Social Security: Economists' Perspectives

Martin Feldstein

Graduated from Havard College and Oxford university.
Published over 300 economic research articles.
He was the chief economic advisor for President Regan and was chairman of the council of economic advisers from 1982 through 1984.
In 2004, he served as President of the American Economic Association.
He is now a professor of Economics at Harvard University and President of the National Bureau of Economic Research.
Bush appointed him to his foreign intelligence advisory board in 2006.

Traditionally, Feldstein has be a strong advocate of privatizing social insurance

In 1997, He described the problem of the aging population and therefore, the higher government costs for pensions and medical care. This is because the S.S. system is a pay-as-you-go system. It pays for the transfers by taxing the current workers. So, in effect we are paying for our parents to retire and our children would in effect pay for our retirement.
He estimated that Gov. spending would increase from 10% of GDP to 18% in 2030. \

To pay for that 18% by raising taxes would require the equivalent of doubling the personal income tax or raising the payroll tax rate from 15% to more than 35%.

So, he supports the idea of only taking 2% of people’s salary and putting it in into investments similar to that of people’s 401(k) retirement funds. This would provide the same amount as raising the payroll tax.

This type of system has already been successful in many South American countries and also in many European countries.

He understands that there would need to a phasing in of this privatization system, but he also shows that components of privatization could be used to supplement the current pay as you go system.

There would be a voluntary add-on tax that would be put in personal accounts and make up the difference between the decline in abilities for S.S. to pay out benefits.

Accomplishments

His argument

Against privatization
“Social” aspect to Social Security would be lost
There would be many transitional problems
Most Americans are inexperienced in investing in the private sector
Believes there is no sign of bankruptcy in the social security system. Economic assumptions have been wrong.
The only fear should be that reformers would destroy it
Believes Social Security to be the most successful pension and insurance plan in the nation. Social Security keeps 15 million people from falling below the poverty line.

His proposition

Voluntary supplementary contributions to social security.
Mandatory contributions to Social Security are preventing the Treasury from having to borrow as much money permitting Americans who would otherwise be lending from the Treasury to invest in the Stock Market
This would contribute to making trust funds solvent indefinitely with no implementation of new taxes
Significantly reduces budget deficit
Encouragement to save
Increase the retirement benefits of most Americans

Options in investing... 1) A fully passive stock index fund 2) A fully passive bond index fund 3) Treasury securities 4) Any combination of the above

All options would have fair annuities and automatic cost-of-living adjustments (not available in the private sector)
The contributions would be credited to the Old Age and Survivors Insurance (OASI) Trust Fund but designated to the individual accounts of the investors
Similar to private pension plans they would be tax deductible
Interest earned on the supplemental balances would be untaxed
Contributors would be unable to cash out their investments therefore focusing the program on supplementing retirement benefits.
These new accounts would be PUBLIC counterparts to the private investment plans such IRAs and 401ks
Benefits would be exactly proportionate to contributions this would maintain the basic social insurance and still favor low-income workers.
This would be on a voluntary basis and taxes would not increase. This system would relate to individual efforts to save.
There would be an upper limit ($9,500) on the amount of tax-deductible contributions. While the increased tax deductions would cause some initial loss in tax revenues the treasury and trust funds would eventually gain much more through the inflow of contributions, the income they generate, and through taxes on benefits.
With enough publicity Americans will begin to take advantage of this program. The supplementary contributions would significantly raise Americans prospective retirement income

Born in 1953 in Long Island, New York
Received his B.A. in economics from Yale University in 1974
Received his Ph.D. from MIT in 1977
Krugman has taught at Yale, MIT, and Stanford. He currently teaches at Princeton
Krugman is the author or editor of 20 books and more than 200 papers in professional journals
In 1991, the American Economic Association awarded Krugman the John Bates Clark medal for his work on “new trade theory,” a major rethinking of international trade
Krugman has been an Op-Ed columnist at the New York Times since 1999