“Transition costs”?
I’m going to be devoting a lot of my blogging energies over the next week or so to Social Security. I hope that it doesn’t bore our faithful ITA readers too much, but it’s rightly one of the most significant issues on the docket and there is a lot of rhetoric that needs a microscope.
Yesterday Balta looked at two columns from Paul Krugman (PK), our favorite NYT economist. Krugman’s column from Tuesday was sufficiently examined below, but the other complaint focuses on “transition costs” and is important to consider. Balta cites this piece from PK warning that transition costs “will run in the $1 to $2 trillion range.” There’s a sly strategy at play when Krugman, Balta, Nancy Pelosi, et al use the phrase “transition costs.” These so-called transition costs are really just the frank and prompt recognition of obligations that Social Security has promised anyway. That’s always a danger in enacting entitlement programs – once you’ve promised it to one generation, it can never end. “Transition costs” simply refer to paying the obligations owed anyway, and scaling back the scheme for those following.
To conceptualize it might help to think of refinancing a mortgage loan. When you refinance you include the closing costs and upfront payments owed today but still recognize that in the long term your overall debt and payments end up for the better. Reforming Social Security will require money “today,” but when you add those to the costs of the remaining payments due on the “loan,” it is enormously less than if you had stuck with the old one. The government is simply buying down its mortgage, and we the taxpayers are a hell of a lot better off for it.
17 Responses to ““Transition costs”?”
Last night, the president assured those 55 and older that nothing would change (sending a coded message to those of us 54 and under that promises made to the rest of us decades ago were going to be broken).
At the same time that he promised that nothing would change (i.e. that SS payouts will remain unchanged — caveat for those 55-and older: ask those 54 and under what they think of the president’s promises) he said that money currently going into SS (SS receipts) would be reduced.
Currently SS receipts exceed SS payouts. However the premise of the crisis-non-crisis is that the amount by which SS receipts exceed SS payouts is steadily declining and that by 2020 or so, SS receipts will exactly match SS payouts and that things will only get worse from there.
If, however, we start reducing SS receipts further, today, by allowing them to be diverted into private individual account, then 2020 isn’t the date anymore — it’s a date considerably closer because, as I mentioned above, SS expenditures are unchanged (again, caveat the president’s mendacity).
And that, my friends, represents the transition costs. Now my question to you all: from where will the money to pay those costs come? Show your work.
Finally, for extra credit: If a $200 billion annual shortfall by 2030 is a “crisis” (according to the president) then what should the $400 billion annual shortfall, in 2005, caused by president’s tax amnesty for the affluent, be called?
greg
Yes, we’ve promised money to future retirees and – surprise! – under any reforms we’ll still owe them for those promises. Why is this so shocking to you? I agree that it’s costly, and that’s precisely why the scheme must be changed so that promises (and the taxing) aren’t made as much (oh no! 2%!) in the future.
Yes, we’ve promised money to future retirees and – surprise! – under any reforms we’ll still owe them for those promises.
Umm, that’s not what I heard last night. With the exception of a short spell in 1995, I’ve worked full-time since I was 19 years old (yes, I worked full-time through college). When I started working, 22 years ago, a promise was made to me that, in exchange for some of the product of my work, that the rest of society would help me with my welfare should I become disabled, should I need medical care, and/or when I were to retire.
Since then, society has sent me regular reports of what I have contributed to others and, in turn, what others’ reciprocal obligations to me are in turn. Over those 22 years, those reports have not varied materially.
Now I am being told that, despite my 22 years of contributions towards the general welfare, that the favor will not be returned — or at least not to the degree asserted for the past two decades as I toiled merrily.
and that’s precisely why the scheme must be changed
Very few are arguing that changes need not be made (although many of us are arguing the degree of changes that need to be made). On the other hand, most of us don’t think those changes begin and end with handing over $100 billion a year to Donald Luskin to piss away.
greg
This part of Bush’s Social Security reform seems to have escaped you – you may continue to send 100% of your Social Security taxes to the government. The current proposals are all a choice.
And no one wants to hand over “$100 billion a year to Donald Luskin to piss away.” But if you’re implying the great majority doesn’t want personalization, you haven’t convinced me.
JC’s line of argument here might make sense if we weren’t already facing a massive deficit; or if the plan were actually to, like, pay for these costs. But working within your metaphor, by increasing the already record-setting deficits still further, it’s more like we’re paying down our mortgage by taking out cash advances on our credit cards. Not, in fact, much of a deal for the taxpayer — certainly not for those of us who expect to be paying most of our lifetime’s taxes in the future.
C’Mon, Joshua. Don’t be so naive. Any system in which people can “voluntarily” keep contributing in full force to SS is one in which significant numbers of people will opt NOT to (because we’ve demonized SS so much that the younger generations have no faith it will help them — so why contribute?). Therefore there will be significant drops in SS revenues — drops that are mirrored in the rise of Donald Luskin’s latest flim-flam fund.
But if you’re implying the great majority doesn’t want personalization, you haven’t convinced me
That’s not my job. I suggest that you look at the empirical data, particularly the polling data, which shows quite the opposite — namely that the great majority of people oppose privatization and individual retirement responsibility.
greg
Philosopher, it’d be paid on a line of credit either way – either by taxing workers and being in debt to them, as it is now, or financing it elsewhere and eventually ending the loan altogether. As I say, it costs more upfront, but not in the long term. And this doesn’t even touch on efficiency and long-term macroeconomic benefits, which are quite important as well.
Any system in which people can “voluntarily” keep contributing in full force to SS is one in which significant numbers of people will opt NOT to (because we’ve demonized SS so much that the younger generations have no faith it will help them — so why contribute?).
Ahhh, so people won’t personalize it because it’s more efficent and sensible, but because of propoganda? I see.
I have looked at the polling data and I think you’re wrong.
Philosopher, it’d be paid on a line of credit either way – either by taxing workers and being in debt to them, as it is now
False premise. Social Security is not in debt to anyone now. In fact, the rest of society owes Social Security roughly $1.5 trillion dollars. It’s the credit rating of the rest of society, a society the recently voted to stop paying $400 billion of its bills (instead opting to let its children pay the credit agencies), that’s in trouble.
And this doesn’t even touch on efficiency and long-term macroeconomic benefits, which are quite important as well.
Ahh, let the free-market handwaving begin!
greg
I have looked at the polling data and I think you’re wrong.
“Some people think individuals should be allowed to put a small portion of their Social Security contributions into a personal account, which could be invested in mutual funds. While the personal accounts would be subject to the fluctuations of the stock market, individuals would own the funds when they retire.
The United Methodist Church is changing its pension system to allow churches to contribute less toward clergy retirement. Why? Because the investments were working so well that it was making a lot of clergy fairly wealthy in retirement. It was felt that churches are required only to provide for a modest, comfortable pension. The point being that overall,investment is a more sound principle than current workers supporting retirees.
I’m still looking for that majority you mentioned Greg.
Joshua,
With all due respect, you wrote initially:
But if you’re implying the great majority doesn’t want personalization, you haven’t convinced me.
I’m not sure how 44 or 38% of anything (see the poll results above) constitutes a “great majority”
greg
Ah, good point. I’ll concede that statement of mine isn’t necessarily true, but I’m not convinced a majority are opposed to personalizaition.
I think most Americans are ignorant on the subject and don’t have all of the facts, which is why so many aren’t sure what they think, or why.
And this doesn’t even touch on efficiency and long-term macroeconomic benefits, which are quite important as well.
In terms of efficiency, private accounts will hardly be able to beat OASDI, which has wonderfully minimal administration costs.
Also, the macroeconomic consequences of adding a few trillion to the national debt are not to be ignored, either. Remember that there’s basically no macroeconomic benefit to increased personal savings if the government sucks up all that capital by taking out loans for itself.
A few months back, I conducted an open poll about Social Security privatization at a message board community I frequent. I didn’t ask whether they supported giving people choice in general, but rather whether they themselves would choose to opt out or stick with Social Security taxes and benefits.
I only got 30 responses (so take this for what it’s worth), but people were split almost evenly. 16 said they would rather keep their own money and do for themselves, and 14 said they’d still choose to remain with Social Security. Several people said that they’d rather stick with gov’t benefits, even if they’re lower, because they didn’t trust their own money management skills.
And as for those who are flat-out against private accounts for anybody, I hate being told that I shouldn’t be trusted with my own money because other people can’t be trusted with theirs.
Loren, there’s a huge difference between saying people can’t be trusted with private accounts, and saying we should put a small amount aside to support a guaranteed reserve, to insure people against risk. A HUGE difference.
Social security is no more about not trusting people to manage their own money than manditory liability auto insurance is. Both are about guaranteeing a minimum amount of safety, is all.
Nobody is telling you you can’t be trusted to play the stock market. They just want you to maintain an insurance policy for yourself by paying into social security. Beyond that, feel free to risk away.