi Pistaferri studied the disability insurance (DI) system; and Bradley Heim, Ithai Lurie, and Kosali Simon examined whether the extension of health benefits to young adults as mandated by the Affordable Care Act (ACA) influenced the behavior of young adults.

In "Prescription Drug Use Under Medicare Part D: A Linear Model of Non-linear Budget Sets," Jason Abaluck, Jonathan Gruber, and Ashley Swanson study how prescription drug use responds to price changes associated with social insurance through Medicare. At the conference, Gruber discussed one key objective of their analysis: uncovering the elasticity of prescription drug use with respect to price. A large elasticity implies that providing insurance in the form of lower prices will distort behavior and lead to much higher drug use, and some recent papers have argued that this elasticity may be quite large. Their basic strategy is to study how changes in the details of Medicare coverage over time influenced individual choices. A novel feature of the estimation strategy is to take advantage of the fact that the marginal price people face depends on their overall annual expenditure on prescriptions, so that individuals can be sorted into groups based on histories of usage, interacted with changes in the details of coverage. A first key finding of this paper is that the elasticity is relatively small. A second key set of findings concerns the extent to which individual choices (in terms of plan selection and yearly expenditure conditional on plan choice) reflect departures from rationality, such as myopia or salience. The paper finds an important role for both of these effects.

Disability insurance (DI) represents a clear and classic example of the tension between insurance provision and insurance. While one would like to provide insurance to individuals who are unable to work, it can be difficult to assess the true ability of an individual to work, thereby creating the opportunity for people who are not disabled to also collect. Luigi Pistaferri addressed this issue in the paper he coauthored with Hamish Low, "Disability Insurance and the Dynamics of the Incentive-Insurance Tradeoff." This paper builds and estimates a structural model that incorporates labor supply, health shocks, earnings shocks, and the key details of the DI application process. The authors conduct various counterfactuals and assess the tension between insurance and incentives in the context of the U.S. DI program. Several results emerge. First, making the review process less strict would enhance welfare despite worsening incentives for people to misreport their health status. This is because the current system denies too many truly disabled individuals from collecting. But decreasing generosity would also increase overall welfare by decreasing the incentives for false collection.

One of the first measures of the Affordable Care Act (ACA) to be enacted was the provision that allowed dependent individuals to remain covered by their parents' healthcare plans until the age of 26. The paper by Bradley Heim, Ithai Lurie, and Kosali Simon, "The Impact of the Affordable Care Act Young Adult Mandate: Evidence from Tax Data," aims to assess the extent to which this provision has affected outcomes for young adults in terms of employment, wages, schooling, and marriage. As Simon described it at the conference, the novel aspect of this analysis is that it tracks outcomes using administrative IRS data, which affords a large sample size. The main empirical strategy is to compare the change in outcomes from before and after the provision was enacted for individuals below the age threshold with the change in outcomes for individuals just above the age threshold. The paper also reports estimates based on triple differencing that uses information on parental health insurance status. The main message from the analysis is that one cannot find robust, statistically significant effects of this ACA provision on outcomes for young individuals. One important qualification is that despite the large sample size, standard errors are still quite large, so that the analysis cannot rule out the possibility of economically significant effects.

Naoki Aizawa and Hanming Fang also considered the effects of the ACA in their paper "Equilibrium Labor Market Search and Health Insurance Reform." However, in contrast to the above papers that focus on how a particular program feature might influence individual choices, this paper focuses on how the creation of health insurance exchanges and the individual insurance mandate would affect the overall equilibrium in the labor market, taking into account the firms' decisions on whether to offer insurance and the wages that they offer to workers. In his presentation, Fang discussed building a structural equilibrium model of the labor market and estimating it using a variety of data sets. The authors find that the ACA will reduce the uninsured rate from about 20 percent to about 7 percent. But interestingly, the paper finds that the uninsured rate would drop even further if the employer mandate were dropped from the ACA. General equilibrium responses are key to understanding this result, illustrating the importance of studying these effects.

One of the rapidly growing social insurance programs is Medicaid. Mariacristina De Nardi, Eric French, and John Bailey Jones assess the benefits of this program in their paper "Medicaid Insurance in Old Age." As French described at the conference, this paper uses a structural approach to assess the extent to which households with different income and health status benefit from Medicaid. The analysis focuses on individuals from age 70 and forward using data from the Health and Retirement Study, emphasizing the risks that individuals face as a result of health shocks. Medicaid offers partial insurance against these shocks, particularly the large expenditures associated with nursing home care, and the paper assesses the value of this insurance for individuals in different positions in the wealth distribution at age 70. The paper has two main findings. First, the insurance value of Medicaid is substantial, and decreasing the size of the program would entail large welfare costs in excess of one dollar for every dollar of reduced spending. Second, expanding the size of the program would offer significant insurance value only to wealthy households. The authors conclude that in terms of managing the risks of the elderly, the current scope of Medicaid seems appropriate.

As the above discussion emphasizes, a critical input into the design and assessment of social insurance programs are data that allow us to reliably document the outcomes and groups that the insurance program wishes to help, as well as measure the efficacy of existing programs in achieving desirable outcomes. In the paper "Welfare Programs and Survey Misreporting: Implications for Income, Poverty and Disconnectedness," Bruce Meyer and Nikolas Mittag documented the serious shortcomings of several standard publicly available data sets when it comes to measuring the resources available to the poorer segments of the population. Meyer presented the paper at the conference, and it uses administrative data from New York State that allow them to link income and transfer data, both cash and in-kind, and compare the measures obtained using these administrative data with the measures obtained using data from the Current Population Survey (CPS), which is a standard source for publicly available data on the income distribution. The results are striking. Relative to analysis based on data from the CPS, analysis using administrative data shows better outcomes in terms of inequality and disconnectedness and yield larger effects from existing programs in terms of their ability to affect these outcomes.

Full papers or presentations for most of these papers are available on the Atlanta Fed's website.

By Melinda Pitts, director of the Atlanta Fed's Center for Human Capital Studies, Richard Rogerson of Princeton University, and Robert Shimer of the University of Chicago

November 13, 2014 in Employment, Labor Markets, Social Security | Permalink


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"...Medicaid offers partial insurance against these shocks, particularly the large expenditures associated with nursing home care..."

Keeping in mind that in order to qualify for long-term nursing home care under Medicaid, the individual has to spend down all their savings and assets first, before they can even apply for that assistance, and that spending is sharply limited to things like medical expenses and prepaid funeral plans, (NOT dispersals to children or charities or other expenses) resulting in each Medicaid entrant becoming functionally bankrupt, with no estate to leave to the next generation -- yet another way in which the upper and lower quintiles are being forced further apart.


Posted by: NoniMausa | November 14, 2014 at 09:00 AM

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October 09, 2006

If You Care About The Deficit, You Care About Social Security

Dean Baker has a bone to pick with Ben Bernanke:

The projected increase in Social Security spending is relatively modest over the next 45 years and in fact no larger than it was over the last 45 years. In addition, he also knows that workers have already largely paid for this projected increase in spending, paying a designated Social Security tax that exceeds current needs. The Congressional Budget Office projects that future tax revenue, plus the accumulated surplus over the last quarter century, will be sufficient to pay all scheduled Social Security benefits through the year 2046, with no changes whatsoever.

So, Mr. Bernanke was not being honest when he claims there is a problem with Social Security...

At the risk of being labeled one of those "unified budget types" that keep Angry Bear's pgl angry, I object.  The trick there is the stipulation that "future tax revenue, plus the accumulated surplus will be sufficient to pay all scheduled Social Security benefits."  It is fair enough to say that the Social Security "trust fund" is a promise to workers that the government ought not breach.  It is incorrect to say that it will finance "all scheduled Social Security benefits" in any economically meaningful sense. 

The relevant piece of information is this, from the 2006 report of the Social Security and Medicare Board of Trustees:  "Projected OASDI tax income will begin to fall short of outlays in 2017..."  In other words, the Social Security ceases to be self-financing out of payroll taxes in about 10 years.  Absent an increase in overall tax revenues or a reduction in government spending, the payment of scheduled social security benefits adds to the deficit. If you think that deficits are a problem, then logic compels you to treat the payment of accrued Social Security promises as a problem, and one that will arrive in fairly short order.

Note that the same sort of problem does not apply to a large chunk of the Medicare program.  Again, from the Board of Trustees:

Part B of the SMI Trust Fund, which pays doctors' bills and other outpatient expenses, and the recent Part D, which pays for access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future by operation of current law that automatically sets financing each year to meet next year's expected costs.

Part A of the program, which covers hospitalization costs, remains a problem, of course, and it is big -- about 1/2 of all Medicare outlays.  And you might reasonably argue that the increasing share of medical expenditures in both government expenditures and GDP is worrisome. Though I think this subject to some dispute, I'm not inclined to object too vehemently. But I just don't buy the argument that this is reason for ignoring the very real imbalance that exists in the Social Security system.

Several bloggers I admire have consistently argued that, given the benefit promises they imply, it would be a very good thing to not commingle Social Security taxes with other sources of federal revenues.  pgl is in that group.  So is Calculated Risk and Andrew Samwick.  In the name of transparency, you can put me on that list as well.  But unless you harbor pretty firm Ricardian views -- in which case you believe that any discussion of the deficit per se is fundamentally off-topic -- the relevant economic measure is indeed the unified budget.  And for that, the trust funds don't mean a thing.

October 9, 2006 in Social Security | Permalink


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I appreciate the words of wisdom from President Bush's Social Security trustees (4 of the 6 arer political appointees). In spite of the efforts by politicians to confuse the issue, under the law, the bonds held by the trust fund are assets for SS and are treated as such in SS accounts.

Unless Congress votes to default on these bonds (can anyone identify any advocates of default? I'm sure we can get them a new job post-November)then this money is there for SS. Of course, this money must be raised by the federal government from tax revenue, but this has nothing to do with SS finances.

This trick by the enemies of SS would be like saying that Ross Perot has a big problem because he holds $2 billion of government bonds, and the government doesn't have the money to pay him back. It is certainly reasonable to claim that government debt is too large, but this gets back to a discussion of the cost of the tax cuts, the war, etc. This is not a a discussion about a program that is fully funded to 2046 by its own tax.

Posted by: Dean Baker | October 09, 2006 at 11:04 AM

I noted your objection in my update as I object. Let's be clear - someone's taxes will go up either explicitly or implicitly for reasons that I note. Now if you are all for converting payroll contributions into that backdoor employment tax increase that I keep mentioning - just say so. Lord knows, the GOP politicians will never be so honest.

Posted by: pgl | October 09, 2006 at 12:07 PM

I said this in comments at AngryBear and repeat it here in slightly different form:

Your declaration that "Social Security ceases to be self-financing out of payroll taxes in about 10 years" is disingenuous at best, as the mechanism for addressing that issue has been in place and active for the past 23 years: that is, the Greenspan Commission's increase in the payroll tax rate to cover this very matter was based on demographic analysis (which remains spot-on) and economic analysis (which was, if anything, pessimistic) and concluded with that investing the excess collection in Government Securities (read: risk-free investment) to prefund the SocSec TF so that it can provide me and my peers (in both directions) with the same level of benefits those slightly older received.

That the "grasshoppers" of the current Administration want to use our monies to pay for its yachts does not undermine the reality that one would have to breach the social contract offered by the Greenspan Commission to contend that 2017 (give or take four or five years) is significant as anything other than a Known Event for which we "ants" of the Baby Boom have been saving.

This is not a future matter of Ricardian Equivalence; that decision has been in place for more than a generation. To suddenly discover that the general fund will owe more is no different than having a balloon or IO mortgage with a set payment schedule.

Posted by: Ken Houghton | October 09, 2006 at 12:47 PM

We've only managed to keep SS going by a 14-fold increase in payroll taxes--including raising both rates and income subject to those rates. That's not an option anymore.

The simple reality is that the Federal govt. has NEVER been able to sustain revenues of even 19% of GDP. So, it won't be able to raise the 25-30% that it would need to meet promised SS-Medicare-Medicaid when the baby boomers are fully retired, either.

And, shortly, that will become obvious. Not in ten years, more like three or four, when the first eligible boomers retire and stop paying in and start collecting. That's when the SS surplus begins to decline and congress has to either replace that revenue or cut spending. Whether they like it or not.

Btw, it is truly Orwellian Double Think to hold in one mind, simultaneously, the two contradictory ideas, 1; The SS trust fund has any value. 2; The important figure is the combination of Debt Held by the Public and Intragovernmental Holdings.

Posted by: Patrick R. Sullivan | October 09, 2006 at 04:25 PM

My sincere apologies to David for letting the virus known as Patrick R. Sullivan coming over here with his usual offpoint banter.

Patrick - beyond the World War II period, how many times has the Federal government run expenditures massively in excess of 20% of GDP? I suspect none. So this notion that the Federal government has even TRIED to collect more than 20% of GDP in revenues strikes me as some Marxist fantasy. So Patrick, pray tell - are you a closet frustrated Marxist disguised as a rightwing hack?

Posted by: pgl | October 09, 2006 at 05:42 PM

Few discussion get my blood boiling as this one does. I am not an economist, nor an academic. I am a 55 year old working man who has never earned more than the SS tax base in my entire working career. I think I am pretty typical of the baby boom generation.

We agreed back over twenty years ago to have our SS taxes raised in order to build up a trust fund for our retirement years. As we understood it then, these extra taxes would be used to reduce the governments borrowing from the private sector. This would strengthing the federal govenments balance sheet by replacing public debt with trust fund debt. Then when the time came that us baby boomers started retiring the govenment would have a clean balance sheet and could pay off the trust fund debt by borrowing from the public sector.

Instead what happened is they used our extra payroll taxes to reduce income taxes and continued to increase the public public debt anyway. And now we have federal government with a far weaker balance sheet than we were told to expect and we have politicians telling us that they have to cut our benefits in order to keep the system solvent.

Someone should hang for this.

Posted by: ken | October 09, 2006 at 10:05 PM


Which generation elected the politicians that did it?

Perhaps they should hang for this.

Posted by: ErikR | October 10, 2006 at 06:01 AM

Ken, well stated. It's incredibly sad for Fed credibility that AG, highly praised for so long by the Economics community, so energetically fed BOTH sides of the argument.

Posted by: bailey | October 10, 2006 at 07:42 AM

I'm not surprised that pgl is too lazy to look up Federal expenditures as a pct of GDP, I always have to do the work for him. Beginning in the mid 70s (thanks to total control of Congress by Democrats) spending hit 21.29% in 1975.

It rose gradually to 23.5% in 1983, until Reagan and his coalition in Congress reversed the trend. Even with the top marginal rate at 70% revenue fluctuated between 17.1% and 19.6% (with only two years above 19%).

That's the reality.

Now, would you like to finally take a crack at reconciling your contradictory beliefs in 1. the 'reality' of the SS trust fund, and 2. the burden of 'intragovernmental debt holdings'?

Posted by: Patrick R. Sullivan | October 10, 2006 at 09:22 AM

I realize this comment is coming a bit late, but I come to this topic from the health care side of things. In particular I was struck by the final quoted paragraph from the Medicare BOT. The one referring to the "mechanisms" in place to adjust reimbursement for doctors and hospitals and keep the program in the black. I believe that mechanism refers specifically to an annual adjustment to the Medicare Conversion Factor referred to as the Update Adjustment Factor. It grows out of the concept of Sustainable Growth Rate.

The adjustment factor is based upon the difference between predicted and actual expenses for the previous year and the last 10 years in aggregate. There is a complicated factor (the Medicare Economic Index I think) adjusting for things like GDP and non-farm wages included as well. By statute, the adjustment can only be between something like 3% and -7%. If memory serves, the last 4-5 years expenditures have been far enough above predicted expenses that the adjustment factor was calculated to be like -22% (and therefore limited by statute to -7%). I'll leave it as an exercise for readers to find out what the ACTUAL Medicare Update Adjustment Factor was for those years (hint: it wasn't negative).

I can't blame docs for objecting to consecutive large reimbursement cuts on already low Medicare reimbursement rates (these rates generally form the ceiling for Medicaid reimbursement, and private insurers often peg their reimbursements to ~10% over Medicare). So consecutive large cuts like those that would have come under the Update Adjustment Factor "mechanism" would have reverberated throughout the system. That said, it's hardly a reliable "mechanism" for checking growth in Medicare Part B (doctor and outpatient services) spending.


Posted by: pidgas | October 13, 2006 at 02:51 AM

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February 08, 2006

This Week In Entitlement Reform

In this the federal budget week, blogland brings a couple of interesting discussions on social security and health policy reform.  First up (in reverse chronological order) is the latest Econoblog installment featuring Mark Thoma and Andrew Samwick.  This, from Andrew, neatly summarizes my thinking about the foundation on which social insurance reform must be built:

As global trade increases, the U.S. loses its ability to be the least-cost producer if it stipulates that employment contracts must include taxes for all manner of redistributive programs. If we are to purse both social insurance and economic growth, we need to consider alternatives to the employment relationship as a way to deal with our health and retirement needs.

Mark agrees, but is skeptical about solutions that rely primarily on the private sector:

There are substantial problems -- market failures -- in the private-sector provision of health and retirement insurance that are not easily overcome with market-based regulatory schemes.

For example, adverse selection issues, where high medical-cost individuals are excluded from coverage or are forced to pay extremely high premiums, plague health-insurance markets. High administrative costs of private health insurance are another problem, and there are problems in the private provision of retirement insurance as well. When markets fail, the insured often pay for the uninsured, and for these and other reasons I believe it's best to share the burden more generally through government programs that require individuals to contribute insurance premiums.

I confess that I don't quite buy that one.  As Andrew points out, there is a distinction between government regulation of an industry and government production of the service that the industry supplies:

The first mistake is to make insurance voluntary when we don't subsequently exclude those who need care from getting it at the public's expense. We should make health insurance mandatory, but we should do so by putting the mandate on the individual, not the employer...

The second mistake is to allow the tax code to distort the type of insurance offered. Premiums are fully excludable from taxation, but out-of-pocket expenses are only imperfectly tax deductible. This generates extremely generous, first-dollar coverage and little incentive for individuals to economize on the care they receive. Rather than the Bush administration's proposal to make out-of-pocket expenses deductible via expanded medical savings accounts, I favor removing the excludability of health-insurance premiums from taxable income.

The third mistake is to force young workers to subsidize older workers in group health-insurance markets. Insurance is supposed to transfer resources from those who have unpredictably low expenses to those who have unpredictably high expenses.

I agree with Mark that the government should mandate coverage, but that doesn't mean the government should centralize the provision of services or dictate their terms. I would prefer to fix some of the obvious mistakes before making such radical changes to the system.

Andrew's diagnosis gets a second from Dr. Becker in this week's installment of the Becker-Posner Blog:

...many of the problems in the health system are correctable with the right policies. I believe the three most important defects are the over 40 million Americans who are not insured, the weak incentives to economize on unnecessary medical spending by most people covered by some form of health insurance, and the tying together of health insurance with employment as a result of special tax privileges provided to employers.

Arguably the best parts of President Bush's State of the Union address are his suggested reforms in the health care system. They do not fully attack all the problems, but they do offer significant improvements. I will concentrate particularly on his proposals to extend Health Savings Accounts (HSAs), and to improve the portability of health insurance when workers change jobs.

Professor Becker goes on to an extensive discussion of the HSA proposal, the benefits of such a plan, and a very wise observation about at least one of the costs:

President Bush has proposed changes in the health care system that initially will reduce tax collections and increase federal spending at a time when the US government is already spending too much and running a sizeable budget deficit. However, by making the health delivery system more efficient, this important set of proposals in the State of the Union address might end up raising tax collections, and certainly would improve the efficiency of the American economy.

There are plenty of other interesting things in these two items -- the discussion, for example, of the Liebman-MacGuineas-Samwick social security reform proposal which I have endorsed (and which was met with a resistance I find as baffling as members of Congress giving themselves a standing ovation for doing absolutely nothing about fixing a system that clearly needs to be fixed).

Really, I beg you.  Read the whole things.

UPDATE: William Polley agrees the key question is "How much social insurance should be provided by the government and how much should be provided by markets." 

There is much relevant discussion at Angry Bear: here, here, and here.  It's fair to say we've taken different sides on this one.

Kevin at Truck and Barter points to research by Alice Zawacki and Amy Taylor on the relationship between employer characteristics and the provision of health insurance benefits. 

You'll find some thoughts about the Posner half of the Becker-Posner conversation at winterspeak

Max remains a consistent reform-skeptic (at least as it relates to social security).

February 8, 2006 in Health Care, Social Security | Permalink


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Not exempting healthcare costs from income is not unreasonable, but decoupling healthcare from employment, as is increasingly being done, would expose all of us to the prevalent market failures. If government determines how much should be spent on it, they had better be prepared to pay for it for all those that can't, and this is the largest portion of the population.

Health Savings Accounts, though, really focus on the wrong end of the problem. If we broke the costs down by occurence and treatment we would see the majority of the costs are those that would fall under catastrophic coverage. They would do little to increase efficency.

Posted by: Lord | February 08, 2006 at 01:05 PM

Lord, Irespectfully disagree. I have a family of four, and a good income. I have elected to get the cheapest insurance I could and pay for medical out of pocket(I am self employed) The HSA account is great for me, because I get to put money away tax free, and if I don't get sick I don't use it. the only thing that worries me is a catastrophic event or illness. I have insurance to cover that.

I agree that the health system of this country is in need for reform. I think that we need to thinking terms of market based reforms and competition, and not of insurance and deductables. there needs to be tort reform as well.

If we went to a simple fee for service system, I think costs would go down, and we would get better service. Vouchers could be given to peopel that couldn't afford it.

Posted by: jeff | February 08, 2006 at 10:02 PM

I agree with the principle people should pay for the benefits they receive, but realistically fewer than half the people out there are able to do so. Nor do I have any illusions that reducing costshifting will materially alter who pays nor how much they pay. Government is probably the largest costshifter of all and it is unlikely changes along these lines will decrease costs. Government will continue to pay for something like half of all healthcare. Therefore I think it misleading to think of this as a private versus public problem, it is a question of the best way to pay for and provide a public benefit.

We all like tax breaks. It can be structured as accounts plus catastrophic coverage for those with adequate incomes, but what do we do with the other half of the healthcare system, those that don't? Does the government fund their accounts? Does the government cover the catastrophic coverage after your insurer has dropped you, or more likely after you have had to drop it when you could no longer pay the costs? What proportion of the premium did you save over a full coverage plan?

While coverage may be separated from employers, it cannot be separated from employment as that is the only means the vast majority of people have of paying for it.

Posted by: Lord | February 09, 2006 at 12:23 AM

Lord -- I'm not sure I understand what makes health insurance special here. In the state I live in, automobile insurance is mandatory, and you darn well better have it. Yet nonone suggests that the insurance ought be provided by the government. You might say the example is forced because people can opt out by not driving -- something that would not be available if health insurance is mad amndatory (or at least the opt-out route would totally unacceptable). But that is where government transfers and such come in. My point is simply that there really is a choice between government provided services and government subsidized services and, in most cases I can think of, if one is feasible the other will be as well. And I strongly prefer the latter.

Posted by: Dave Altig | February 10, 2006 at 02:14 PM

Government doesn't pay for auto insurance; we all do when people without it have accidents. Let them eat cake is a nice sentiment but hardly deals with the problem.

The difference is government is half or more than half the market. If you don't talk about about how that challenge is met, then you aren't talking about healthcare.

Here is an alternative. Tax healthcare 100% and redistribute the revenues to cover the other half. This would be consistent with proposals suggested and have many socially desirable effects.

Posted by: Lord | February 11, 2006 at 11:58 AM

The idea that health insurance isn't enough like auto insurance now, and that HSAs move us further in that direction, is baloney.

You don't pay an "annual deductible" on car insurance - you pay a "per-event deductible". And the stuff that auto insurance covers isn't things that changing your oil would have any effect on, so the oft-claimed perversity of health insurance "covering the equivalent of oil changes" is also baloney.

Posted by: M1EK | February 12, 2006 at 10:29 AM

In comparison to pharma drugs herbal medicines have less adverse effects...

so visit and buy herbal medicines only

Posted by: khosla | February 12, 2006 at 11:38 PM

Lord and M1EK -- I think I made my point poorly. I was only trying to say that the heavy involvement of government in health care is a measure of the social value placed on access to the service, not an intrinsic quality of the moral hazard and adverse selection problems associated with the insurance being provided. The oil change analogy is a clever one, but there are all sorts of other preventative measures that are involved in the types of events that automobile insurance does cover ... not talking on cell phones while driving, not eating when operating a motor vehicle, and so on. Or take homeowners insurance. Fire prevention can be greatly facilitated by the addition of smoke alarms, an appropriate number of well-maintained fire extingushers, regular servicing of furnaces and fire places. Some of these things can be factored into prices, of course, but so it is also with health insurance (in the form of rate reductions for nonsmokers, participants in "wellness" programs, and so on). Or let's get started on life insurance...

Posted by: Dave Altig | February 13, 2006 at 06:37 AM

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December 15, 2005

Why Social Security Reform?

My (admired) colleague-in-blogging Calculated Risk is unimpressed by my call for support of Andrew Samwick's latest proposal for reforming the U.S. social security system.  In the comment section of my previous post, CR writes:

Of course I oppose the Samwick, et. al. plan. The reason is simple: the two major fiscal problems facing America are 1) Health Care and 2) the General Fund deficit. Both of those problems dwarf any SS shortfall.

Any good manager would start with the most serious problems first. Wouldn't it be great if the blogosphere banded together and pushed the National debate to those two issues?

Ahhh. Now I remember why I haven't written about social security reform in awhile.  Oh well. I opened the door, so I may as well walk on through.

I'll start with this: I don't understand CR's position at all.  By his logic, we ought to avoid grabbing the perfectly edible fruit on the branches that can reached from the ground because there is some really juicy stuff way up at the top of the tree (that can be reached only after a fairly arduous climb.) That just doesn't make much sense to me.

Here's my view, in brief:

a) I agree with CR ranking the health care issue in front of social security, but believe it is a much harder nut to crack.  Where, for example, is the nonpartisan proposal on that one? If some civic-minded across-the-political-spectrum group like Samwick-Liebman-MacGuineas have a simple well thought out compromise plan, by all means let's all jump on board.  I've yet to see it, though. and am disinclined to let other opportunities languish while we wait for it to arrive.

b) Let's put things in perspective. No matter what side of the issue you are on, the most important immediate subject for the country is the war, as there is much more at stake than today's treasure.  If you are going to argue we can only do one thing at a time, then it seems to me everything on the economic policy list goes off the table for now.  I, of course, am willing to accept that we can walk down the policy street and chew a few pieces of gum at the same time.

c) My philosophy on the federal deficit is that if you get the spending, tax, and transfer stuff right, deficits per se -- especially of the magnitude we are experiencing now -- are of second or third order importance.  It is better to let the (completely manageable) deficits we have now run for a bit, while we get the big picture on fiscal policy right.  By getting some sensible social security reform, for example.

UPDATE: Calculated Risk posted his arguments mentioned here, and generated plenty of reaction. Jane Galt correctly (un my view) notes that the social security problem and deficit problem are inextricably linked. Arnold Kling reinforces the argument that we ought to be looking at the fiscal policy as a whole. And Andrew, not surprisingly, agrees that we ought to first solve the problems for which ready solutions exist.

December 15, 2005 in Social Security | Permalink


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We can have as many retirees as the economy can support. Screw up the econmy and you end up killing retirees with waiting lists and other deceptions that hide scarcity.

Posted by: Mark | December 15, 2005 at 05:57 PM

I sincerely appreciate Professor Samwick's efforts - I just think they are aimed at the wrong problem. And I respectfully disagree on the consequences of the General Fund deficit - so lets focus on health care.

The GAO estimate of the NPV of the Medicare shortfall is $27.8 Trillion compared to $3.7 Trillion for Social Security. Clearly fixing SS and ignoring health care only fixes about 10% of the problem related to these two areas.

The savings from reforming health care are potentially huge. The US has the most expensive health care system in the world and some of the worst outcomes of any first world country. Talk about an opportunity for reform!

And I think the US can tackle multiple problems at the same time, but for fiscal issues I'd start with the largest ones first. I don't think SS reform will ever be easy, so why not spend our energy on a bigger payoff?

And finally, from my management experience, I always make someone that works for me prove they can clean up any mess they made, before I give them a new assignment. Mr. Bush is responsible for Iraq, the General Fund deficit and a significant portion of the Medicare deficit (according to the GAO). If he can demonstrate competence in cleaning up those messes, I will be willing to give him another assignment.

Best Wishes.

Posted by: CalculatedRisk | December 15, 2005 at 07:08 PM

"I always make someone that works for me prove they can clean up any mess they made, before I give them a new assignment."

How does this jive with the following:

"The Chinese definition for insanity says, 'continue doing the same thing year after year but expecting different results.' "

Posted by: nate | December 15, 2005 at 07:36 PM

nate, the alternatives to making someone cleanup their mess is to either demote or fire them.

If I could, I'd fire Mr. Bush. Unfortunately he has a contract that runs for another three years, 35 days and 16 hours - not that I'm keep count.

Best Wishes.

Posted by: CalculatedRisk | December 15, 2005 at 07:44 PM

Mark Thoma also weighed in what some tough questions. This Angrybear has put his two cents in on what at least is an interesting proposal.

Posted by: pgl | December 15, 2005 at 07:56 PM

I like the key feature, the mandatory payment of X amount toward ones own retirement fund. The same idea should be included in a health care solution.

One cannot drive a car without buying liability insurance, one should not be allowed to work without setting aside a minimal amount into a tax advantaged health savings account. The real cost to the purchaser would be negligible and numerous inefficient government programs could be canceled.

The empowerment of the poor to control their health care and retirement savings would be a nice "freedom thing".

Posted by: Jack K. Miller | December 15, 2005 at 08:00 PM

"The empowerment of the poor to control their health care and retirement savings would be a nice "freedom thing"."

Just exacctly what does that mean? The prescription drug plan is so convoluted with "freedom" that SMART RICH people cannot understand it.

Why is it that businesses focus on "core competancies" and individuals are supposed to be experts at healthcare, retirement, finance?

Somhow taht "freedon thing" just rigns hollow.

Posted by: me | December 15, 2005 at 09:11 PM

Read Prof. Thoma's take on the proposal. This is not the low hanging fruit. The crowd in the white house will use social security reform as an excuse to cut social security taxes without making any real changes in the social security outlays. That's how they've managed the general fund and exactly the pitch they made when they were touring the country. We'll cut your taxes, you'll invest the money, look at how much better things will be. They never talked about social security cuts because they had no intention of making any. If the democrats support Samwick's plan, it will turn into another unfunded tax cut in committee.

Posted by: Mark Sullivan | December 15, 2005 at 11:11 PM

Actually they have talked about nothing other than privatization and benefit cuts. Any tax increases have been verboten. I'm afraid they would pass this and then decide they really can't allow raising of the cap.

Posted by: Lord | December 17, 2005 at 12:22 AM

'Calculated Risk' says, "Any good manager would start with the most serious problems first." Wrong. A good manager weighs the most serious problems vs the ones that are he easiest to fix. Lots of times it is the latter that needs to be tackled first.

Posted by: Norman | December 17, 2005 at 09:07 PM


Proper prioritization of the federal problems in terms of financial risk is critical.

Calculated Risk is correct in his approach.

Moreover, he is astute in stating the following at his blog:

"One of the skills of a successful executive is to be able to manage with two lenses: a wide angle lens (to see the big picture) and a telephoto lens to zoom in on problems. But just like a photographer, the executive needs to know when to use each lens."

"If an executive uses the telephoto lens on every problem, they will never see the big picture."

Tackling the financial problems and program costs in the correct order is important. Particularly if one fix, Social Security, will be used improperly as a continued financing mechanism for the General Treasury (General Fund). It makes no sense to address Social Security first under such conditions. We have already played that card disingenuously on the citizens.

The growing fiscal deficits represent the largest financial threat to the future of the United States of America. Simply stated, the projected rise in net interest payments on the U.S. Debt represent the largest and most serious threat. Not Social Security. Not even health care expenditures.

By 2040, the net interest mandatory obligations dwarf the funding needs of Social Security or health care, representing approximately 85% of their total funding needs. Thereafter, the net interest obligations continue to grow, representing an even larger share of funding needs vs. revenues under the tax cut extensions model.

Evidence? Yes.

Let's look at the conservative GAO/CBO projected data as portrayed in graphic html presentations, further supported by projected numberical data in pdf.

Composition of Spending as a Share of GDP Under Baseline Extended
Source: GAO's August 2005 analysis

Composition of Spending as a Share of GDP Assuming Discretionary Spending Grows with GDP after 2005 and All Expiring Tax Provisions are Extended
Source: GAO's August 2005 analysis

Tabulated Chart Data:

Baseline Extended (for chart one above) ...daugust2005.pdf
*Source: GAO's August 2005 analysis.

Discretionary Spending Grows with GDP and All Expiring Tax Provisions are Extended
(for chart two above)
*Source: GAO's August 2005 analysis.

Seriously, activate the following links in two separate windows. Click back and forth a few times.

Do you see the major problem? It's the growth in net interest payments. Imagine what happens if interest rate rise faster than anticipated.

Only a poor leader or 'supposed' manager would elect to pursue fixing Social Security first. And if she/he did do so in the corporate world, the individual wouldn't survive too many board meetings.

The order of addressing the problems is simple:

1. Fiscal deficits
2. Health care
3. Social Security

Clearly, addressing the two largest problems first is essential to our future well being as a nation and society.


Posted by: Movie Guy | December 18, 2005 at 01:40 AM

It seems to me that of the three points you listed, fixing fiscal deficits is the easy one. It is pretty simple, cut government spending, reduce the size of government, and stimulate growth with efficient tax policy. The second, health care is pretty tough. Our system is so screwed up now that you are tallking about a total revamp, including tort law's in the legal system and we all know lawyers are very agreeable people when it comes to money right?

Privatizing Social security is the low hanging fruit mentioned in an earlier comment. It is similar to advancing home ownership. The more people have control of thier own finances the more responsible and free this nation becomes. Having control over the money that you intend to use in later years is empowering. It is not just to quickly goose the stock market. Doing this will require some education on the governments part, but my guess is that the money will have restrictions on it. You won't see it go into hedge funds.

I believe the Democrats have a severe case of myopia on this point. They have a negative knee jerk reaction to every idea Bush postulates because they hate Bush, not becasue they have any real concern fo rthe future of the country.

Posted by: jeff | December 19, 2005 at 08:15 AM

I agree w/ Jeff, particularly his last paragraph. It leads to stupid comments like this - "The US has the most expensive health care system in the world and some of the worst outcomes of any first world country."

Posted by: cb | December 19, 2005 at 11:45 AM

Well if it is low hanging fruit, then you have an easy case and we hardly have to discuss it. If it isn't then it probably won't pass.

Bush hasn't proposed anything. He is probably incapable of doing so. He leaves it to others to make even more stupid comments like the last.

Posted by: Lord | December 19, 2005 at 03:12 PM

Now kids -- let's play nice. I have a couple of comments. First, I don't think there is much percentage in pre-judging what the outcome of the political process will or will not yield. As an economist, this is way above my rank, and I am an eternal optimist in any case. Here in blogland our goal should be to move the conversation forward on the substance.

To Movie Guy -- I always appreciate the fact that your views are supported with evidence. I think Jane Galt has the best response to the "let's worry first about the deficit" argument (which I link to in the update above). Once the social security system reverts back to pay-more-than-you-collect-as-you-go -- which will happen in fairly short-order -- it becomes part of the deficit problem. So some sort of social security reform has to be part of that solution in any event.

Posted by: Dave Altig | December 20, 2005 at 08:43 AM


Kind thoughts. Many thanks.

The truth is that I need evidence because I'm not as bright as you. Not close.

I did read Jane's post. Good points.

I differ with her presentation in that I ignore the accounting slight of hand (Unified Budget vs. General Fund Budget), and attribute all monies loaned to the Treasury (and General Fund) as representing loan payment obligations, including interest payments. Debt is debt, and that is the point that CR, GAO, and I have made.

I agree with Jane and you on the point that if the Social Security system is changed, a more visual presentation of the U.S. net debt comes into view. Where I differ is how the Social Seurity "problem" is expressed.

Social Security positive flow revenue streams do not represent the problem. The actual size of the General Fund Budget deficits are the problem. Masking them with a revenue stream (loans) from Social Security doesn't not mean that the Social Security program is in trouble until such time as the surpluses disappear. Further, the Social Security "problem" only surfaces thereafter in the short term (prior to 2040 or so) if the U.S. Government fails to acknowledge that it must satisfy its formal debt obligations to the program for monies previously loaned to the General Fund.

Jane said, "I'd argue that the relevant question, for the US taxpayer, is not the accounting distinctions that the US government makes, but what percentage of (tax revenues + borrowing) is devoted to paying Social Security benefits. Bringing the "trust fund" into things arbitrarily changes a substantial portion of the Social Security burden from benefit payments to interest payments. This substantially overstates the general fund deficit and understates the Social Security problem."

I disagree. The General Fund deficits have been substantially understated. Any changes resulting in an early removal of Social Security surpluses as revenue streams for coverage of a portion of the General Fund deficits prior to year 2017 or so simply make the urgency of correcting General Fund deficits all than more critical.

Changes in the Social Security program are not the source of the problem. We can tinker with the Social Security program, its trust fund, and a hundred or so other federal trust funds, but the real problem is the General Fund deficit picture.

But our mild disagreements appear to be more about sematics than substance.

Debt is debt. And federal net interest payments are financial obligations. The sooner we rein in our General Fund deficits, the better.

The GAO chart below says it all. Net interest payments represent our largest problem. The growth in interest payment obligations is nothing short of shocking. By 2030, the problem is huge. By 2040, the ship is sinking fast, and the bow is slipping under. There simply isn't any revenue available to cover any discretionary spending, any health care costs, and three fourths of Social Security costs.


click on my name for an html image.

Dave, thanks again for your kind words.

I wish that you could resolve this mess. Interested in running for President?

Posted by: Movie Guy | December 21, 2005 at 01:08 AM

That's 'semantics'...

Posted by: Movie Guy | December 21, 2005 at 01:12 AM

MG -- Got it. I agree that we fundamentally agree. (I'll check my schedule and see if I'm available in '08.)

Posted by: Dave Altig | December 21, 2005 at 04:25 AM


Have some close friends set up that campaign web site, and we will start collecting the money and making those calls for political support.

Richard Fisher, Dallas Fed, would be an interesting Vice Presidential candidate. Jane Galt would be a fine Director of Communications. And you may need the excellent services of Calulated Risk, Mark Thoma, Jim Hamilton, Brad Setser, and the Angry Bear crowd. But, hey, those are your calls.

By the way, I want Carl Rove's job.

Come on, Dave. Save the Nation.

Let's go. I'm ready.

Presidency 2008

Electoral College Calculator and Map Generator

Do it for all the citizens!

Posted by: Movie Guy | December 21, 2005 at 04:26 PM

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Vox Baby Does The Work Of The Angels

Andrew Samwick,  Jeff Liebman, and Maya MacGuineas have unveiled their new "Nonpartisan Social Security Reform Plan," which Andrew describes in brief at Vox Baby.  Long-time readers know that I am a proponent of privatization, primarily because a demographically-centered transfer system seems to me an inferior way to run a pension program.  But I am sensitive to the better arguments of privatization's opponents -- that a purely private system might shift too much risk to those in or near retirement, that private accounts do not themselves guarantee sustainability of the system, that too many of privatization's proponents serve up their proposals as if there is free lunch to be devoured by one and all.

The Samwick-Liebman-MacGuineas plan suffers none of these deficiencies and, Solomon-like as it is, essentially splits the difference between many different reform proposals -- part privatization and part traditional fix-er-upping, paid for out of a combination of expanding tax coverage and raising the retirement age.  As Jane Galt says, "that sounds like a plan" that "could achieve broad consensus across the left-right spectrum."

Much has been made of the power of the blogoshpere to move agendas that are overlooked, or resisted, by the traditional seats of power.  And much has been said about the growing influence of econ blogs.  Wouldn't it be something if we could band together and finally get real social security reform off the dime?

December 15, 2005 in Social Security | Permalink


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Of course I oppose the Samwick, et. al. plan. The reason is simple: the two major fiscal problems facing America are 1) Health Care and 2) the General Fund deficit. Both of those problems dwarf any SS shortfall.

Any good manager would start with the most serious problems first. Wouldn't it be great if the blogosphere banded together and pushed the National debate to those two issues?

I'm going to do my best.

Best Regards.

Posted by: CalculatedRisk | December 15, 2005 at 02:16 PM

Privatization is a shell game. There's nothing under the SS shell so, go look under another shell. There isn't anything there either but, it's a useful distraction.

Posted by: Lee | December 15, 2005 at 02:49 PM

A demographically centered transfer plan has its limitations but really isn't so bad. Previously we had a more or less steadily growing population that is now transitioning to a more or less steady state population so our plan will have to adapt but then should be stable, at least until avian flu hits or unlimited life extension comes our way.

Posted by: Lord | December 16, 2005 at 11:57 PM

While I like the privatization of my retirement account, it is not without its own problems. Plan as you like, there is no certainty. How much to save, what real return achieve, what crises face, how long work, how long life, much less what investments and what proportions. One can only do what one can and hope for the best. One can simplify these as the proposed accounts do, but then it is barely privatization.

Posted by: Lord | December 17, 2005 at 12:12 AM

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April 26, 2005

Do Americans Support Privatization?

Mark Thoma gives the heads-up on Congressional hearings on the subject that begin today, noting this bad-sounding piece of news for the administration.

And despite the president's efforts to rally support for his Social Security plan, seven in ten Americans say they're uneasy about his approach to the issue.

More people (49 percent) say the president's plan to partially privatize the system is a bad idea than say it's a good idea (45 percent).

There is certainly news there about confidence in whatever the public perceives the adminstration's plan to be, but I'm not sure how much we learn about attitudes concerning privatization per se.  Is it not possible that one could be a proponent of reforms that include privatized accounts and still be profoundly uneasy about the administration's approach?

Paul Krugman, of course, thinks he's got it figured out.  In yesterday's column, to which Mark links, Krugman starts with the results from a Gallup poll question on the general state of the economy, throws in a little Terry Schaivo and Tom Delay red (er, blue) meat, before finally moving to the (ambiguous) CBS poll question and somehow concluding that the evil Bushies and their minions are about to shove privatization down the throats of a resistant public.

The truth about public sentiment is more complicated, I think.  Last month, I posted on a March Gallup poll on attitudes about privatization.  Here's a quick round-up of the responses.

-- 56% of respondents favored reform that included some provision for private accounts invested in the stock market
-- 58% of respondents favored legislation that would allow people who retire in future decades to invest some of their Social Security taxes in the stock market and bonds
-- 51% of respondents felt it was necessary to make changes to Social Security this year
-- a slim majority -- 50% vs. 46%  -- responded that they relying on the current system to delivered promised benefits was riskier than investing in stocks and bonds
-- A significant majority favored limiting benefits to wealthy retirees and eliminating the cap on wages subject to taxation as ways to address concerns about Social Security

Interestingly, today's Wall Street Journal reports that the wealthy may not be particularly enthusiastic about privatization.

... affluent Americans are split on the merits of Social Security overhaul, although about 45% of respondents believe that this move could boost stock-market returns...

[The April UBS/Gallup survey of investors] showed similar results, with 50% saying that the Social Security system should be kept as is, and 47% opting for personal savings accounts. This is the first time since June 2000 -- when respondents were first asked about their support for Social Security overhaul -- that more people preferred the status quo.

Do Americans support privatization?  Who knows?  I think what we are seeing in all these survey results is good old-fashioned common sense.  I'd bet that most Americans think some sort of privatized account option is a good thing, recognize that there is no free lunch, and know that the devil lives comfortably in the details.

UPDATE: John Irons has more on the survey of "affluent  Americans."

April 26, 2005 in Social Security | Permalink


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» Social Security Debate Degeneration from The Dead Parrot Society
President Bush's recent campaign stop in Galveston, Texas, was a public relations disaster. Years ago, the President's Social Security Commission articulated a Social Security reform that (a) increased benefits to the poorest of the poor, (b) increased... [Read More]

Tracked on Apr 28, 2005 6:39:07 PM


I'm not opposed to some reforms and would give a partial thumbs up to the suggestions from Tyler Cowen. And I have never had a beef with Robert Barro who used to advocate complete privatization. While I don't, I enjoy his intellectual honesty. I also enjoy yours, which was the real reason I posted all that Cato free lunch dreck. Some Angrybear readers incorrectly suggested honest conservative was an oxymoron. One reader thought that I lumped you into the free lunch crowd - to which I had to say that was never my intent. Fester was the one who got it right - there are honest conservatives like you and Barro who really should have their views, which are very different from the likes of Michael Tanner, heard. Thanks for this post and the opportunity to be more clear what I was trying to say yesterday. We economists really do need to step up and get these issues above the usual partisan nonsense.

Posted by: pgl | April 26, 2005 at 09:02 AM

For me, the issue has always been the way risk is handled, not the involvement of equities as a means of storing the surplus.

We can give everyone the mean return if risk is held collectively. Under the proposal, risk is held invidually and I see no need for that. Why not average over individuals so that there are no big winners and more importantly, no big losers? I suppose there is some sort of private propoerty individual reponsibility argument here, but as I see it the shocks that social insurance mitigates are not related to individual behavior (except through markeet failure mechanisms such as moral hazard).

I wonder if those being polled understand this difference? I would have preferred that back in 2001 the trust fund assets were channeled through intermediaries into the private market as a means of storing the surplus (annd we'd have more national saving...), taking advantage of returns on equities, and sharing the risk collectively. If that had happened, things would look far different today. But of course the objection was that the government would then be invlolved in the private market on too large a scale. I don't buy that and don't see how borrowing rather than lending trillions to the private sector makes a difference.

Posted by: Mark Thoma | April 26, 2005 at 01:58 PM

Mark seizes on the Smetters-DeLong idea! Ah, Cato trashed this idea but touts its own (weaker) version.

Posted by: pgl | April 26, 2005 at 03:18 PM

Mark --

What's to stop people from getting the mean return now? There is absolutely nothing to keep people from purchasing indexed-based mutual funds. Unless, of course, they do not have the funds to do so, in which case your proposal gives them access. But that's privatization!

As for having the government as the intermediary, I thought one of Brad Delong's objections to privatization has been that the government -- or at least the current administration -- would mess things up. Does putting them in charge of a giant private capital allocation scheme meet the comfort test?

Posted by: Dave Altig | April 26, 2005 at 09:23 PM

David - you just made my point, which is also the point being made by Barro and Becker. Yes, households have Soc. Sec. retirement benefits AND 401(K)s and if they wanted more expected return (along with the extra risk), they could just convert 401(K) bonds into stocks. Bush's privatization is not going to change overall asset allocation, which means NO FREE LUNCH! Glad we agree!

Posted by: pgl | April 27, 2005 at 02:30 PM


First, I want to carefully distinguish between the saving and the insurance component of retirement income. People can take as much risk as they desire, etc. with the savings component. My comments are limited to the insurance component.

I will take as given a societally determined minimum level of support for the elderly – anything below this and we help them. That is what the insurance against economic risk is for, insuring against falling below this minimum level.

Any risk around this mean at all risks having some individuals fall below the minimum acceptable level and their incomes will need to be augmented by everyone else – an income transfer system that many on the right disdain so much.

So, as I see it, the only acceptable level of risk around the insurance value is zero to avoid such transfers, and to avoid moral hazard behavior it needs to be governmentally regulated. How is perfect risk accomplished in the markets you suggest – index funds and the like – by creating a perfect hedge and duplicating the T-Bill rate.

Why go to all the trouble, pay all the transactions costs and fees to create a perfect hedge, when T-Bills and money market funds already exist?

Think of it this way. How does shifting financial risk to individuals help them insure against economic risk around the minimum level? It doesn’t.

We should have had this debate in a more public forum!

Posted by: Mark Thoma | April 27, 2005 at 07:31 PM

Reading over my last post, it isn't as clear as I'd hoped, there are a couple of confusing sentences. Apologies - I am willing to follow up...

Posted by: Mark Thoma | April 27, 2005 at 07:35 PM

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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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April 12, 2005

Inequality and Social Security

A nice article on the topic from Greg Ip appears in yesterday's Wall Street Journal (page A2 in the print edition).

The debate over Social Security has managed to drown out other longstanding issues in American society, including the widening gap between rich and poor and surging health-care costs. Yet these two phenomena play an important, though little appreciated, role in Social Security's problems. That is because they are eroding the base of taxable wages available to support Social Security benefits.

The reason is that taxable payroll is expected to expand more slowly than is GDP and, by 2080, to equal just 33% of GDP, compared with 38% now. Stephen Goss, Social Security's chief actuary, says there are two main reasons why. One is that a "somewhat increasing share of all the earnings in the economy [is] above our taxable maximum," and the second is that a growing share of "employee going not to wages but to fringe benefits, which are not included in our tax base," Mr. Goss says.

Social Security payroll taxes are levied on wages up to a certain cap, currently $90,000 a year, which rises annually with the average wage. In the past 25 years, a growing share of income has been paid to people who earn more than the cap.

This increasing concentration of income at the upper strata of society is an important reason why, from 1980 through 2000, taxable payroll fell to 83% of wages of contributing workers from 90%...

Even if inequality stopped widening, Social Security's tax base probably would continue to be eroded because of rising health-care costs. Since 1996, health-care costs have risen to 7.3% of employee compensation from 6.3%, and Social Security's actuaries expect it to keep rising. This is a big problem for Medicare, the federal health program for the elderly, but it also affects Social Security, because payroll taxes aren't levied on health-care insurance premiums. Mr. Goss says that is the main reason for taxable payroll's shrinking share of GDP.

Wholesale prices for popular brand-name prescription drugs rose an average 7.1% in 2004, more than twice the general inflation rate, a new study commissioned by the nation's largest seniors lobby says.

The increase is the biggest in the five years that AARP, with 35 million members, has sponsored the study. It's just slightly higher than the 7% price rise in 2003.

... although the results are, apparently, under some dispute:

Ken Johnson of Pharmaceutical Research and Manufacturers of America, the trade group of brand-name drugmakers, called the study "exaggerated and misleading." He said the use of wholesale prices excludes factors such as rebates that could cut retail costs.

"Price data clearly shows prescription-drug prices have increased about 4% a year," Johnson said. He called that in line with growth in other health costs.

That observation, of course, doesn't diminish Ip's point.

As if to underscore the point, there was this report from this morning's USA Today...

April 12, 2005 in Social Security | Permalink


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I like this quote the best

"Can policy makers do anything about these phenomena? Income inequality defies any easy solution. Mr. Orszag says its impact on Social Security revenue can be alleviated by raising the payroll cap. This would fall hardest on those earning between the old and new cap: They would get higher pension benefits, but not enough to outweigh their increased taxes."

Isn't this solution the ignoring the cause and controlling the effect?

It seems to me that the rise in inequality is due to the demand for an educated labor force. Firms are demanding higher and higher levels of education, while the educational system is becoming more unequal in quality?

Doesn't the ultimate fix require us to provide better education to the next generation?


Posted by: Matt Festa | April 12, 2005 at 01:08 PM

Yep. Why is it a surprise that when you exempt most income from FICA you get less revenue from FICA?

The solutions to this are: get a whole lot more people to pay into the system (presumably through immigration), raise FICA max, have the people who are already here but are making less than FICA max make a lot more (how?), raise the FICA rate, or pay less out in benefits. Again no surprise.

Posted by: Dave Schuler | April 12, 2005 at 01:11 PM

Why raise the FICA rate when you can re-adjust benefits and use the money towards something else (like deficit reduction or medicare. Isn't the real question one of opportunity cost, wouldn't it be better to cut benefits and use the money saved towards something else? I can think of a bunch of things I would rather spend the money on than social security.

Matt Festa

Posted by: Matt Festa | April 12, 2005 at 03:09 PM

Let me help you out with some facts:
Fact#1: The social security trust fund should not be use as general funds this would stop politians from spending it on any and everything,ie tax cuts ,wars and all the other crap that politians like to spend money on to redistribute the wealth of this country; these funds belong to the working people of this country these taxes are taken directly from the workers and their employers who, by the way must match there taxes dollar for dollar;This is the main reason why GB do not want to raise the income cap because it would raise corporate america taxes this is a promise Iam willing to bet that he has made this is why he want to take out part of it from the current percentages I would bet my life that this promise has been made make no mistake about this.
Fact #2:If GB and company really want to ensure the solvency of social security leave the cap where it is or even do away with FICA all together and institute a 1% national sale tax on everything we buy other than food this would ensure solvency of social security until the end of time. don't take my word for it check it out.
Fact#3 If they want americans to save more make corporate america reduce the amount of interest that they charge, this is what has happened to the american saving rate.

Posted by: JIM Glover | April 13, 2005 at 12:30 AM

Given that there's a monthly SS benefit cap, it makes lttle sense to dwell on the part of the income distribution above the FICA cap. Taxing that income is pure redistribution, since most payers will see no incremental retirement benefit for the extra tax.

Broadening the base to include the value of fringe benefits, however, makes sense. Treat both as labor income (which they are), and tax the combined amount, again up to an annual income cap.

Posted by: Dave Sheridan | April 13, 2005 at 05:12 AM

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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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