Two notes on social security

Brad DeLong and Paul Krugman are taking Joe Lieberman and others to task for asserting that the cost of fixing the social security problem increases at $600 billion a year.  I agree that Lieberman is confusing an increase in the nominal present value of the debt with an increase in the cost of fixing social security but in correcting Lieberman both DeLong and Krugman meander towards the opposite error – that the costs of fixing social security is not increasing.

But almost inevitably a fix to social security will involve tax increases and the longer we wait the larger the costs of those increases will be.  The technical explanation is that deadweight loss increases more than proportionately with an increase in taxes.  The common sense explanation is that you don’t want to take all your hits at once – instead, if you must take a hit, it’s best to spread it out over time.  Thus, the sooner we deal with the problem the lower the total costs will be.  Lieberman’s message is correct, even if the details are wrong.

Also this week, Robert Shiller’s simulation study of returns to personal accounts is getting some attention.  There is really nothing new in Shiller’s study, what he concludes is that based on historical data private accounts invested in stocks are great but if returns are lower in the future well then returns will be lower in the future.

Although Shiller’s paper is filled with all kinds of scenarios about stock market risk he has hardly a word to say about the risk of social security (even referrring at one point to the "guaranteed Social Security benefit," yeah right).   But social security payments are going to be cut and they are going to be cut more the lower are stock market returns.

A realistic comparison of social security and private accounts would make consistent assumptions about stock markets returns, taxes, and benefits and the full government budget constraint.  I have yet to see such a study.


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