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Saturday, August 23, 2008

Social Security and the Budget

Somebody should reassure this poor woman that there is absolutely nothing for her to worry about:

Answers, not IOUs, for Social Security, by David Lazarus, Consumer Confidential. LA Times: Whatever happened to Social Security?

As the Democrats prepare to convene this week in Denver, and the Republicans gear up for their get-together in St. Paul, Minn...., precious little has been said about an issue that touches virtually every American family and, for a brief spell a few years ago, dominated the political agenda.

West Los Angeles resident Marilyn Taylor, 78, is typical of many seniors in relying on Social Security for a significant portion of her income. She told me she received about $1,100 a month from Uncle Sam, which covered about a third of her expenses.

These days, Taylor wonders whether she'll keep receiving her full Social Security payments. ...

That's a pretty misleading introduction to a Social Security story unless your intention is to create undue fear about the program's solvency. The article cites some scary sounding numbers, but that's because the totals are accumulated over so many years. Here's some perspective (which is missing from the article):

If Congress makes permanent the 2001 and 2003 tax cuts without paying for them, the cost over the next 75 years will be about three times the size of the Social Security shortfall over this period.

It's acceleration in health care costs, not Social Security, that is the biggest budget problem going forward.

Since we're on the topic of Social Security and entitlements more generally, Diane Rogers responds to Glenn Hubbard's recent WSJ editorial criticizing Barack Obama's approach to Social Security:

We Can’t Entitle Our Way Out of Paying Taxes, by economistmom: Thursday’s Wall Street Journal contained an opinion column by Glenn Hubbard, arguing that ”We Can’t Tax Our Way Out of the Entitlement Crisis.” Glenn, whom I worked closely with as his resident tax-policy antagonist at the Council of Economic Advisers for the first 100 days of the Bush Administration (my being a staff holdover from the Clinton Administration CEA), uses the column to criticize what seems to be Senator Obama’s tax-heavy approach to entitlement reform (or at least Social Security reform). ...

Glenn ... point[s] to some academic research that demonstrates the danger of Obama’s taxes-only approach...:

Research by economists Eric Engen of the Federal Reserve Board and Jonathan Skinner of Dartmouth suggests that such a tax increase would reduce long-term GDP growth by about a full percentage point. This is no small matter: Think of it as reversing all of the gains in our long-term growth rate from the productivity boom of the past 15 years.

Coincidentally, I know Eric Engen and Jon Skinner pretty well, too. ... And I know something about this research that Glenn cites, the first thing being that this was a paper written 12 years ago, before we even saw the evidence (data points!) from the later years of the Clinton Administration that growth in revenues as a share of the economy could coexist with–and even encourage–strong growth in the economy overall. The second thing I know about this paper (and you can see for yourself here) is that the “full percentage point” drop in GDP growth Glenn cites is derived from an Engen and Skinner conclusion about the effect of marginal tax rate changes, roughly translated into a “corresponding” range of average tax rate changes. ...

You see, ... it’s the marginal tax rate ... that matters for economic incentives–the supply-side behaviors of labor supply and saving... When we study the beneficial economic effects of what we think of as “tax reform,” the mental exercise is usually the following: how would economic efficiency improve if marginal tax rates could be reduced (through base broadening), holding revenues (and hence average tax rates) constant? Hence, the studies that Eric and Jon used ... explicitly hold constant the average tax rate, the national saving rate, or the capital stock. Why? Because the studies try to isolate the incentive (or substitution) effects of tax policy. But Eric and Jon made the mistake of providing the reader with a loose translation of what a given marginal tax rate change would imply for the average tax rate..., and then suggesting (unintentionally?) that their results based on the marginal tax rate and economic growth could translate directly into a connection between the average tax rate and economic growth.  Nope–you can’t do that. (I thought Jon Skinner had taught both me and Eric that.)

And if you check out the paper, you’ll see that even with the connection between marginal tax rates and economic growth that Eric and Jon were really trying to emphasize, Eric and Jon weren’t exactly confident in the statistical ”robustness” of their empirical conclusions... They were very upfront about that, but that sort of language doesn’t get put into the NBER digest summary of a paper that has such a clean and precise conclusion and potential policy implication.

So then Glenn comes along, 12 years later, with the claim that an Obama Administration is proposing to increase taxes by enough to fully cover the growth in entitlement spending over the next forty years, which implies that more than 50% increase figure, and a boost in the average tax rate from 19% of GDP to 29% of GDP. ...

Besides the fact that Senator Obama has far from proposed to raise federal revenues as a share of GDP to 29% (he’s barely budging it from the 40-year historical average of just over 18% from what we’ve seen so far), even if anyone were to recommend such an increase in taxes, it would be an increase in the average tax rate we’d be talking about, not the marginal tax rate. ... Ideally, if deficits are deemed too large for the health of the economy, we do want to raise  ... the average tax rate ... and reduce spending/GDP, and we want to do that in a thoughtful way that weighs costs against benefits...

Glenn Hubbard knows a lot about tax reform... That’s why I’m disappointed that he would forget about tax reform when it comes to how he thinks we ought to balance the budget. ...

    Posted by on Saturday, August 23, 2008 at 02:34 PM in Economics, Social Security | Permalink  TrackBack (0)  Comments (71)

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