Tyler Cowen Changes James Glassman’s Mind on Social Security

Anytime you get your opponent, particularly one from AEI, to adopt your position after a debate, you ought to be declared the winner.  By that standard, Tyler Cowen at Marginal Revolution won this debate over Social Security handily. 

According to Glassman, "innovative economist Tyler Cowen of George Mason University" convinced him to drop privatization and focus solely on solvency.  Thus, Tyler convinced Glassman to disagree with Ben Bernanke and the White House who will insist that both solvency and privatization be part of any reform proposal.  Glassman believes solvency is the primary issue and private accounts will emerge naturally as benefits are reduced to achieve solvency.  Though I see the solvency issue as less pressing than the rhetoric surrounding reform implies, impressive win in the debate!

How to save Social Security reform, By James K. Glassman, Scripps Howard News Service: Since his re-election, President Bush has pushed hard for reform of Social Security, but he's made little headway on his proposal to let Americans divert part of their payroll taxes to personal investment accounts. … It's time for a new approach. ... Personal accounts won't prevent Social Security's impending bankruptcy. Personal accounts are great for other reasons: they will encourage savings, provide a more comfortable retirement, give people a nest egg they can own and increase personal responsibility. But the accounts won't solve the insolvency problem.  Bush should stop talking about these two issues — insolvency and personal accounts — as though they are connected. He needs to concentrate on one or the other to start. Which?

You probably think I'll say "personal accounts." I might have, but a few months ago I took the administration's position in a debate in Reason magazine with innovative economist Tyler Cowen of George Mason University. Sometimes, you learn something from such an encounter. I now see that Tyler was right … I believe the president should focus on putting Social Security on a sound footing. The best way to do that is to adjust benefits by increasing the retirement age, cutting back payments further for those who choose to retire early and indexing the growth in benefits to the consumer price index (that is, inflation) rather than to wages. … Should we give up on personal accounts?  Not at all. Those accounts will grow organically as Social Security withers. The inevitable result of benefit adjustments will be to reduce, slowly over time, the importance of Social Security in the overall retirement scheme. The system would become more of a safety net. Retirees would, very naturally, fill in the gap by saving more.  The vehicle for those savings would be personal stock and bond accounts — which already exist!  There are 401(k) plans, IRAs, Roth IRAs, Keoghs, 403(b) plans and other tax-advantaged accounts. ... My preference is a universal, unlimited IRA — income that you put into savings is not taxed at all. When you withdraw the money, at, say, age 60 or later, then you pay capital-gains taxes on it.  ... we take steps to make Social Security solvent, personal investment accounts will blossom naturally, without the sorts of government rules and restrictions that would be inevitable under the plan envisioned by Bush. Investment firms will get on board, AARP will be disarmed and reform will actually happen. And not a moment too soon.

I don’t share Glassman’s optimism that add-on type accounts will blossom naturally, a point addressed here. Government intervention of some sort appears necessary to overcome important market failures in the retirement saving  market.

Comments

[anne]

What is supposed to be solvency is simply cutting Social Security benefits, which would effectively begin to end the system. James Glassman would of course end Social Security in a moment, but he is playing at being politically clever which he is not. Never ever expect Glassman to be other than he is.

[Mark Thoma]

Thanks anne. I guess since I've written so much about Social Security in the last months (and foolishly believed it might end soon ...), and since I'm teaching 8-12 daily right now, I get lazy and don't say or miss the things that need to be said each time. I will have to be sure to keep the comments open so all of you can straighten me out!

The political game is ever present here, and the long-run goal is as you state. I agree this is largely about how to get there. Thanks for keeping me sharp, or at least taking off the duller edges.

[anne]

There is never a time when you are not sharp, so give that no thought. These posts are a wonderful resource for all.

[Mark Thoma]

Thanks anne. All of you together in comments, email, links to your own blogs, etc., are amazingly smart. Not all agree on every point, deservedly at times, and there are holes to fill, dots to connect, shadings to color in, messages to deliver, and so on, and I welcome help from all sides of the debates. Mostly.

We now return you to your regularly scheduled blogging activites.

The Management

[Bruce Webb]

"Those accounts will grow organically as Social Security withers. The inevitable result of benefit adjustments will be to reduce, slowly over time, the importance of Social Security in the overall retirement scheme."

Words fail (thank God for this handy keyboard). I have a sneaky admiration for the Samwicks of this world, people who know the numbers and have simply chosen to deploy them in unfair ways in an effort to demolish Social Security. I fundamentally disagree with the libertarian idea that Social Security was a terrible threat to freedom, but I respect the intellectual honesty that some straight out opponents of the system exhibit.

But I am constantly stupified by people who are smugly confident that the numbers are firmly on their side to the point that they believe they can just sit back and let those numbers do the talking and win what they admit is an ideological battle by the back door. Cato made a conscious decision to fight the battle out on solvency in 1983. Cato is now realizing it made a serious mistake, the economy is not doing its part, the economy is not going to grow down to the numbers of Intermediate Cost, nor would Cato want it too. Intermediate Cost makes a mockery of the notion that tax cuts grow the economy. You can take Intermediate Cost's productivity numbers seriously, you can take the Laffer Curve seriously. But trying to do both at the same time is to try to stuff ten pounds of manure into a five pound bag. The seams are already showing serious signs of strain.

I am a progressive Democrat. Per the right I am a lying traitor that simply hates the miracle of the free market system. But on Social Security reform my fundamental claim is that the economy is doing just fine, I am placing my bet on American productivity. The smarter privatizers are waking up to the horrifying reality that the numbers that produce Social Security insolvency are numbers that suggest the American economy will be heading in the direction of permanent stagnation. They can't salvage them without admitting that every bit of the rest of their economic platform is a sham. Hence their efforts to sell private accounts on their ideological merits.

As for me I believe neither in Intermediate Cost or the Laffer Curve. I don't believe economic productivity will go to 1.6% ultimate or that tax cuts magically bring in more revenue and economic growth. I don't have to, I just have to bet that America will grow more or less in the future as it has in the past.

The Low Cost alternative of the Trustees is the sweet spot. The numbers are fully attainable, who doesn't think we will get a better productivity number than 2.1% this year? And the results are great: fully funded Trust Fund. The trends in the EPI table are at this point irreversible and yet the Glassmans of this world simply think they can sit back and let the numbers do their heavy lifting on this one.

Sorry James, I am sitting in the catbird seat here.
Changes in Trustees projections over time

[Bruce Webb]

I am not suggesting the battle is over. This war didn't start in a debate over numbers, it won't end in an agreement on numbers, in many ways the numbers are just a sideshow in a seventy year old ideological struggle. The Right chose Social Security as their opening battle in the effort to discredit FDR and dismantle the New Deal. They chose it because they thought it was low lying fruit, there was agreement on all sides that in the long run it was unsustainable as currently configured, and they simply assumed they could leverage that.

But they got lazy, apparently no one was assigned to actually pay attention to the key numbers. When the battle broke out and they reached into the quiver for numeric arrows they came up empty.

Privatizers remind me of Custer at Big Horn. They rode right into this one with shiny buttons and buglers just assuming the natives would scatter before them. They didn't prepare themselves by studying the ground, they never dreamed they would need to. The numbers were supposed to be there. Now they are discovering that Hope is not a Plan.

[Tim C]

I think raising the eligibility age should be the first step. No one should be able to retire at the very young age of 62 unless they have provided for it themselves. For my generation (I'm 40), the magic ages are currently 62 and 67. I think raising those ages to somewhere around 68 and 73 would go a long way toward solvency. You'd have more people paying into the system (because they'd have to work more years) and they'd have fewer years to take from the system.