Re: Social Security Column

[Dale Coberly <coberly@PEAK.ORG>]

I no longer have access to the web.  Attached is an example of the
kind of comment I would make if you would like to add it to your
discussion.  If anyone has questions, I will try to answer them.
coberly@peak.org

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The first thing about social security reform is, "don't panic."
Much of the reform-now rhetoric is an invitation to scare ourselves
into charging over the cliff.  The following is a brief effort to
pin our thinking to the reality of the situation.  It's too short
to cover every issue, but I think it's a good start and will be
glad to listen and think together with anyone who disagrees or
wants to think further.  First, it is important to realize that
money is just a way of keeping track of what we produce and consume:
thinking about "money" while forgetting about production can lead
to serious confusion.  The social security "crisis" is based on
the assumption that there will be insufficient increase in productivity
to make up for the increase in the number of retired people.  And
the proposed cure of privatization appears to expect "the miracle
of compound interest" to take care of the problem without that
increase in real productivity.  Currently there are three working
people for each person receiving Social Security.  Assume the
average pay of working people is $30,000 per year, and the average
Social Security recipient gets $10,000 per year.  This means that
each worker contributes $3,333 in social security taxes.

This means that each worker has $26,666 left over to spend on
himself and his family. ( About $5,000 of that will go to the
government in the form of other taxes.  Because in principle we
vote on where our taxes are spent, and we get the benefit of that
spending, in the form of national defense, schools, roads, and so
on, I will for now consider those other taxes as spent on "himself
and his family.")

Thirty years from now there will be only two workers for each
retired person.  If everything else is the same...no inflation, no
increase in per worker productivity, each worker will still be
producing $30,000 worth of goods and services, and being paid
$30,000.  In order for the retired person to still get $10,000
(worth of goods and services), each worker will need to contribute
$5,000 to each retiree (on average).  It is important to realize
that there is no way to avoid this.  If productivity does not
increase, either the retired part of the population must get by on
less, or the working part of the population must get by on less.
It does not matter whether the "money" comes from social security
taxes, stock market "profits," or gold coins under the mattress.

Let us look a little harder at the numbers. This year I earn $30,000
and pay $3,333 to Social Security.  This is 11% and leaves me with
$26,666 to spend on myself and for other taxes. Thirty years from
now I earn $30,000 and pay 5,000 to social security, or 16%, leaving
me $25,000 to spend on myself and other taxes.  I have lost $ 1,666
in apparent purchasing power (apparent, because it is very difficult
to equate money now with money in the future: The arguments about
the Consumer Price Index reveal, if nothing else, that it's very
hard to measure the comensurability of say the pickup I want now
against the fishing trip I may want then, even though the money-cost
is about the same. It should be clear that reducing "other taxes"
by ,say, paying down the national debt, or preventing costs that
no one wants to pay, even though they are counted as part of the
GNP, such as building jails, fighting wars, cleaning up pollution,
can have major impacts on standard of living that are hard to
account for just by comparing money incomes and outgoes from one
decade to the next.)

If we choose, we can find a way (through investment, or through
government spending, but not by leaving "our money" in a box) to
increase average productivity thirty years from now to $31,666
worth of real goods and services. I could then pay $5000 to social
security, and still have that same $26,666 left for myself and
other taxes. This is a 5% increase in productivity in thirty years,
or about 2/10 of one percent per year.

What scares people is that Social Security taxes will have increased
from about 11% to about 16%, and they believe people will not be
willing to pay such a high rate even though they are just as well
off in absolute terms as they were before.

In order for the tax rate to remain the same, and still pay the
retired person $5,000 (per worker), the income of each worker would
have to go up to $45,000 per year. This is a fifty percent increase
in thirty years, or a growth rate of about 1.5 percent per year.
Such an increase is not really all that high, but also not a
certainty.

But then the average worker would have increased his standard of
living by 50% while the retired person's standard of living had
increased not at all in thirty years.  And what all the shouting
is about is the prediction that in thirty years the working person
will not be willing to give a larger SHARE, as part of the social
contract of Social Security, of his much bigger pie to those retired
people, whose work and investment made his bigger pie possible in
the first place.

All of the plans to "save social security", including the ones that
promise to ease the pain if only we "begin now," are just schemes
to hide the real cost of paying for retired people's incomes by
putting the money in some other box...even stock market returns
have to come out of the goods and services produced by future
workers. For example, if my prductivity has increased to 31,666
but my company only pays me 30,000 so it can pay 1,666 to retired
persons in the form of dividends.  Or that retired person can sell
me 1,666 worth of stock so he can have the cash to buy the goods
and services he needs, and I am left with a piece of paper I hope
I can sell in my turn when I need the money.  (Note that by buying
the stock, I have given up my ability to purchase goods and services,
so my real income, for now, is the 30,000 I have left after buying
the stock.)

And we need to keep in mind that all investment is not made on the
stock market.  The schoolteacher who worked extra hours to see that
"her" kids got what they needed to succeed, but forgot to monitor
her "private savings account" surely invested in those kids' more
prosperous future, but has no stocks she can count on to finance
her retirement. Also, any government spending that makes it easier
for workers to make money (goods and services) in the future is
just as much "investment", or better, than any stock purchase.

I will stop here, because my purpose for now is only to start a
little thinking that does not rely on panicked misperceptions about
what is the "social security crisis."  I should point out that I
am not arguing against privatization, necessarily.  Only that
privatization is not a magic cure, and that we need to look very
hard at all the proposals to see what harm they may do.  In
particular, we do not know what the world will look like 30 years
from now.  We may all find we prefer spending lazy days along a
cleaned-up river to working frantically in an office to get enough
money to buy that new digital t.v.

Dale Coberly
coberly@peak.org