Social Security: Economists' Perspectives
Martin Feldstein
http://www.nber.org/feldstein/photo/marty7.jpg
Accomplishments
- 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.
The problem as he sees it
- In 1997, He described the problem of the aging population and 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. \
- The program will begin to run in the red in 2017.
- To pay for that 18% of GDP 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%.
His proposal: Finding common ground
- He supports the idea of only privitizing people's social security by taking the would be tax and putting it in into investments similar to that of people’s 401(k) retirement funds. He calculates that it would only take 2% of the people salary toprovide 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.
Commenting on President Bush’s approach to Social security reform.
- current legeslation of implimenting Bush's approach to S.S. is to use the surplus between now and 2017 for a foundation privitizing that does not require an increase in payroll tax.
- He believes this is not a long term solution, however, it is a great start.
- He understands that there would a need to phase in 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 an "automatic 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.
- He proposes that a permanant solution could be to suppliment the pay-as-you-go system with private accounts and this "voluntary automatic savings," and would eliminate any need to raise taxes.
Robert Eisner
http://www.cnn.com/US/9512/budget/12-26/balance_budget/eisner_cap.gif
- 1922-1998
Accomplishments
- Professor of economics at Northwestern University
- President of the American Economic Association
- Member of the American Academy of Arts and Sciences and the Econometric Society
- Has published numerous articles in professional and academic journals.
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
Milton Friedman
- Born in 1912 in New York City
- Graduated from Rutgers before his MA at the University of Chicago
- passed away Nov 16th
Accomplishments
- Won Nobel Peace Prize in Economic Sciences
- Acknowledged head of Chicago school-specializes in the experimental testing of policy provisions from market analysis
Is known for
- Monetary Policy
- Favoring Free Market
- Floating exchange rates
- A “negative” income tax
- Being an advocate of a voluntary army
- Long time critic of the social security system
*Since 1950- points out that system was: -Fiscally Unstable -disadvantaged low-income workers -infringed on personal liberty
Best Works Include
- Social Security: Universal or Selective?
- Free to Choose: A Personal Statement
- “Speaking the Truth about Social Security Reform” Cato Briefing paper no 46 April 12, 1999
- Capitalism and Freedom
- Tax Limitation, Inflation, and the Role of Government
Friedman’s Views on Social Security
- A highly regressive tax with largely indiscriminant benefits
- Overall affect-probably redistributes lower income benefits to higher income people
- Feels it serves no essential social function
- Inefficiently and inhumanly provides:
-An assured minimum to all persons in need regardless of their reason for need
- The fraction of a person’s income that is reasonable for him or her to set aside for retirement depends on that person’s circumstances and values.
- It makes no more sense to specify a minimum fraction for all people than to mandate a minimum fraction of income that must be spent on housing or transportation. -Social Security has become less and less attractive as the number of current recipients has grown relative to the number or workers paying taxes
-The imbalance will only get bigger
- Younger workers are skeptical that they will get anything near their money’s work for the taxes they pay
- Believe they would do better if they could invest the money in their own 401(k)s
In addition to Social Security
Public assistance (ex. Welfare) Has also had a wide spread dissatisfaction Has proposed numerous proposals for drastic reform
His general assumption for social security
people can best judge for themselves how to use their resources.
Government Administrators Believe:
- the workers themselves contribute to their own future retirement benefit by making regular payments into a joint fund
-Argument
- Taxes paid by today’s workers are used to pay today’s retirees
- Left over money finances other government spending
- maintaining insurance relies on a “trust fund”
- assurance that workers will receive benefits:
-doesn’t depend on the particular tax used to finance benefits or any trust fund -Depends solely on the expectation that future Congress will honor promise made by earlier Congresses “A compact between generations”
Friedman Questions
How will the debt be paid when due? -Taxes, borrowing, creating money, or reducing other government spending. -Therefore: Payroll tax (regressive tax on productive activity) is a bad tax
Friedman’s Views on a Privatized Social Security
Privatization should not be mandatory -S.S. is already mandatory and taken advantage of -If privatization is mandatory, the same will happen
Friedman argues Martin Feldstein’s article Public Interests
Feldstein states
- some individuals are too shortsighted to provide for own retirement
- alternative of a means-tested program for the age might encourage some lower-income individuals to make no provisions for their old age deliberately, knowing they would receive the means-tested amount.
Friedman’s Argument
Paternalism of first reason and the reliance on extreme cases of the second are equally unattractive *Feldstein doesn’t refer to the clear injustice of a mandatory plan Ex- Aids- who has a short life expectancy and limited financial means, yet would be required to use significant fraction of his/her earnings to an almost certainly proven worthless asset
- Fraction of a person’s income that is reasonable for him or her to set aside for retirement depends on that person’s circumstances and values, makes no sense to specify an amount…
- Basing things on the general presumption that individuals can best judge for themselves how to use their resources.
Friedman Agrees with Barry Goldwater
1963- Barry Goldwater suggested that the participation in Social Security be voluntary Friedman-thinks it is a good idea
- Finds it hard to justify requiring 100 percent pf the people to adopt a government-prescribed straitjacket to avoid encouraging a few lower-income individuals to make no provisions for their age deliberately knowing they’d get the mean-tested amount
Suspects- In a voluntary system-many fewer elderly people will qualify for the means’ tested amount from the imprudence or deliberation than fro misfortune
Current Government’s Fiscal Policy
Fiscal Policy
- View that is widely held: an increase in government expenditures relative to tax-receipts is necessarily expansionary and a decrease in concretionary
- This view is at the heart of the belief of the fiscal policy
- Can serve as a balance to the wheel, but:
- Is now taken for granted by businessmen, professional economists, and laymen alike
- Belief has its origin in a crude Keynesian analysis
- Suppose the governmental expenditures are raised by $100, and taxes are kept unchanged, in the first round, people who receive the extra hundred dollars will have that much more income. They will save some of it, say one third, and spend the remaining 2/3. But this means that on the second round, someone else receives the extra $66 dollars/ 2/3 of income. He in turn will save some and spend some and so in a sequence. If at every stage, 1/3 is saved, and 2/3 spent, the extra $100 of government expenditures add $300 income.
*This is a simple Keynesian multiplier of 3 *Friedman thinks the effect will die off *Initial jump of income will gradual decline to earlier level *The simple analysis is appealing but. *Friedman Provides the Following Arguments: *Nothing is said in the simple account about what the government spends the $100 on (Keynesian analysis can easily be offset) *only way to show no diversions is for the government to spend the money on something utterly useless *“filling holes” is a type of make-work shows there’s something wrong with the analysis. *Nothing is said in the account about where the gov. gets the 100 dollars to spend-results are same whether print more or borrow more money from public *Assumes borrowing money doesn’t have an affect on other spending *There are only 2 extreme circumstances where this occurs *If potential borrowers are so stubborn about spending that no rise in interest rates however steep will cut down their expenditures, meaning if the marginal efficiency schedule of investment is purely inelastic with respect to the interest rate. *People are utterly indifferent to whether they hold bonds or money, so that the bonds to get 100 can be sold without having to offer a higher return to the buyer than such bonds were yielding before. A higher interest rate would then have to be paid also by the borrowers. *If Neither Assumption Holds True: *The rise in government expenditures will be offset by a decline in private expenditures on the part either of those who lend funds to the government or of those who would otherwise have borrowed the funds.
Friedman States
The role of the market permits unanimity without conformity; that is it is a system of effective proportional representation. The feature of action through explicitly political channels tends to require-enforce substantial conformity. Typical Issues: Yes or No on provisions Final outcome generally must be a law applicable to all groups -rather than separate legislative enactments for each party
- We can argue, discuss, and Vote, but we still must conform.
- Protection of the individual and the nation from coercion
- prevents exclusive reliance on individual action throughout the market, therefore, we must employ political channels to reconcile the differences.
Political channels
Inevitable use Tend to strain the social cohesion essential for a stable society
- The fewer the issues on which an agreement is necessary, the greater the likelihood of getting agreement while maintaining a free society.
No set of rules can prevail unless most participants most of the time conform to them without external sanctions, unless, there is a broad underlying social consensus. *Can not rely on customs or this consensus alone to interpret/enforce the rules *Need an umpire- Government
Friedman Believes in a Free Society of Free Markets
Basic roles of government in a free society: to provide a means whereby we can modify the rules, and to enforce compliance with the rules on the part of those few who would otherwise no have played the game. *The need for government in these respects arises because absolute freedom is impossible. *Fed. Reserves system was assigned the responsibility of a monetary policy 1930 Tariffs and other restrictions on international trade, high burdens and a complex and inequitable tax structure, and regularly commissions government price and wage fixings -Give an incentive to individuals to misuse and misdirect resources and distort the investment of new savings. What we urgently need for both economic stability and growth is a reduction of government intervention, not an increase.
- Reduction would still leave an important role for government
- desirable to want government to provide a stable monetary framework for a free economy
-also, general legal economic framework -relevant government policies: Monetary policy, fiscal policy, and or budgetary policy
Friedman Speaks of Future Competitive Capitalism
-a free enterprise capitalism Future of private enterprise capitalism- the future of a free society -possibility of having a politically free society unless: - The major part of its economic resources are operated under a capitalistic private enterprise system Freedom of enterprises to set up enterprises, Conformity/collectivism differs as follows:
Downfall of Collectivism
-No freedom of enterprises to be set up -Rise of taxation -Restrictions on freedom of speech -Restrictions on freedom of the press
Friedman Questions
What produced this shift from free society to regimentation by government? -Growth of the government is a result of good people trying to do too good -Method of doing so is flawed-trying to use others money
What Is Needed
Tax Limitations:
Government spending is the real problem: state federal and local amounts to 40 percent of the national income This means, of every dollar made: 40 percent is being spent for him/her by the bureaucrats -Upward pressure on this percentage -Federal Level- there have been moves for an amendment providing a balanced budget Freidman finds this a serious mistake- spends energies of the rights of the people in the wrong direction (doesn’t stop taxes from going up)
Feels we need-to limit government spending as a fraction of income The true cost of government to the public: is not measured by explicit taxes but by government spending if government spends 500 billion and takes it through taxes of 440 billion, (Carters Budget) the deficit must be financed by creating money or borrowing from the public. If printed money- hidden tax of inflation and explicit tax Financed by borrowing-government gets resources instead of the private sectors (higher level of taxes in the future to pay the interest and pay back the debt Two kinds of taxes – open explicit taxes Hidden taxes (deficit)
Friedman Believes
Every step we take to strengthen the tax system, whether by getting people to accept payroll taxes they otherwise would not accept or by cooperating in enacting higher income taxes an excise taxes or what not, fosters a higher level of government spending, therefore:
This is why he is in favor of cutting taxes
Taxes Cause Inflation
Technical cause and cure of inflation: • Long-continued inflation always and everywhere a monetary phenomenon that arises From a more rapid expansion in the quantity of money (M2) than in total output Also adds: it is not a precisely or mechanically linked to the exact rate of monetary growth
• What matters for inflation:
o Not simply the rate of monetary growth
o The rate of growth relative to the rate of growth of output
o Relative to the rate of growth in the demand for real money balances at constant level of prices
Time lags lead to side effects on inflation: Higher inflation reflects acceleration in growth rate of total money spending. Ending inflation requires a deceleration in growth rate of total spending. The reason for the side-effects from such in total spending (the boom, and the recession-undesirable side affect) is the time-delay between an increased or decreased rate of growth of total money spending and the full adjustment of output prices to that changed rate of growth of total spending.
How can we make it feasible to end inflation much sooner? - adopting measures that will reduce the side-effects from ending - Side effects reflect distortions introduced into relative prices by unanticipated inflation or deflation - Distorts arise because contracts are entered into in terms of nominal prices under mistaken perceptions about the likely course of inflation. - The way to reduce these side effects is to make contracts in real, not nominal terms -This can be done by the widespread use of escalator clauses
Escalator Clauses
• worth both up and down to prevent both actual side effects from unanticipated inflation and the hypothetical side effects from unanticipated deflation • Better to have no inflation or escalator clauses, but this is the best solution till then o Escalators have no direct effect on the rate of inflation o They simply assure that inflation affects different prices and wages alike and thus avoiding types of distortions in relative prices and wages.
Milton Friedman’s Argues with Paul Krugman
Krugman Views Friedman as A Famous apostle of free markets Known as the “champion of the conservative doctrine known as Monetarism” -Monetarists Get the government out of the business of short-term economic management Rejects the use of the Fiscal Policy Believes in discretionary tax cuts or spending increases to fight recession Almost all economists now agree with the position of monetary vs. Fiscal Policy but: -Krugman feels: *Friedman’s Monetarism is a misguided doctrine -was looking for a magical way to exclude judgment and perception from economic policy
- Friedman is asking a lot from the markets to solely rely on Supply and Demand to do the job
- Friedman’s m2 as the key to the business cycle has failed
- Almost nobody focuses on the monetary aggregates anymore
-the current economic policy is “inflation targeting,” suppressing Any explicit discussion of the money supply and use other indicators of monetary supply. -Friedman’s “claim to greatness” rests on Monetarism- which is now seen as embarrassing - Is “naïve” on his intellectual evolution -Friedman’s only contributions include: -The permanent income theory of consumption -Proposed by Friedman in 1957 -People base consumption on what they consider their “nominal” income -attempts to maintain a fairly constant standard of living -Increases-decreases income that people see as temporary have little effect on consumption spending -depends on what people earn over considerable amount of time -smooth out fluctuations in income -loosen relationship between consumption and income so that an Exogenous change in investment may not have a constant multiplier effect -introduced assets into the consumption function -gave a role in the stock market -a rise in stock prices increase wealth and thus should increase consumption while a fall should reduce consumption Concludes: Financial markets matter for: -Consumption -Investment
The natural rate hypotheses
-Proposed by Friedman in 1956 -States that unemployment in the long run is stable at a particular natural rate. -natural rate of unemployment, cyclical unemployment=0
Since then, has been seen that is lacking a missing equation Economists have added the Phillips Curve Phillips Curve-
Provides empirical rationale for the setting of the dynamic nominal wage which was absent in the system
(dw/dt)/w= h (u)
Where h’ < 0 So that as unemployment increases, then wage inflation declines
Paul Krugman
http://graphics8.nytimes.com/images/2005/09/13/timesselect/tskrugman.jpg
Biography
- 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
Works Cited
Martin Feldstein
Robert Eisner
Milton Friedman
Paul Krugman
