Lost in the partisan idiocy (that’s too weak a word) that constitutes our politics these days is anything faintly resembling the discussion of ideas, especially those that deeply affect us and our children. I was reminded of this by an excellent editorial in the WSJ today (sub only, alas) – The Population Boon. It channels Nixon and Paul Ehrlich (both of whom were devoutely Malthusian… yes, Nixon) from the days when we were all worried about the population explosion. Times have changed. As the WSJ notes:
In Japan and Western Europe, population implosion has become the crisis of the moment. Birth rates in most Western European countries are now so low that governments are busily looking for ways to avoid a very different kind of demographic catastrophe. The problem posed by Europe’s aging population is exacerbated by its reliance on intergenerational transfer payments to support its public pension systems; America, with both a greater emphasis on wealth accumulation and a higher birth rate, is comparatively better off. Demographics and Social Security are on a collision course here as well, but Europe’s difficulties in this regard make America seem fortunate by comparison.
China, thanks to its draconian one-child policy, also faces a demographic challenge, embodied in the oft-heard refrain that the Middle Kingdom risks becoming the first country ever to grow old before it grows rich. Population-control measures have resulted in a shortage of women and girls, one of many unintended consequences of the population-control hysteria of the 1960s and 1970s.
A shortage of women and girls is something I personally would not like to see for a whole host of reasons. But turning back to our country, I am reminded of the Social Security debate of a couple of years ago – or the pseudo-debate, because it never happened. My former liberal allies simply shouted down the discussion before it could start. Never mind that those it might have helped most were their supposedly disadvantaged constituency. As with much affirmative action debate these days, there is a (not very) covert vested interest in failure operating whose object is to preserve the perquisites of a pseudo-liberal mandarinate.
But enough snark. Most of us know that Social Security, like most pension plans, is nothing more than a Ponzi scheme. Nothing wrong with that. Ponzi schemes have their place and are useful in this instance in the creation of a necessary safety net. But it would seem obvious that we cannot depend forever on an expanding population, useful as that may be, to preserve this net. 300 million now, 400 million later… where will it stop? And will even those numbers be able to sustain an aging population as medical science extends our lifespan toward 100. Doubtful.
Nevetherless, mega-capitalists like Ted Kennedy refused to countenance the idea of any part of Social Security being privatized. The implication here is that the lower classes cannot be trusted to invest in the market. The hoi-polloi just don’t understand. And the market is too volatile for them. This of course has put the kibosh on the myriad suggestions of how to preserve this safety net while allowing for market investment. I’m far from an economist and I can think of a half-dozen myself. What the Kennedys and their ilk have done in their lust for power is cut the poor out of their share in the 12,000 Dow, keeping them down on the farm as it were. Noblesse oblige, American style.
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37 Comments
1. heather:When FDR established Social Security most Americans were dead and gone by the age of 65. You could begin checking your monthly check at 65, and FDR has been worshipped ever since.
Now, of course, all has changed. There was an interesting lecture on this once, about when the Americans collide with reality, when there is one Oldie to 2 younger taxpayers? At that point, it will be a choice of supporting American military outreach (eg, Fifth Fleet in the Pacific) OR the pensions for the Oldies. And, I might add, the huge medical expenses attendant upon just being Old. It’s not hard to predict the decision that the US citizenry will make, is it??
The implications for the WORLD are vast. The US is – in effect – the world’s municipal cop. When that cop disappears, all sorts of very unpleasant things start happening, especially for those outside “Fortress America.” And a fortress it will be, at that point….
This is, by the way, why the current state of the American polity is so rotten: the Democrats have consistently blocked any reasonable move to deal with this. And, I might add, so have many of the Republicans. But when, really, have humans planned ahead for such academic contingencies??? And the USA is magnificently human.
Oct 21, 2006 - 11:32 am 2. Sissy Willis:Just as the lower classes “cannot be trusted to invest in the market, so,” too they could not be trusted to reelect a president — in this case Ronald Reagan — to conduct foreign policy during the Cold War without Teddy’s insidious attempts to undermine that policy through backchannel contacts with the Soviets.
As I’ve often blogged, the totalitarian impulse runs dark and deep in our species. Curious that it always seems to seep through the cracks on the left side of the aisle.
Oct 21, 2006 - 12:04 pm 3. Cap'n Billy:Teddy Kennedy a mega-capitalist?! Surely you jest, unless that’s the proper term for a mega-rich guy who inherited everything he has (including his political office) and has never had a job outside of politics.
Oct 21, 2006 - 1:02 pm 4. syn:What did Hayek say, something about the road to serfdom is paved by uber rich Socialists.
Well, I’m relieved I’m not a serf forced to depend on the Socialist to save me.
What did Einstein say, something about compound interest over long time builts a big of pile of greenbacks.
He’s really smart.
Let’s hope for the children’s sake the Estate Death Tax never again sees the light of day.
All those who have children and are investing in the market, have lots of IRAs and such must ensure the your lifelong work investing and growing wealth will never be looted by 50% when Socialist Death Tax Detector comes knocking on your door. Before Bush eased the Estate Tax burden there was such a thing as Death Tax Insurance so that when you die the insursance covers part of the tax due and helps prevent you freom losing your small business entirely.
Socialist do some crazy stuff man.
Oct 21, 2006 - 2:10 pm 5. Erik:And so complicated.
Sweden has already moved a lot of the pensions to private mutual funds. It was basically the only way to keep it floating, and this way if there is no money, the politicians can always blame the stock market, the companies, and/or the fund managers.
Oct 21, 2006 - 3:36 pm 6. TomTom:As a side benefit, those who do not make an actual choice of were to place their share has their money placed in a state fund, making the same politicians a big player in the stock market…
You should rethink your benign characterization of “nothing wrong” with Ponzi schemes, Roger, especially when participation in the Ponzi is mandated by law, instead of just enticing the gullible to invest. Ponzis are frauds, pure and simple. And Social Security was from inception indeed a Ponzi.
Oct 21, 2006 - 5:31 pm 7. Carl Spackler:My son came up with his own indignant epithet while very young: “You…you…..Roosevelt!” His parents were Democrats at the time.
Some emancipation is more equal than other emancipation.
It is OK for the working stiff to dig into the ignition code of Teddyís Mercedes 600 and run it through a diagnostic program on a UNIX based laptop. But, for a overhaul wearer to handle his own finances? Pluaazeee! Thatís for his Budweiser drinking, Spanish cheating, Belmont driving betters.
Little people and their little dreams, they are so amusing.
Oct 21, 2006 - 8:03 pm 8. photoncourier.blogspot.com:What struck me about the Social Security “debate” was the utter resistance on the part of Democrats to the discussion of any alternatives at all. Their reaction was very much like that of an extreme religious fundamentalist facing a proposal to change the fundamental tenets of his religion.
Some of the reaction was of course political gamesmanship, but I don’t think that account for all or even most of it. Although these people may call themselves “progressives,” their personality structure is in many ways reactionary.
Oct 21, 2006 - 8:22 pm 9. Grumpy Old Man:A pedantic note: it’s not “the hoi polloi” but “hoi polloi.” “Hoi” means “the” in Greek. The phrase means “the many.” You don’t need the English “the.”
It was Bismarck who first used the age 65 for retirement. Most people were dead by then, or almost so, when the Iron Chancellor first instituted the welfare state.
Oct 21, 2006 - 10:41 pm 10. Lem:There is guy in Ohio making a green industrial chimney that saves money. Contrary to long held prejudices the coincidental green in environmental and the color of money may not be incidental any more. http://tinyurl.com/yxsote
Social Security is, by today’s standards, as timely as a horse and buggy. Given the statistical downtrend in crime, Social Security is riskier than putting your money under the mattress. If is true that the government (contrary to the private sector) grows in direct proportion to its failures then Social Security is in a real sense a big enabling scheme. Why would anybody believe in Social Security seems to me to be long on prayer and short on everything else.
Social Security in on death row. The private sector should not grant clemency.
Oct 21, 2006 - 11:12 pm 11. ricpic:If memory serves, it was the suggestion that 2% of Social Security payments be freed up for private investment, that the Dems ferociously opposed. 2%! Sez it all.
Oct 22, 2006 - 6:44 am 12. timmah!:“My former liberal allies simply shouted down the discussion before it could start.”
That was only half of the problem.
Who controlled the house, senate, and white house? Bush failed to use the bully pulpit, and congressional republicans trampled each other running for the doors the moment Teddy K. whispered “rabbit”.
Oct 22, 2006 - 6:50 am 13. Vulgorilla:I agree something needs to be done about Social Security, but for people like me, in our early to mid 60’s, we’ve had a gun to our heads for these last 45 to 50 years demanding we pay into it out of every paycheck, so we’re really looking forward to finally getting some of our money back. The other thing about us folks in this age group is that there are a lot of us, and one thing we always have time to do is to vote, so anyone attempting to cut or SS payments will be looking for a new job pretty quickly. I’m not saying thats right or not, but I’ve got tens of thousands of dollars invested in SS at the point of a gun, and I’ll be damned if I’m not gonna get as much from it as I can. I had no choice each payday, and the government should have no choice now that the shoe is on the other foot.
Oct 22, 2006 - 9:28 am 14. stu:I do not recall any of the proposals leaving those who were nearing retirment being left in the lurch. A proposal that would have threatened Vulgorilla’s social security would have been as politically impossible as doing away with the income tax. But apparently the Democratic propaganda coupled with the media’s complicity and the administration’s incompetent marketing managed to confuse those folks who actually thought their social security would actually be placed in jeopardy. Generations X and Y are a different story.
Oct 22, 2006 - 10:54 am 15. photoncourier.blogspot.com:Re Vulgorilla’s comment: people often refer to the huge amount of Social Security “expenditures” without noting that much of this money it actually a repayment of the monies paid in. It is a “return of capital,” in financial terms. When your bank pays back the money in your savings account, it is *not* shown as an “expense” on the bank’s P&L.
Another part of the SS expenditures represents imputed interest–that is, if the government had not been collecting the SS payments, it would have to have borrowed additional money at the then-current interest rates. I think it’s pretty clear that the government has been getting a lower effective cost of funds from SS than it would from the normal debt markets.
This confusion clearly shows one problem with government programs like SS: you can pay in for your whole lifetime, but the benefits aren’t really *yours*–they are just an “expenditure,” which can be redirected with the stroke of a political pen.
Oct 22, 2006 - 11:59 am 16. David:I teach physics at a small college. I make sure that I lecture eacch and every class on the time value of money. I want my students to be part of a future 36000 dow.
Oct 22, 2006 - 3:57 pm 17. Lem:Way OT.
There was a due diligence failure with the choice of the national anthem singer at tonight’s World Series game on national television.
I’m guessing that a Detroit native, former Grammy winner and availability sealed that deal.
Iím guessing no one dared ask her anything.
You have to go back to Rosanne Bar in Cincinnati for a poorer rendition.
Oct 22, 2006 - 5:38 pm 18. Lem:It was pointed out to me at the high definition local watering hole that Anita Baker may not in the history of the Grammy’s been a recipient of such accolade.
It is very likely that I have erred in assuming her to be a Grammy winner.
Oct 22, 2006 - 9:17 pm 19. Lem:Photoncurier,
You have also, perhaps unwittingly, illustrated why Al Gore’s “locked box” idea was so preposterous.
I seem to remember reading something about the fed writing it self I owe you(s) and the fact that it is very difficult for the average American to welcome this concept in financial regularity without much skepticism.
Oct 22, 2006 - 10:01 pm 20. Lem:Is it possible that the fed is exempted from the laws applied to Andersen?
The people versus Ben.
Oct 22, 2006 - 10:13 pm 21. Soldier's Dad:While I agree that the political discussions on what to do about an aging population are quite poor. THe answeres being proposed are poor as well.
The Japananese are a lot further along in their national aging process..and what happened to the Japanese Stock Market when the aging starting selling their stock to pay for living expenses? Oops…it crashed.
Of course the corporatate executives in Japan got blamed…and fired..but the politicians kept their jobs.
A real discussion about social security would be enlightening, but that requires real economists, using real demgraphics, to determine what happens to capital markets when significant portions of investors divest.
Oct 23, 2006 - 7:31 am 22. Knucklehead:Photon and Vulgarilla illustrate the political “genius” of the SS issue. People pay into the system for decades. I, as an example, will have roughly 50 years of paying into SS. I’ve had no real choice in the matter – just another inevitable, unescapable tax to be paid. I know full well it has been and will continue to be a terrible investment but when the time comes I want my paltry payout. To the individual paying into the system it is a forced retirement savings plan regardless of how poor it may be as such.
But in the overall scheme it is structured as nothing of the sort. Voters who are currently, or soon to be, collecting will not allow any changes that contain even a politically conjured risk. And the older people are in the US the more likely they are to vote. Those looking out at their future half-century of paying into the scheme recognize that it cannot survive but they don’t yet carry sufficient political power to force change. The three or so decades beginning about 10 years out from now are going to be vewy, vewy intewesting.
Oct 23, 2006 - 7:32 am 23. stumbley:Here’s the real problem with Social Security:
My grandfather (bless his soul) received Social Security payments for 35 years without ever paying a *dime* into the system; he was 65 in 1941. And you don’t “get your money back”, you get *more* than what you paid in, unless you croak early, because benefits are paid at inflated rates. SS is just criminal. If the government would just force you to put your money into a *regular savings account* at the rates currently paid, you’d have more money for benefits than you get now!
And the fact that the Dems stood and cheered themselves in GWB’s SOTU speech when he mentioned being unable to change SS says volumes about how they represent “the people”.
Pathetic scum.
Oct 23, 2006 - 8:46 am 24. Neo:I figure eventually that Social Security will be “mans tested” which means it becomes a welfare program.
The usual formula is to deduct from your check based on your “outside” income and savings, but perhaps there should be a consideration for those who supported and raised new contributors to the system (AKA actually had children) that would restore most or all of those deductions.
Oct 23, 2006 - 8:55 am 25. Sandy P:Contributing to SS is not manditory, there is an opt-out. Just not sure of the rules.
Oct 23, 2006 - 11:10 am 26. Knucklehead:Stumbley,
I’d be interesting in seeing your arithmetic regarding the claim that people get more out than they put in. This may be true at the lowest income brackets, for people who payed in only a relatively few years before starting to collect, and for people with unusual longevity. But for those in my age bracket who have been paying in since our very first paycheck…
Here is the history of the SS tax rates. Here’s an indepth analysis by Cato. Here is a Brookings Institute analysis favorable to SS.
Some other notes regarding getting out more than one puts in. People who die before collecting, or after collecting for just a few years, certainly don’t get anything out. My father passed away before he collected a penny after paying for his entire working life. My mother now collects based upon his contributions but forfeits her own. She’s never seen a penny of the money she put into the system. Since she didn’t work for many years while raising children she does get out more than she ever paid in – she collects on my dad’s account. Yet 20 some-odd years of her own contributions are gone. Not much of “retirement savings plan” there; two people putting in, one of them loses the entirety of their input.
Sandy P,
A subset of working people can “opt out” of social security. This is limited to government employees (not sure this is possible any more but millions are certainly grandfathered if not) and others who had or have government certified pension plans (there were some plans for, IIRC, railroad workers that exempted them). Clergy can opt out. And there are certainly some “freeper” types who rant and rave about not getting a SSN and how it’s all unconstitutional and such but for the vast majority of working Americans there’s no escape
Oct 23, 2006 - 11:54 am 27. monkeydarts:Lem- Anita Baker has won 8 Grammy Awards.
Oct 23, 2006 - 11:54 am 28. Knucklehead:Roseanne Barr screeched in San Diego not Cincy.
Neo,
There is an odd sort of “means testing” for SS now. Unfortunately it is based upon earned income. If you are collecting SS payments and you work then you have to be careful about how much you work since beyond a certain level of income (and it isn’t very high) the SS becomes taxable. You could have a million a year in unearned income and not jeopardize the taxability of a dollar in SS payments.
At some point though it will surely have to be means tested and some folks denied their $12,000/yr ’cause, well, they just don’t need it.
But until the thing is caving in around people’s heads nobody will do anything. The gummint needs the dollars and people see the money as theirs (which, of course, it was up until the moment Uncle grabbed it).
Oct 23, 2006 - 12:27 pm 29. Buddy Larsen:I hope that over the next few years, we will be treated to many, many viewings of Mrs. Clinton at the State of the Union Address, leaping to her feet to lead the Democratic side of the aisle in clapping, stomping, laughing, and jeering the president’s sad, rueful “I failed to reform Social Security” lament.
Oct 23, 2006 - 2:47 pm 30. HA:I wonder what the total opportunity cost of Social Security and all the other New Deal/Great Society programs has been to this country?
How much wealthier would this nation be if the trillions of dollars spent on these various programs had remained in the private sector where it had been saved and invested and earned market rates of return compounded over decades?
America currently has a $12 trillion economy. Would it be $15 trillion if we hadn’t had these programs? $20 trillion, $30 trillion…? Who knows?
Oct 24, 2006 - 3:37 am 31. cathyf:BingBingBingBingBing!!! We have a winning answer here. The main problem with the social security debate is that the “private account” folks are always making wild goofy predictions about what investment returns are in the future based upon what they have been in the past. The first law of economics is the law of supply and demand. (Demand curves slope downward.) Economic activity is a combination of labor and capital. The value of labor and the value of capital are, like all goods, a function of supply.
And the coming demographic “train wreck” is all about:
1) The supply of labor going down and the price of labor (wages) going up;
and
2) The supply of capital going up and the price of capital (investment returns) going down.
Make all the snide comments you want about pay-as-you-go and ponzi schemes blah-blah-blah, but you have to understand that, in the macroeconomic sense, the whole economy can only be pay-as-you-go.
So what happens when we get to the 2 working people for every one retired person stage? A whole bunch of things, and they all work in the same direction.
1) The supply of capital, in the form of the baby boomers’ retirement savings, will go way up. This means that your capital will compete against your cohorts’ capital, and drive investment returns down. To put it in concrete terms: $1 million in retirement savings, 6% returns — comfortable $60K/yr in income; 1% returns — eating cat food on your $10K/yr income.
2) If the total population goes down, the total demand for capital also goes down. Capital goes to producing stuff that people will buy; less people, fewer customers. So not only does the “pie” need to get divided up into more pieces, but the whole pie is smaller.
3) As the supply of working people shrinks, wages will go up, and so things will become more expensive, especially things which have lots of labor as components. Capital-intensive things (big old houses on big lots) will not increase in value at all or will decrease in value, while labor-intensive things (home health-care aides) will. So if you were planning on eating cat food, well, those high-income wage earners splurging on their pets are going to price you out of the market for that, too.
4) As wages go up, this will draw all sorts of people into the job market. Especially any seniors who have the physical ability to work and want to eat your higher quality cat food. Increased wages means increased social security tax receipts.
Ultimately, all of this creates a single process. At every step of the way, retired people will be relieved of their retirement savings, and that money will go into inflated wages for working people. Where it will be collected as social security taxes and paid back out as social security benefits. But the predictions of bankruptcy of social security which result in social security benefits ending are overblown. The future working people are going to relieve all of the savers of their savings, and the government is going to take its cut, and *bing* that’s where the future benefit payments will come from. Certainly those retired people with savings will be somewhat better off than those without, just like now, and people with children and grandchildren helping to support them will be better off than the people who didn’t have kids because they thought that the world was overpopulated, but it’s not going to be nearly the sort of effect that the “bankruptcy” folks are squawking about.
And most importantly, there isn’t going to be a “bankruptcy” in the sense that payroll taxes won’t pay for benefits, but what is going to happen is that capital gains tax receipts are going to collapse. That can probably be made up for by making the self-employment/social-security tax a flat tax rather than a regressive tax.
Oct 24, 2006 - 8:35 am 32. photoncourier.blogspot.com:cathyf…an interesting analysis, but needs to consider the fact that capital markets are global. Demand for capital in China and India–for highways, railroads, and power generation, for consumer-products factories and individual residences–also impacts rates of return in the US.
Also, why does supply of capital go up as baby boomers begin to retire? They’re in the capital accumulation phase right now; as they begin to retire, to the extent they dip into capital this will *reduce* the supply of capital.
Oct 24, 2006 - 12:04 pm 33. Buddy Larsen:This link explores more on the topic of ha’s post, just above.
Oct 25, 2006 - 8:31 am 34. cathyf:Yeah, you are right, it’s a peak-then-decay process.
I was born in 1963, which was the US’s largest birth cohort of the baby boom. (Other years in the 50’s had higher birth rates but that was because the populations — the denominator in birthrate — were smaller then.) The 1964 cohort was somewhat smaller, and in 1965 the birthrate collapsed. So I’ve spent my whole life at the edge between baby boom and baby bust.
My grammar school class was the last big class the school had (we were 70, the class behind us was 50, and 3-4 years younger they were at 25-30.) The high school district had two high schools in it until the class of 1981 (the 1963 birth cohort) graduated and they merged down into one school.
Ok, so look at retirement from the 1963 (Class of ‘81) perspective… When we are 55-65, the huge bulk of the baby boom will be living out their retirements. They will not be working, so they won’t be paying payroll taxes. One way or another, their retirement savings will be out there flooding the capital markets. This is true whether they manage their own IRA’s, or whether they give their savings to an annuity company, and the annuity company invests it in the capital markets.
So in the years leading up to my retirement, my retirement savings will earn lousy returns. But there will still be robust labor markets, because the largest birth cohorts are still working (and saving for retirement.) And we’re going to be paying for all those retirees’ medical bills. Both of which mean that my wages will be flat or declining.
Then I get to retirement age. (Which I figure will be about 75…) The labor market is very tight behind us, because there aren’t enough people. So wages go up. Investment returns are still anemic, because after paying all those expensive employees, enterprises don’t have much left for return on capital. Sure, as the markets take away the retirement savings of the older boomers and give them as wages to the gen-X, Y, Z workers then the supply of capital goes down and that should help.
But it’s going to be just like schools closing in the 80’s as the economy has to shift around to adjust to different demographics. The bottom line is that the demographic effect is that people retiring in the last 10 years and next 10 years will be significantly better off than the people (like me) retiring in the 20 years after that. Not because social security is a ponzi scheme, or people who got money who didn’t pay in, or whatever. But because of the basic economic law-of-supply-and-demand which says that each person born in 1963 is less valuable because there are more of us.
You are absolutely right, photoncourier, that globalization is our only hope. If the Indians and Chinese (3/8 of the world’s population) become capitalist economies, their young people are going to need our capital to produce the unimaginable wealth which is the natural product of human endeavor when it is not crippled by kleptocracy.
Forget “social security reform.” What we need is human freedom — the wealth created by freedom can fund vast amounts of foolishness. Yeah, there are lots of things which are stupid about the system that we have, but that’s small potatoes compared to the wealth-destroying effects if India, China and/or Russia stay (or fall further back) in their productivity-sapping fascist/socialist authoritarian command-economy kleptocracies. Look at Europe. It’s not just the aging population, it’s that the Europeans have so crippled their economies that somehow they can’t find jobs for many of the (relatively) few young people that they have.
Oct 25, 2006 - 9:15 am 35. Buddy Larsen:nice posts, photon & cathyf. A feller could learn something if he weren’t careful–!
Oct 25, 2006 - 7:50 pm 36. HA:Buddy,
Here’s a Cato analysis of the Social Security opportunity cost going forward:
http://www.cato.org/pubs/ssps/ssp7.html
They estimate the opportunity cost of NOT privatizing (as of 1996) at $10-20 trillion.
Conservative assumptions imply that Social Security privatization would raise the well-being of future generations by an amount equal to 5 percent of gross domestic product (GDP) each year as long as the system lasts. Although the transition to a funded system would involve economic as well as political costs, the net present value of the gain would be enormous?as much as $10-20 trillion.
Oct 26, 2006 - 4:05 am 37. Buddy Larsen:10-20 trillion, or a upvaluing of the national asset base, by a good 10%. Thanks for the link, ha.
This is interesting, publiuspundit writing in full disgusted stream-of-consciousness (”empire of thieves”), on what this topic can look like, run wild on the socialist side, down Cuba way.
Oct 29, 2006 - 6:06 pm