More Garbage Words: Social Security, A Minor Fiscal Issue

Paul Krugman calls Social Security a minor fiscal issue, citing this report in which Social Security spending as a percent of GDP levels off at around 6% in 2030. For someone whose blogging modus operandi is pointing out disingenuous arguments made on the right, Dr. Krugman is skating on thin ice here. The Trustees Report that he uses as the basis of his numbers shows GDP rising 66% between 2010 and 2020, which would be on par with the rise between 1990 and 2000. Huh? Is that what the &#8220-invisible bond vigilantes&#8221- are telling us? The Trustees Report assumes GDP growth of 160% between 2010 and 2030. If we are becoming Japan as Krugman says, maybe the more relevant comparison is the 66% GDP growth seen in Japan 1990-2010. Changing this assumption has a large effect on Social Security as % of GDP.

Now, Dr. Krugman could argue at least two points:

First, even if you assume Japanese-style growth, Social Security would still account for less than 10% of GDP. This however leaves aside the state and municipal versions of the pension problem, that might eventually take the form of demands at the federal level, and in any case are relevant to state taxpayers. It looks like he is telling half the story, and then with only half the numbers. Not to mention Medicare, which perhaps is only a different issue in a pedantic sense, if not in terms of urgency.

Second, if further stimulus were applied as Krugman recommends, we might have a chance of achieving those GDP targets. If however income is now structurally impaired by demographics or other factors, as some argue, those numbers are out of reach pending some new technology. Maybe you can double down on a bad balance sheet if your cash flow assumptions are good, but in this case they seem to be a product of naive empiricism. This is the same sort of empiricism that got pension funds that had assumed 8% annual returns in trouble. Those numbers seem to be picked from the same fictional future world as the GDP projections that Krugman endorsed, and as usual there is a willful blind spot to reasons why the past might not reflect the future.

To be clear, although it would be largely in my self interest, I am not some right-winger bent on ending social security. In my view, the minimum age must be raised. Dr. Krugman rightly points out that this would put a disproportionate burden on low-income workers, which is why I counter that any age hike must be coupled with means testing, which I prefer to higher taxes. Those on the left that argue that means testing would undermine the popularity of the program are absurd partisans. What is the metaphor? That would be like wearing the wrong color shirt to the wrong neighborhood, getting shot and then freaking out that your shirt is ruined, but not going to the hospital. Neither the right nor left would be thrilled with with an age hike / means testing deal, but that&#8217-s what makes a good compromise.

Mark Thoma, Superficial Blogger

His post, &#8220-The Myth of the Social Security Shortfall&#8221-, here, but if you don&#8217-t want to defer thinking, read Mish Shedlock on pension underfunding instead. Yes, taxes will have to go up, but it&#8217-s not as though sunsetting the Bush cuts and tacking on a couple percent here or there will stem the entitlement spiral, of which social security is a single piece. Thoma is quoting Michael Hiltzik, whose message, when you strip away the authoritative tone is basically, &#8220-don&#8217-t worry so much, it&#8217-s in the future and stuff.&#8221- That strategy hasn&#8217-t worked out so far.

Deferral, abetted by private and public conflicts of interest, is the essence of the problem and is at the root of both the corporate and sovereign credit crises. Now, it&#8217-s one thing when you have an impaired balance sheet propped up by good cash flow, but there are reasons to believe that prospective growth and public income will also be lacking relative to the 20th century. These reasons of course are swept under the rug by at least one liberal economist. Paul Krugman chides someone for rambling on about demographics one day, and tells us we are turning Japanese the next. Why are we turning Japanese? Krugman sees this, but thinks we must defer that issue to deal with unemployment and deflation. To what extent, however, are unemployment, deflation, and the series of booms and busts over the last 30 years symptoms of demographics? If that&#8217-s the case, if pension rate of return assumptions are off for this or other reasons, things could get late early.

– out of your titles if you aren&#8217-t going to have any real discussion. If everything is quoted, the quotes lose their meaning and everything is implicitly endorsed.