COVID-19 RESOURCES AND INFORMATION: See the Atlanta Fed's list of publications, information, and resources; listen to our Pandemic Response webinar series.


The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

Comment Standards:
Comments are moderated and will not appear until the moderator has approved them.

Please submit appropriate comments. Inappropriate comments include content that is abusive, harassing, or threatening; obscene, vulgar, or profane; an attack of a personal nature; or overtly political.

In addition, no off-topic remarks or spam is permitted.

December 15, 2005

Why Social Security Reform?

My (admired) colleague-in-blogging Calculated Risk is unimpressed by my call for support of Andrew Samwick's latest proposal for reforming the U.S. social security system.  In the comment section of my previous post, CR writes:

Of course I oppose the Samwick, et. al. plan. The reason is simple: the two major fiscal problems facing America are 1) Health Care and 2) the General Fund deficit. Both of those problems dwarf any SS shortfall.

Any good manager would start with the most serious problems first. Wouldn't it be great if the blogosphere banded together and pushed the National debate to those two issues?

Ahhh. Now I remember why I haven't written about social security reform in awhile.  Oh well. I opened the door, so I may as well walk on through.

I'll start with this: I don't understand CR's position at all.  By his logic, we ought to avoid grabbing the perfectly edible fruit on the branches that can reached from the ground because there is some really juicy stuff way up at the top of the tree (that can be reached only after a fairly arduous climb.) That just doesn't make much sense to me.

Here's my view, in brief:

a) I agree with CR ranking the health care issue in front of social security, but believe it is a much harder nut to crack.  Where, for example, is the nonpartisan proposal on that one? If some civic-minded across-the-political-spectrum group like Samwick-Liebman-MacGuineas have a simple well thought out compromise plan, by all means let's all jump on board.  I've yet to see it, though. and am disinclined to let other opportunities languish while we wait for it to arrive.

b) Let's put things in perspective. No matter what side of the issue you are on, the most important immediate subject for the country is the war, as there is much more at stake than today's treasure.  If you are going to argue we can only do one thing at a time, then it seems to me everything on the economic policy list goes off the table for now.  I, of course, am willing to accept that we can walk down the policy street and chew a few pieces of gum at the same time.

c) My philosophy on the federal deficit is that if you get the spending, tax, and transfer stuff right, deficits per se -- especially of the magnitude we are experiencing now -- are of second or third order importance.  It is better to let the (completely manageable) deficits we have now run for a bit, while we get the big picture on fiscal policy right.  By getting some sensible social security reform, for example.

UPDATE: Calculated Risk posted his arguments mentioned here, and generated plenty of reaction. Jane Galt correctly (un my view) notes that the social security problem and deficit problem are inextricably linked. Arnold Kling reinforces the argument that we ought to be looking at the fiscal policy as a whole. And Andrew, not surprisingly, agrees that we ought to first solve the problems for which ready solutions exist.

December 15, 2005

Vox Baby Does The Work Of The Angels

Andrew Samwick,  Jeff Liebman, and Maya MacGuineas have unveiled their new "Nonpartisan Social Security Reform Plan," which Andrew describes in brief at Vox Baby.  Long-time readers know that I am a proponent of privatization, primarily because a demographically-centered transfer system seems to me an inferior way to run a pension program.  But I am sensitive to the better arguments of privatization's opponents -- that a purely private system might shift too much risk to those in or near retirement, that private accounts do not themselves guarantee sustainability of the system, that too many of privatization's proponents serve up their proposals as if there is free lunch to be devoured by one and all.

The Samwick-Liebman-MacGuineas plan suffers none of these deficiencies and, Solomon-like as it is, essentially splits the difference between many different reform proposals -- part privatization and part traditional fix-er-upping, paid for out of a combination of expanding tax coverage and raising the retirement age.  As Jane Galt says, "that sounds like a plan" that "could achieve broad consensus across the left-right spectrum."

Much has been made of the power of the blogoshpere to move agendas that are overlooked, or resisted, by the traditional seats of power.  And much has been said about the growing influence of econ blogs.  Wouldn't it be something if we could band together and finally get real social security reform off the dime?

April 26, 2005

Do Americans Support Privatization?

Mark Thoma gives the heads-up on Congressional hearings on the subject that begin today, noting this bad-sounding piece of news for the administration.

And despite the president's efforts to rally support for his Social Security plan, seven in ten Americans say they're uneasy about his approach to the issue.

More people (49 percent) say the president's plan to partially privatize the system is a bad idea than say it's a good idea (45 percent).

There is certainly news there about confidence in whatever the public perceives the adminstration's plan to be, but I'm not sure how much we learn about attitudes concerning privatization per se.  Is it not possible that one could be a proponent of reforms that include privatized accounts and still be profoundly uneasy about the administration's approach?

Paul Krugman, of course, thinks he's got it figured out.  In yesterday's column, to which Mark links, Krugman starts with the results from a Gallup poll question on the general state of the economy, throws in a little Terry Schaivo and Tom Delay red (er, blue) meat, before finally moving to the (ambiguous) CBS poll question and somehow concluding that the evil Bushies and their minions are about to shove privatization down the throats of a resistant public.

The truth about public sentiment is more complicated, I think.  Last month, I posted on a March Gallup poll on attitudes about privatization.  Here's a quick round-up of the responses.

-- 56% of respondents favored reform that included some provision for private accounts invested in the stock market
-- 58% of respondents favored legislation that would allow people who retire in future decades to invest some of their Social Security taxes in the stock market and bonds
-- 51% of respondents felt it was necessary to make changes to Social Security this year
-- a slim majority -- 50% vs. 46%  -- responded that they relying on the current system to delivered promised benefits was riskier than investing in stocks and bonds
-- A significant majority favored limiting benefits to wealthy retirees and eliminating the cap on wages subject to taxation as ways to address concerns about Social Security

Interestingly, today's Wall Street Journal reports that the wealthy may not be particularly enthusiastic about privatization.

... affluent Americans are split on the merits of Social Security overhaul, although about 45% of respondents believe that this move could boost stock-market returns...

[The April UBS/Gallup survey of investors] showed similar results, with 50% saying that the Social Security system should be kept as is, and 47% opting for personal savings accounts. This is the first time since June 2000 -- when respondents were first asked about their support for Social Security overhaul -- that more people preferred the status quo.

Do Americans support privatization?  Who knows?  I think what we are seeing in all these survey results is good old-fashioned common sense.  I'd bet that most Americans think some sort of privatized account option is a good thing, recognize that there is no free lunch, and know that the devil lives comfortably in the details.

UPDATE: John Irons has more on the survey of "affluent  Americans."

April 23, 2005

Defending Cato

Mark Thoma takes a shot at the latest Cato Institute blast at the anti-privatization crowd, and pgl at Angry Bear asks "Will the Cato Institute Even Offer a Reply to Mark Thoma?".  Probably not, but I'll give it a try.

Out of the gates, Mark takes issue with this statement from Cato:

Yes, if solvency is the only issue at hand – and it does appear to be the singular focus of the Bush administration thus far – then raising the retirement age is a fine idea.

Mark's complaint?

First, the claim that the Bush administration has had a singular focus on solvency is wrong. Privatization does nothing to address solvency as the White House now admits, and no proposal from the administration addresses solvency, in no small part due to the fact that contrary to popular belief, the administration has no proposal for reform on the table. Their singular focus has been on privatization, not solvency, and the two issues are independent.

That's a pretty ticky-tack foul to be calling, if you ask me.  Without jumping into the issue of what the Bush administration has or has not claimed, the passage in question is hardly material to the Cato piece.  And I see no claim in the offending piece that privatization per se addresses the solvency problem.  In fact, the admission that raising the retirement age is sufficient to restore solvency explicitly separates the solvency issue from the privatization issue.

Mark continues:

Second, the claim that the Johnson-Flake proposal solves the solvency problem through privatization is false. The proposal replaces wage indexing with price indexing, a cut in benefits, it covers downside risk which increases the burden on the system, more so with moral hazard factored in, and there is the matter of the 6.5 trillion transition cost that is conveniently ignored in Cato’s analysis. The proposal achieves solvency by cutting benefits, not through privatization (there is another version of the proposal which also achieves solvency by cutting benefits).

I think Mark is misreading what the Cato folks are actually claiming.  This is from Cato's February post on Rep. Sam Johnson's proposed legislation, which is based on Cato's own preferred plan:

Workers who do not choose this option would remain in the current system, but their benefits would be based on a price-indexed formula, rather than the current wage-indexed formula. Workers choosing individual accounts would forgo future accumulation of Social Security retirement benefits, but would receive a tradable "recognition bond" based on those benefits already accrued under the current Social Security system.

The solvency issue is addressed by the change in indexation and the reduction of benefits.  To my knowledge, there has never been a claim to the contrary. (And the recognition bonds, by the way, are all about the transition -- honest people can disagree about whether these represent "costs".)

pgl gets a little closer to the Cato argument:

The most recent “Daily Debunker” from Cato discusses the Johnson-Flake proposal, which sounds to me like an old song: (a) reduce government expenditures by switching from wage indexing to price indexing; and (b) allowing workers to take half of their contributions and invest them anyway they want. Yes, (a) addresses this alleged solvency problem by cutting benefits, but Cato claims that workers will be somehow better off because of (b).

Even though their free lunch claims have been refuted numerous times over the years, the Cato crowd just keeps repeating these bogus arguments.

Close, but still no cigar.  pgl is correct about what the Cato clan believes, but incorrect, in my opinion, in characterizing those beliefs as "free lunch claims."  Their argument, as I understand it, goes something like this: There are many avenues to restoring long-term balance to the system.  Demographics (and delay) make fixes that rely on sustaining a payroll-based pay-as-you-go scheme an increasingly bad deal.  Alternatives that effectively cash out the system over time, coupled with capital-based returns on mandatory saving would be a better deal.  There is no free lunch -- just better and worse diets.