Social Security, Savings and Stagnation

Here is Evans, Kotlikoff, and Phillips making the case that transfers to the elderly, such as Social Security and Medicare, have dramatically lowered the US savings rate, the investment rate and real wage growth:

In the lifecycle model, the young, because they have longer remaining lifespans than the old, have much lower propensities to consume out of their remaining lifetime resources. This prediction is strongly confirmed for the US by Gokhale et al (1996).

Hence, in taking from young savers and giving to old spenders, which Uncle Sam has spent six decades doing on a massive scale, the lifecycle model predicts a major decline in US net national saving associated with a major rise in the absolute and relative consumption of the elderly. This is precisely what the data show.

In 1965, the US net national saving was 15.6% of net national income. Last year, it was just 0.9%. And, according to Gokhale et al (1996) and Lee and Mason (2012), the secular demise in US saving has coincided with a spectacular rise in the consumption of older Americans relative to that of younger Americans.

As Feldstein and Horioka (1980) document, US net domestic saving tracks US net national saving. Hence, postwar intergenerational redistribution has not only lowered net national saving; it has also reduced net domestic investment, from 14.0% of national income in 1965 to just 3.6% in 2011. This decline in the rate of net domestic investment is, no doubt, playing a major role in the slow growth in US wages. Indeed, the level of private-sector average real earnings per hour, exclusive of fringe benefits, is lower today than it was 40 years ago.

We call this America’s “fiscal child abuse”. If it continues, it will no doubt shortly drive the national saving rate, which was negative 1.2% in 2009, into permanent negative territory and further reduce net domestic investment and prospects for real wage growth.


The traditional ending for a post like this is "Have a Nice Day."

When taxes are high, and the social safety net is generous, one would expect low savings rates, no? So it's instructive to compare net savings rates for Sweden vs. the US:

Hmmm. Maybe instead we should think of savings rates as a prediction market, with low rates signaling optimism regarding future income streams.

I missed this comment earlier. This is a much pitheir statement of what I was trying to say further down.

I'm not sure Sweden's system actually transfers as much net wealth to the elderly. For one thing, there is a transfer to the young:

The parents of children up to age of 16, sometimes older, receive a child allowance, "barnbidrag" of 1,050 kr per child, with an additional supplement, "flerbarnstillägg", for multiple children ranging from 150 kr for two children to 4,114 kr for six children.[1] The parents also receive parental benefits, "föräldrapenning", to be able to be home from work to take care of their children for up to 480 days, and a temporary parental benefit to stay home and take care of a sick child. Families with children, and people below 29 years of age may be eligible to receive a housing allowance, "bostadsbidrag"

They also appear to ration their version of Medicare much more strictly than we do.

Much more strictly as in to the whole population instead of to the elderly or as in terms of care?

There's plenty of transfer to the young in America, too. The Earned Income Credit is much more generous if you have children and there's the child tax credit and there's a credit to help with college education and there's probably more that I am forgetting. Oh, yes, how about the child care tax credit and let us not forget that those old folks are busy paying property tax to educate all those little rascals.

And yes, they do appear to ration medical care, but like Lemming says their medical care covers everyone and not just the elderly.

I know, picky, picky, picky.

I think the criticism raised by Bob Knaus is a good one. The authors should explain why their theory does not appear to hold in other countries.

I would also raise another issue: For the sake of argument let's assume that there are massive transfers from the young to the old and let's forget for a moment that the old have paid a substantial share of this transfer in the past and are only getting back what they have paid in. So the old people consume a lot of stuff, particularly medical care. Well, where do those dollars go? It goes back into the local economies for the most part and so goes to pay salaries for the young! If the old folks are hoarders then their children will inherit their wealth. The transfer is transferred back.

It seems the authors really want to blame social security and medicare with causing "fiscal child abuse" (really clever, by the way). And that's why they don't look at other countries or other potential factors like the fact that the United States pays approximately twice per capita for health care than any other developed country or the fact that during this same time period both globalization and financialization of the economy became huge. But why look further when you've already found your chosen perpetrators.

Billy Kraus is a young man who lives in a small farming village where it is routine for villagers to steal from each other. Being young and not part of a very big coalition, he often gets stolen from. He has found ways to adapt, but sometimes he worries that his rate of savings is rather low. Yet, how could he save? If he saved anything, it'd just get stolen anyway, so why not just consume what you produce right away?

Then Billy was visited by a pleasant thought. One day, perhaps he could become a beneficiary of the thievery! It seemed a good thought. An honorable thought. The thought wafted, then it waned, then it warped... "What if," Billy wondered aloud, "other people choose choices like I've been choosing... and there's not a lot to steal later on?" He puzzled for a moment. "Ah fuck it, a game theoretic strategically dominant move is a game theoretic strategically dominant move."

The personal savings rate in America fell off a cliff starting just around 1982 which coincides with bull market in both bonds and stocks and the inflation of the 70's had the effect of paying off the mortgages of people who had purchesed their homes before the mid 70's.


Big payroll tax increase in the early 80s might be part of it.

Social security started much earlier, so it's not a likely explanation.

Didn't Tyler have a major argument that our problem is a stagnation in things worthy of investment? Perhaps that would imply something else is going on

Payroll taxes doubled in the early 80's(greenspan led commission)....I think that is not trivial.

Why does it matter the source of consumption (in this case SS/medicare) by the elderly to decrease net investment? By magic, if we assumed that everyone on SS had instead saved for retirement, wouldn't we see some version of th same effect since it's caused by age demographic?

I have got to think that ultra-low nominal and largely negative real interest rates are depressing the savings rate.

What other said. Also what is left unnoticed is that Americans really tried to save, or at least invest in future income streams. They put alot of money in the stock market in late 1990s. They then bought houses in droves, which is supposed to be safe long term investment. And they have spent alot of money going to college and sending their children to college, a safe way to boost their earnings in the future. Its not like the entire paycheck is getting spent at Walmart or the local strip club.

What is the definition of saving? It doesn't include investing in the stock market?

Savings is the difference between income and spending.

If you take money from current income to buy stocks that is savings. But any change in the value of the stocks does not count as savings.

I think when measured on the national level, this is incorrect. When you buy a stock, you buy it from someone who sells it, therefore the net savings is zero. It only counts as savings when you buy it from the issuer, in an IPO or a secondary offering or something like that.

That's not quite true. Any capital appreciation they realize is new savings for you compared to their original savings. If you buy from them at their cost basis, then there's no new savings.

You may have confused this with investment (which is not quite the same but as savings), where secondary market transactions don't count as new investment on the economy-wide level.

What are the definitions of income and spending? If I take some money to buy equipment for a factory (investment), is that counted as saving? If I put some money on the bank, is it counted as saving or it will be counted as spent, sincce the bank will borrow that money to somebody to buy?

It seems that every country measures that, is there some WTO definition?

And to encourage Americans to save, we have had tax loophole after tax dodge added to the IRS code to allow Americans to save for retirement because Social Security won't be around by the time the baby boomers even think of retiring at the beginning of the 21st century.

Clearly the reason the labor force is shrinking is all the baby boomers started saving back in the 70s because Social Security was going to be broke by the time they retired, and by saving over the long term, the 10% return from Wall Street most boomers are millionaire and just aren't going to be bossed around by a gen-xer who thinks they should take a pay cut and work 80 hours a week.

Only liberals believe that:
- people are irrational
- Social Security could be sustained beyond the year 2000, 2009 at the latest
- the stock market won't provide a 10% return, 8% at worst
- tax incentives to save won't induce virtually every American to become a millionaire from saving by age 55

The stock market is up creating wealth for boomers, so why should boomers keep slaving away when they are sitting on millions in savings - time to retire and leave the workforce!

The 2012 Trustee's Report details the exhaustion of trust fund reserves in 2033, three years earlier than projected last year ( Yes, it is true that even after the fund is exhausted Social Security will be able to pay 75% of benefits, but how is being able to meet only three quarters of its obligations acceptable?

Clearly, something needs to be done and reform must take place: either by raising the wage cap, by increasing the retirement age to keep pace with longevity, by means-testing and eliminating benefits for very high income seniors, or by some combination of these proposals.

But what about Italy? (savings rate of 20%)

Italy has a famously generous state pension system. That's true of any number of countries in the developed world with much higher savings rate.

I think the more likely explanation is financial deregulation (and, not coincidentally, gambling regulation):

- it's the Anglo Saxon countries that most embraced retail financial services deregulation: Canada, Australia, UK, US, NZ

- lifecycle theory tells you that if consumers have credit availability, they will use it to bring forward desired consumption. All of the evidence suggests that is exactly what consumers do

- gambling deregulation has a similar impact. Australia has the highest level of gambling per capita in the world, and one of the lowest savings rates. Note for those in the lower half of the income curve, who will never have significant savings, gambling is a form of investment (one with a negative expected return, but enough chance of a high payout)

- asset price bubbles also contribute. The average American has had a massive increase in nominal housing value in the last 40 years. Americans were richer, if not richer in liquid assets (shares, bonds & cash)

- Rajan's point: income distribution. Most savings are done by a relatively small proportion of the income curve. Facing stagnant incomes, the average American family sustained its consumption by borrowing. Think larger mortgages, soaring student debt etc.

On top of this you have the decline/ abolition of hidden forms of saving like defined benefit/ final salary pension schemes. It's abundantly clear that behavioural finance holds here: individuals do not save the equivalent amounts in DC/ money purchase schemes that would provide a comparable level of benefit, if annuitized at retirement. And employers cut contributions post introduction of DC/MP schemes (because employees don't carry retirement calculators around in their heads: they value current salary and benefits more highly than deferred pension assets).

So if they abolish hidden forms of saving, non-hidden forms of saving will go down? That makes no sense.

Italy is special saving-rateswise. In Italy it's mostly the elders who save. This ossifies society as the wellbeing of individuals who retires depends more and more on their inheritance, not on their own savings. Right now most young people/couples cant buy a house unless some (elder) family member puts up the downpayment AND the guarantees for the mortgage (co-signing it).

And health services are free, so u dont need to be 65y old to enjoy it, u can retire at 58 and freeride the system.


This is hardly uncommon in any number of countries including modern Britain re age distribution and inter-generational transfer to fund first housing purchases.

The point holds. It's the deregulation of financial markets that has allowed higher levels of borrowing by consumers. That plus stagnation of real incomes.

In countries where you have not seen that deregulation of personal lending, you have not seen the same falls in savings rates.

Note that almost all the countries we are talking about have *more* generous systems of state retirement than US Social Security.

Since the SS system has been remarkably stable for over 70 years, you'd push hard to find structural change that would account for a drop in savings rates, that was connected to the US SS system.

(you'd have to look at the Reagan increases, but it's not clear why those increases in taxes would lead to a fall in savings rates of the magnitude that has occurred. Also that was a shift in the 1980s, the fall in savings rates accelerated after 2000).


If you abolish involuntary saving (defined benefit pension schemes) households may not increase their discretionary saving in result.

Households don't carry forecasts of equity market returns and annuity rates, 30 years out.

Alex, you may want to know that there is a reference to your work in this article (hope you can get it translated)

On a current basis, of course the transfer from savings producers to savings consumers results in a decrease in savings (sort of by definition). Also, it would follow from a model of normal rationality that people would substitute expected social security benefits for a portion of their savings represented by the tax, so the aggregate models would show a decrease in (private) savings if the measure excludes the tax. The more interesting question is whether the expected social security payout exceeds the expected tax, and so would lower the savings rate in excess of the tax rate, so that people would consume more on a current basis.

Scanning the piece on VOX, there did not appear to be any citation of the calculation of the "Savings Rate."

Given the commonly referenced mode of calculation that relates the ratio of consumption (spending) to income, it is very possible that the calculation has become progressively skewed by the proportion of spending that has been funded through debt (leveraged consumption) rather than income exclusively.

If the proportion of spending ( possibly measured by the rate of increases in consumer debt) funded by debt were eliminated from the calculation, the "savings rate" as a proportion of incomes only should be higher than the calculations used.

Presumably, the other effects of interest costs and interest as income have already been "smoothed." If not, their impacts need inclusion.

Politicians and economists seem surprised at the existence of the baby boomers. Gee, we have only been talking about it since the late fifties.
And I seem to remember paying SS taxes for the past 45 years or so.

What next, "Logan's Run?" We will vaporize grandma.

Before long, climate change will have driven the price of ice floes beyond the reach of the average family. At least without subsidies. But no doubt the market will come up with a solution.

I have an even better model for why savings is low: workers are not getting paid enough money to make a living. I call this, "CEO worker abuse."

But that would bring conversations about how employers are unwilling to pay living wages to people. Better to turn grandma into our fiscal scapegoat.

What a joke. If they're not getting paid a living wage now, what were they getting paid in the '50's during the "golden age"? A hell of a lot less.

Why don't they just leave for a better-paying job?

Most likely, because they can't find one, because a company that paid them more would go out of business, because consumers wouldn't pay their higher prices. I call this "consumer CEO abuse."

Then, why do all that not apply to CEOs?

There is something huge going under the radar here, it is real and even the few people that can see it can't understand what it is.

If every company paid a living wage (to adults) consumers would have no choice about paying the prices for it. Yes, I know, globalism, blah, blah, blah. But leaving a large fraction of the population in destitution will, in the long run, have far worse consequences than making sure everyone can put at least a humble roof over his head, eat three squares, and have necessary healthcare. We've run the 'let them eat cake" experiement any numbers of times. It does not end well.

If everyone were paid this so-called "living wage", it wouldn't buy what it buys now.

The bottom 5% of Americans live better than the top 5% of Indians.

If every company in the world was required to pay a U.S. living wage, it would simply be impossible to employ the large majority of people in poor countries.

This is what people arguing for unfree labor markets don't seem to understand -- productivity is a limiting factor.

"living wage" - It would be nice if people would use well defined terms. I honestly have no idea what people are talking about when they use the phrase "living wage". It seems as if the term is intentionally vague.

Sorry, but this doesn't fit my experience. I work in the high tech industry, and I know my co-workers are well paid. I also know that many of them have little to no savings, and are living in a hand-to-mouth fashion. One guy's got four high-performance cars he's constantly modifying. He's got a huge house for him and his brother. Another has to take in (paying) roommates because of all the musical toys he buys (although a Reactable is still out of his price range). Not to mention all the little electronic gadgets they're constantly buying; I don't think any of them have ever owned a cell phone for more than a year.
Nothing I say to these people can make them even consider doing otherwise. It's just not in their mindset. I'm on the other end of the scale, and am on track to be able to retire in my mid-40s (a plus in the high-tech field, because age discrimination is rampant unless you're willing to go on the managerial track, and I'm not).
I bought a used car, an Acura TSX, a couple years ago, for less than what the guy selling it still owed on the loan. He was another high-tech employee in a huge house with lots of toys, but he needed cash quick for his daughter to go to college, and getting out from under the loan payments was a necessity.

I know they could save and still live well if they wanted to. They don't. Spend till you drop is the American way.

There is so much wrong with this why don't we get back to Angels dancing on pins.

Saving, once regarded as a virtue, if not a necessity, is now considered akin to miserliness. Individuals that eschew consumption in favor of savings are seen as eccentrics. Those who have no debt, who aren't using "leverage", are examples of financial naivete.

If everyone is consuming and buying houses, I wonder if one major effect is that you can't do big things that reduce risk with the law of large numbers.

Let's say you are investing in housing. Aside from the fact that you will eventually over-invest, you aren't going to have a high risk, high reward tranche (at least the high reward part).

If we, just as an example, invested in researchers directed at anti-aging research, most could fail but if any succeeded the returns would be astronomical.

To add the criticism litany, using the national savings rate is disingenuous, since you are concerned with household savings, not net savings. When you look at personal savings rates, it sits at 10% in 1965, and *rises* to 12% by 1980 (approx. numbers, data from FRED). It begins declining in the mid 1980's, which corresponds with the decline of the welfare state in the US, not its advent. While maybe the full paper explains the argument better, in its current form it seems quite inadequate.

Well, the personal savings rate is calculated against income less taxes, so it ignores assets (i.e. if you lose $100K of equity in your home, this doesn't show up).

No, wait, apparently this is why national and personal diverge:

"The National Savings Rate is confusing at first glance, due to the fact that it is often substantially less than what the typical American reports contributing to their employer-sponsored retirement plans and IRAs. This difference is because the national savings rate includes government savings, and they are usually reporting deficits which lowers the national savings rate."

Government accounting is different than business accounting too. They don't report social security and pension liabilities as actual liabilities. If they did, thinks would look far more bleak than Alex presents them

Humm-- social security was created in 1939 and the savings rate started falling in 1965--
interesting lag times.

There is another thesis. People save towards a goal, maybe like having a million dollar stock portfolio at retirement. But if you increase the return to savings -- like making it tax exempt as in a 401 --than you need to save less to achieve that goal. Savings is the flow from current income into the portfolio, not changes in capital gains in that portfolio. The lag times between changes in tax rules to encourage more savings accompanied by a secular bull market in stocks and housing and the decline in the savings rate is much more reasonable than the suggested lag between the start of SS in 1939 and a peaking of savings in 1965. Besides I though the peak in the personal savings rate was around 1980.

Presumably they chose Medicare because it began in 1965, and SS benefits paid look like this:

1937 – 53,236 – $1,278,000
1938 – 213,670 – $10,478,000
1939 – 174,839 – $13,896,000
1940 – 222,488 – $35,000,000
1950 – 3,477,243 – $961,000,000
1960 – 14,844,589 – $11,245,000,000
1970 – 26,228,629 – $31,863,000,000

*chose it because Medicare began in 1965

Except that the title invokes Social Security not Medicare.

Medicare is explicitly identified in the first sentence.

Pay no attention to anyone who makes assertions like "People save towards a goal" because they are emitted by people who manifestly don't know what they are talking about.

If you transfer money from a group with a lower propensity to consume and to a group with a higher propensity to consume, then the overall consumption will go up.

When Keynes spoke of the long run, life expectancies were much shorter.

We're still all dead, though.

What's apparent in this thread is that many of us (including me) don't quite understand how macro economists define savings for the economy. Pretty much every form of savings I have has been cited as "not savings" by somebody on this comment list.

So let me get this straight: the government takes 7.65% out of your paycheck and makes your employer "contribute" an equal amount, and that leads to a lower savings rate? How could that possibly be so?

So the simpler explanation is that higher taxes lead to a lower savings rate? I guess it does not even matter what the government does with the taxes. If it burned them in a fiery pit, workers would save less, because they have less.

On the other hand, people may have some sort of savings target that is unaffected by the amount of disposable income they have. If the government takes more, they will spend less and save the same amount.

I tend to think that the increased encouragement of consumption through the widespread availability of credit and the constant marketing bombardment is to blame for our low savings rate. It is basically the same thing that is making us fat. When virtually every message that most citizens hear is "consume more," they are going to consume more. Saving is presented as being about as sexy as the average American's fat ass.

"In 1965, the US net national saving was 15.6% of net national income. Last year, it was just 0.9%."

Oh Alex, the scales have fallen from my eyes! I mean, yes! Social Security began in 1965 not 1935, right? So that's the perfect baseline year! And US net national savings really have been going down ever since! There's no other possible explanation! No other confounding factors! No other reason but Social Security to explain not only the decline in national savings but even the rate of domestic investment!

The fact that 1965 was close to the peak rather than average workforce participation and earning? Beside the point! The fact that just a year or two later the combination of Cold-War, Viet Nam, Great Society, and Interstate/Infrastructure spending started to drive up inflation? Irrelevant! The fact that within seven years oil shocks and union overreach further fueled inflation while simultaneously driving down employment? Nothing to see there, keep walking! The advent of credit cards and other facilitators of consumer debt that meant consumers no longer had to save the entire amount before purchasing durable goods? The destigmatization of debt, particularly mortgages that began in the 1970s and peaked in 2007? The corresponding celebrations of allegedly world-economy-driving, debt-driven "consumer spending?" The one that reached such a crescendo that after 2001 the President of the United States solemnly declared that the most patriotic thing ordinary Americans could for their country was to go shopping? Nothing to do with it. Wage stagnation? Couldn't be. Offshoring manufacturing and services to less-developed countries beginning in the late 1970? Nothing to do with it! Competitive manufacturing from already-developed extra-national sources? No pressure there. Exponential growth in healthcare costs since 1965 (when it was so cheap companies offered it to workers in lieu of raises?) No way.

Nope, Alex. I guess you're right. There's simply no other explanation for the decline in personal savings rates except Social Security.

I do have a couple of points I'm pondering though, Alex, and then one big question. Maybe two. First? I know your buddies are all excitable about that 1965 savings rate of 14.0% But what was the national savings rate in 1960? (5.4%) In 1975? 14.6% In 1932 and 1933? Below zero percent!

Since you're an economist I know you're not as prissy about lying with statistics as I am, but why do you think Evans, Kotlikoff, and Phillips chose 1965 as their starting point? Seriously. I'm curious why you think

Why not 1932, before Social Security kicked in? Could it be because it's not as dramatic to say "Social Security has driven national personal savings rates to the same levels they were... um... before Social Security?"

And why didn't they pick the mid 1970s instead, when personal savings was even higher than in the mid 1960s? Could it be that it's even less convincing to try and make a case that Social Security has destroyed personal savings when instead personal savings steadily increased from below zero percent to 14.6% during the first 40 years?

1965 to 2012? Seriously? That's their story? And you're just hiccuping it back out? Seriously? What if I was to say I was willing to sell you my sure-fire, market-tested, no-lose market beating investment strategy. Would you buy it if I showed you the model portfolio has done nothing but go up, up, up going all the way back to 2008? (Yikes! You might mightn't you? I hope someone else is managing your retirement plan!)

1965-2012? Seriously? Don't look now but someone's painted the word "gullible" on the ceiling right. Over. Your. Head.


I'd be interested to see the earlier years, but presumably they chose 1965 because that's when Medicare started, and SS benefits (the transfer to the older generation) had really kicked in by then:

1937 – 53,236 – $1,278,000
1940 – 222,488 – $35,000,000
1950 – 3,477,243 – $961,000,000
1960 – 14,844,589 – $11,245,000,000
1970 – 26,228,629 – $31,863,000,000

Ah, here we go, from 1949 onward:

Do you want a meaningful correlation to that period from 1965?

During that period the return on assets declined from around 6.7% to about 1.2% in 2011.

See, The Shift Index - Deloite

Sorry, in my haste, I read the wrong chart heading:

That was a decline in return on invested capital: A decline of about 25% over the period.

However the the decline in returun on assets is equally compelling.

Besides, are savings the chief source of invested capital, or of its increases? Probably not considering retained surpluses.

When SS started, the tax was 1%. In 1965, the OASDI tax rate was 3.625% and there was no Medicare tax. The maximum taxable wage was $4,800. Benefits under the program were increased repeatedly and now we stand at 7.65% on a base of $110,100. Take some time to become informed.

Good points, and the number today should probably be 14.5%.

How does this mesh with the NGDP notion that we need more inflation to induce people to consume more and save even less? Will it be seniors who do all the consuming?

Multiple relevant zero bounds?

On net, it seems like child-rearers subsidizing non-child-rearers.

Or check out the more level-headed Kevin Drum's assessment: "In any case, whenever I hear this stuff, I always think back to Dean Baker reminding me that net national savings is always equal to the trade surplus. It's an accounting identity. So if we're running a big trade deficit — and we are — then either we run a big federal budget deficit or we have very low private savings. Or both. There's no way around it."

If only there was... I don't know... some sort of blogging economics professor we could read who'd provide those sorts of Econ 101 contexts. I mean, for instance, was Dean Baker right? If he wasn't 100% wrong do Evans, Kotlikoff, and Phillips account for the way changes in trade balances and deficit spending might confound analysis of personal savings and Social Security?


Dude they are specifically including medicare. Are you so biased you can't even read what is written? Kudos to your partisanship.

Presumably they would argue with more investment, national productivity would be better and the trade deficit would be smaller.

Deficit spending is basically the problem -- it's how we're accomplishing this massive intergenerational wealth transfer.

It all depends on what you take as constants in your model. If the trade deficit were decreed by God, then we'd have the decision you describe, but the cause-effect relationship may actually run the other way.

Surely the rise of consumer debt as a market has something to do with this? Credit cards were initially considered villainous, but over time it became essential to have one to establish a credit score. ISTR the first credit card was introduced in the sixties by Bank America.

Interestingly, Australia's system is apparently quite different:

No it isn't. It is just more unified, coherent, and generous.

Social Security in Australia is more uniform in providing benefits than SS in the US; one computation is used for the poor, disabled, unemployed, and aged over 65, while in the US, SS provides aid to each of the same groups with different SS programs, UI benefits for the unemployed, SS DI for the disabled, SS dependent benefits for widows and orphans, SS OA for the elderly, with some of the benefits means tested for assets, others for income, and others for both. In Australia all SS benefits are income and assets means tested.

So, what does that mean for their SS old age benefits?

Well, for a couple over 65, assets less than $400K and little earned income gets a benefit of $27K a year which is higher than the typical couple in the US on SS with fewer assets. And even with assets of a million dollars, a couple is just being phased out of SS benefits. Income for a couple of $6000 a year gets the full $27K benefit, and it isn't phased out until income exceeds $60K.

The other Australian taxes are high enough to pay for the SS system out of general revenue, so it is not clear what the taxes required amount to to support this system. The idea that the 9% of forced savings covers the same things the ~14% of US FICA does is absurd because FICA covers the low wage retirement income support, the disability, the survivor benefits. And to provide a similar system to Australia, the US means tested welfare system would need to be far more generous so the low income workers would get a high supplemental benefit to make up for the low assets accumulated in their "private accounts", as well as providing protection from stock market crashes and depressions and even bad investments which wipe out retirement accounts.

You seem to have missed the point, which is that they have private savings.

This could be an example of "correlation" is not necessarily causation.

Something else also happen between 1965 and the Oughts. The U.S. went from having having a current account surplus to running a massivie current accont deficit. If you want Government income to be balanced or in surplus, and private savings in surpluse, then the national account requires the country to run a current account surplus. To compete world-wide in a globalized labor market, U.S. workers have, and will have to continue to take a substantial cuts to their both real and nominal wages, assuming the dollars stays the reserved currency and overvalued, which is of course in the interest of wealth holders. Since social security and Medicare taxes unchanged since 1990, and essentially unchanged since 1984, I don't see where this big transfer of wealth from young to old operates by Government.

I do see where CEO pay has gone up to 380 times the average worker pay (which as shareholder of many of these companies I find a kind of outrageous looting funds that should either be invested in the business or paid out in dividends), and the upper 1% (and as Krugman says it is really the upper .1%) have seen their share of national income increase to 275% over the last 30 years. Now since these folks receive 20% of national income, one would expect them to be greatest savers and for most of them the monthly average social security beneft of $1,221 dollars is a rounding error on their annual income.

When I read stories like blogs like this, I always notice they leave out actual numbers that the supposedly rapacious old receive from the young (and it is the moral thrust of a supposedly "scientific" economic piece, the outrage of the "old" taking from the "young," that also perplexes since we are supposed to feel no moral outrage at elite looting and control frauds). Class warfare is evil and divisive, but dividing the working class against each other (private workers agtainst Government workers, young v. old, and of course the old stand by, whites vs. the Black vs. the brown, and everyone should hate hippies!!!) that's okay.

Finally, someone please explain Singapore, Germany, Austria, Netherlands, Switzerland, etc. all countries with more generous medical and social insurance schemes then the U.S. and all high net saving rates.

This assumes that running a current account deficit is a bad thing. It basically means people sending us stuff for nothing. And the worst thing that can happen is that later we run a current account surplus, which is just what the current account deficit fearmongers would like to see - how bad could it really be?

I think the worst thing about the current account deficit is that it screws up measurements like the national savings rate and scares people. People wanting to hold more dollars just gives you an opportunity to get stuff for free. Take advantage and don't worry about it.

I've only skimmed the comments so maybe I missed somebody mentioning this, but isn't this just a Ricardian Equivalence question?

Not quite: The Ricardian equivalence proposition (also known as the Barro–Ricardo equivalence theorem[1]) is an economic theory holding that consumers internalize the government's budget constraint: as a result, the timing of any tax change does not affect their change in spending. Consequently, Ricardian equivalence suggests that it does not matter whether a government finances its spending with debt or a tax increase, because the effect on the total level of demand in the economy is the same.

Unless you somehow equate old people with the ability to tax the young or vice versa.

I also saw a graph the other day showing the proportion of "disabled" receipients, which goes up and up. It seems employment is becoming ever more dangerous.

Meanwhile, the SS admin has responded to the unfavorable publicity of a man using his diaper to claim disability (upheld on appeal!) by... disallowing Google and Facebook searches by the people deciding benefits. No, seriously.

I agree it's deficit spending in general, not particularly what the spending is on.

I also don't think Social spending is either sacrosanct or sustainable at present rates.

I just think the argument that a belief in Social Security is the key driver of declining savings rates is beyond stupid.

If nothing else, I remember hanging around with other teenagers in the 1970s agreeing that we'd never see a nickel. And since roughly 1980 the Right has been both drum beating its demise and doing everything in their power to make it die. (The first shot, incidentally, was the Reagan administration rule changes allowing private companies to gut defined pension plans. Basically 'wingers just thing retired people are parasites no matter whether their savings are public, private, or even personal.)


No company can compete in a global environment with the defined benefit plans of your parents' generation. What sort of "benefits packages" do you think companies will offer a workforce that's in competition with the global poor?

When you think about it, the idea of an employer paying somebody to ride in a golf cart long after they've quit work is ridiculous.

Defined benefit plans have problems, but not for the reasons you identify. The concept of the defined benefit plan is that instead of paying an employee more money in salary you put the money into an investment fund that will pay them in retirement. The benefit is that the company absorbs market risk from the employee, which it can do because it is a much larger entity and will be around for a longer period of time. Unfortunately, there are a number of ways this can go wrong. The company may not set aside enough money, they might experience poorer than expected returns for a long time, the company may have financial trouble, or they might get bought out by a corporate raider who steals all the pension money.

But pretending that a defined benefit plan amount to paying people after they've quit working just marks you out as a disengenuous jerk.

Whatever. Bottom line, so long as there's offshoring and immigrant labor, defined benefit pensions go the way of the dodo.

Isn't this just the increasing availability of credit? The word credit doesn't even appear in their entire essay. I'd imagine it would have to have something to do with negative savings rates since you can't achieve negative savings rates without credit.

I suggest Alex and Tyler put up this quote by Bertrand Russell next to their screens and read it to attempt to correct for their bias before they post:

"If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it. If, on the other hand, he is offered something which affords a reason for acting in accordance to his instincts, he will accept it even on the slightest evidence."

"No company can compete in a global environment with the defined benefit plans of your parents’ generation."

Ok. Fine. But what kind of #@%~#% libertarian pulls that out when the issue at hand was the government's decision to change the law so that a) companies with contractual obligations to their employees can ignore those obligations, b) expressly encourage those companies to use their still-obligated funds for crap like leveraged buyouts, and then c) have the E#%!#% audacity to create the 100% moral-hazard-encouraging Pension Benefit Guaranty trust (a.k.a. American taxpayers) to cover any (a.k.a. all of them because, hey, free money) shortfalls!

Now what did any of that purely domestic LBO-donor-fluffing policy have to do with global environments? Nothing at all? Hey! Right in one!

Maybe you're right that defined pensions couldn't have survived. Too bad your side of the aisle made sure we'd never have a chance to find out. Like a lot of things they gutted established social commitments and kicked the cleanup down the road 30 years (as did Reagan when he was governor of California.) It was 30 years later for California in the 1990s. It's 30 years later for America now.

And, again, Alex and his playhouse pals have the audacity to say it's all Social Security's fault. Ok, or all Social Security and Medicare. Instead of, say, a whole freaking basket of shriekingly irresponsible legislative and executive policies by both sides (but, queerly, mostly by nominally "fiscally conservative" 'wingers.)

Ticks me off.


You're looking at a problem roughly 1% as large.

Fair enough, but management and ownership simply have no incentive to maintain an income stream to retired workers. It's one of those notions that only looks good on paper, like "health insurance." It's not good financial practice, and it's an actuarial nightmare.

"Welfare state," another of those notions that works only on paper.

It's interesting that social security and medicare are characterized as "transfers to the elderly." I see it differently: (1) I spent nominally 13.3% of my net income as a self employed person on self employment tax throughout my working life. That my investment is now being returned to me is a just payment of the investment the government has held for just this my well deserved retirement. (2) I further paid for medicare insurance, as I now continue to do from my social security benefits every month. I have no choice in this at all but nonetheless, since I have and continue to pay into this system, it hardly seems to be a transfer in whatever nefarious sense the phrase you use implies. I like to see it as the fulfillment of a binding contract.

Hence, in taking from young savers and giving to old spenders, which Uncle Sam has spent six decades doing on a massive scale, the lifecycle model predicts a major decline in US net national saving associated with a major rise in the absolute and relative consumption of the elderly.

Imagine a counter-world with no Social Security where the young put savings into bank accounts. What would an alien observing humans from a giant telescope see? Why he would see young humans taking a portion of their pay and giving it to men in a giant grey building. He would also see older humans going to their giant grey building and taking money out. (I'm assuming, of course, that in this culture shift humans start doing things in a way that's very visible to anyone looking straight down at them). What the alien can't see, though, is the name on the building because he has to look straight down, he can only see the roof. I can imagine some will argue the name on the building is 'bank' and this proves that humans run their society without social security. I can imagine a rival school saying the name on the building is 'Treasury' and arguing that humans do have social security. Maybe they spend trillions to send a spaceship here and when it lands it sees the name is 'Federal Reserve Bank' leaving everyone baffled.

More briefly, of course Social Security lowers the savings rate. It's a system of forced savings so if your savings rate consists only of voluntary savings then you won't capture that.

Except that it's not a system of forced savings, because nothing is saved -- the government has been spending the surplus all along -- and the "saver" can get out much more than he "saved."

Naaa, don't buy it. First of all, even if the SSI tax was set so that it only equaled whatever benefits were being paid in the current period, it would still be a system of forced savings. Second, suppose the tax rate was set ten, twenty years ago so as to have eliminated the surplus. Tell me what spending would have been cut? The first Gulf War? The second? NASA? Bush tax cuts? All happened without a wit of concern about the deficit yet you're going to tell us that there's something magical about the SSI surplus that made spending happen that otherwise wouldn't have? Which spending specifically?

Most of the above comments are waste.

Here is the fundamental point:

When you transfer the income of the young to the old (or the income of the working to the non-working)- the old will largely spend it on consumption, not investment. This really isn't a controversial idea, either- it precisely describes why people save and invest while they are working- so that they will be able to continue to consume after they stop working.

The only real question you have to answer is does the structure of SS/Medicare make productive investments with the surplus funds (those left over after paying for the consumption of present retirees)? I think the answer is already clearly no- if it were otherwise, the trust funds themselves would not require future workers to pay higher percentages of their income. Put another way, today's retirees' "returns" are far higher than would have been possible otherwise, but with coming insolvency of the trust funds, we already know that bill comes payable on future workers whose taxes will have to be higher along with a corresponding drop in the return to them within the program, or it just goes into a death spiral.

Social Security ran a cash flow deficit of $49 billion in 2010, and the 2011 trustees report indicates such deficits will be the norm by 2017. The report also reveals that Social Security’s unfunded obligation stands at $9.1 trillion, in net-present-value terms; in other words, it owes $9.1 trillion more in benefits than it will take in through taxes. The program will experience further financial strain as the worker-to-retiree ratio keeps falling. Medicare faces a 75-year unfunded obligation of $34.8 trillion, in net-present-value terms, and must be reformed if we want to ensure that younger generations have quality health care when they retire.

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