« He interrupted his sabbatical for this? | Main | More on Krugman »

Social Security thought experiment

Lots of you have 401k's, right? Typically you are given a menu of investment choices including highly-diversified mutual funds (either stock or bond focused), money markets, etc.

Let's do a thought experiment and imagine you were suddenly given a "new" investment option -- call if "Option X." It is described as a government IOU that promises an average rate of return of less than 2% a year.

How many of you would:

  1. Contribute to Option X at all?
  2. Contribute exclusively to Option X?
  3. Insist that Option X be the only allowable option for all retirees, and that all other choices must be removed from the menu?
  4. Shriek hysterically that anyone who doesn't agree with number 3 wants to "destroy" or "bury" your 401k?

Well if you're Paul Krugman, you'd obviously answer number 4.

But for the rest of you?


That's a false choice and a deceptive argument.

The premise of the current system is that current workers pay taxes to pay the benefits of current retirees. Now, the first beneficiaries of this system got a great deal because they did not have to pay taxes their whole life in order to receive benefits. Nonetheless, the current retirees and those about to retire did pay in their entire life. They paid taxes to support those before them so it is only natural that they expect the current generation of workers to support them.

It is a system that has provided a base level that has kept our old people from having to live in squalor and starvation. Now, if an old person wants to live well, there are pension programs and 401K programs that provide additional money so one can live comfortably in their old age.

The 401K system and the Social Security system are not one and the same so you are offering a deceptive comparison.

I should add that the Social Security system does take into account how much a worker pays in FICA taxes -- so it does operate in some ways like a pension system. Most people, however, recognize that an income entirely based on social security, no matter how much you put in, is a subsistance income.

Another point (to counter those who would like to destablize the present system because it does not work for them personally) is a political reality check. If you think that you can politically deny the baby boomer generation all of the social security benefits enjoyed by the current retirees, think again. While they may accept less or a higher retirement age, I doubt that they will accept huge reductions. If that happens, they will comprise one large, angry block of voters. (Not George Bush's problem, of course, but could be a problem for his party.)

Barry's argument is right on target. SS is a bad program that needs to be reformed before it's outlays exceed receipts.

PE or whoever you are, perhaps you should consider getting your own blog if I may be so bold. It might be better than continuall trying to shout down the author of another blog in the comments section. They're free you know. That being said I notice that you never really addressed the point behind the thought experiment. It's true that FICA and 401(k)s have somewhat different goals, but you still need to ask two questions. If it's okay to invest your retirement monies in well-diversified funds in your 401(k) why should it not be okay to do the same with a small percentage of FICA contributions? Also if you'd be unhappy with a sub-inflationary rate of return on your 401(k) why would you so readily accept it for FICA?

If Barry wants to block me for commenting, he can at any time and I will oblige. That said, it is Barry who is using adjectives such as "shriek hysterically" and "intellectually dishonest nonsense" to describe the writings of a scribe with whom he does not agree. I am indeed responding passionately in Krugman's (and others) defense, but I don't know how it is possible to "shout down" anyone in a blog as it is still quite possible for anyone to read Barry's post. I am just responding.

To address your question regarding why it is not OK to set aside a portion of the FICA tax for your own retirement, well that is fine as long as we understand that we are defunding the present system. In many ways, it is creating a mandatory 401K account, which is fine in itself but does not help the current system survive. Now I have an essential disagreement with CRB. I don't believe that the current system is bad and I do believe that it can be strengthened rather than replaced. That said, I would much rather a complete privatization than a partial privatization because, at least in a complete privatization, each worker can see clearly what will change.

I am not against debate. I am not against George Bush putting forth a plan. The concerns that Paul Krugman expresses, however, reflect my concerns as well. The devil will be in the details and it is possible that a broad reform bill would answer my concerns. But I'm skeptical. Very skeptical. And frankly I'm annoyed with confusing "skeptical" with "hysterical." I also do not accept that George Bush "doing something" is any better than Hillary Clinton "doing something" about health care in 1993. Reforming Social Security is a huge deal and confusing legitimate question for hysterics is not going to help in that debate.

PE as you readily point out Bush hasn't even put forth a plan yet, and former Enron advisor Paul Krugman comes out swinging against it, making unsubstantiated charges that the non-existant plan will "make things worse" and using inflammatory rhetoric about how the "right" secretly wants to "destory" SS. It is hard to defend Krugman against the charge of being rabidly partisan.

I have read and re-read Krugman's article. He does not come out against the specifics of Bush's plan because, as of yet, there are none. He does, however, question what he calls "the politics of privatization", the idea that "the system is in imminent danger of collapse, that we must destroy Social Security in order to save it."

To me, he is taking on the mindset such as what CRB expressed above that "SS is a bad program.."
Krugman, on the other hand, believes, like I do, that "Social Security is a government program that works" and in this piece he went on to describe in broad terms how it can be fixed rather than be replaced. Personally, I think it is entirely relevant to comment in broad terms before the details arrive as surely there are people who agree with CRB commenting in broad terms themselves.

As far as labeling Krugman as a former "Enron advisor", I believe that he served on an advisory board in 1999 and was paid $50K for his economic advice. He was not part of day to day operations and, frankly if you were to check, I bet that you would find numerous people of all political stripes who made some money serving on boards of companies that are no longer doing well. (Colin Powell, for example, served on the AOL board and made far more than $50K when AOL merged with Time Warner.)

No one is against his asking "broad questions." What triggered the response was reckless rhetoric about "the right" wanting to "bury" and "destroy" SS. That is not sober, reasoned reflection, and you still haven't acknowledged that.

The reference to Professor Krugman as "former Enron Advisor" is misleading. I prefer to call him, per Arnold, "the nation's leading 'Economic Girlie-man!'"


I have read many on the right who have expressed fundamental philosophic disagreement, even outrage, with the nature of the social security program. Walter Williams, who is a substitute host for Rush Limbaugh, has called it economic slavery. My congressman, when running in the Republican primary, dismissed the entire system, calling it a "ponzi scheme" (although he changed his rhetoric completely when running in the general election.) There are others, including the founder of the "Club for Growth", who would personally benefit greatly by privatization.

So I personally agree that there are many on the right who see SS as a welfare program, who are philosophically opposed to such government programs, who would extend the same "starving the beast" logic they when advocating tax cuts without spending cuts to the government as a whole.

As far as Paul Krugman being a "rabid partisan", it is interesting that Lawrence Kudlow isn't spoken of on this page as a partisan; yet he actually participates in a PAC ("Club for Growth") that is highly partisan. Yes, Krugman can be heard on Air America as well as the Lou Dobbs show. Yet he is pretty much a political loner, as far as I can tell, who does not participate in politics directly. He just speaks his mind.

As far as his being an "economic girlie-man", well his mirror opposite again tends to be Mr. Kudlow who is a cheerleader for tax cuts and privatization. Here, I would love to compare the columns of Kudlow and Krugman. If anything, Krugman is far more cautious in his pessimism than Kudlow is in his optimism, but I would reckon that the predictions of Krugman have stood the test of time far better than that of Kudlow's.

It is all well and fun to call your opponents "girlie-men." I am sure, Barry, that if you were the captain of the Titanic that you would called anybody suggesting that you slow down the ship a "girlie-man" as well.

I take it from his response that PE agrees that Krugman is a "rabid partisan".

Sounds like we all agree on that one.

A few quickies: It's not just the "Club for Growth" who would benefit from privatization. It's anyone who has to pay into it -- basically, all of us. Second, Social Security *is* a welfare program -- in the sense that it is a wealth transfer program from one group of taxpayers to another. Its proponents insist on dressing it up a savings account of some sort to hide this fairly obvious truth.

Paul Krugman has strong views about what he sees as an underlying agenda behind many on "the right."

Agree with him or disagree, I think those are his true views, but I don't think he is a partisan in that he actively participates in political groups as Kudlow does, nor does he serve as a spokesman for inside sources as Bob Novak does; however his views do fall on one side of today's political debate and he certainly is fervent.

Well, Barry, whether privatization would benefit "all" of us is a debatable point. My reference to the founder of "Club for Growth" is to Richard Gilder whose business would greatly benefit from privatization.

As far as SS being in part a welfare program, well it is and it isn't. It is certainly not a savings program, but, as a government run pension program, it does provide a safety net for those who did not save or who lost their savings before retirement and there are many people who receive more than they pay in. Prior to SS, the caring for the aged was left to religions and many were forced to live in "poor houses."

> Prior to SS, the caring for the aged was left to religions and many were forced to live in "poor houses."

If your argument is that SS is better than nothing, I would agree with you. I still think there is vast, vast room for improvement, however.

I was merely pointing out that the current system is like welfare in that it provides an income floor for retired workers no matter how poorly they saved or invested.

The bastardization of social security is something that has always amazed me.

When social security was formed during the first Roosevelt administration, it was specifically called an income [I]supplement[/I] for retired Americans.

Somewhere down the years, it has morphed into America's pension fund for too many of us.

Politicians from both sides have allowed this to happen and have created this false safety net premise for too many of us who don't learn to put aside discretionary income during our working years.

One of the greatest problems with SS is that virtually every retiree now collecting it put in far less, even when adjusted for present value, than they have received or will receive. My mother is now 96 and has been drawing a check for decades.

She worked on and off during the 1950s and 1960s and that was it.

The amounts required in payroll taxes back then was negligible compared to today.

Allow me to toss this theory out for consideration:

The Democrats concern is that by reducing the SS 'fund', it would be less to tap when they call for ther domestic spending programs.

No less than Daniel Moynihan pointed out the cute tactic that government uses when it 'borrows' against the SS surplus to cover its spending excesses.

If that surplus is reduced, or put into jeopardy, which party do you think would be more sorely tested by the loss of the governmental teat?

Just a thought.

The trust fund should have been put off budget as soon as the "surplus" began accumulating as a result of the 1983 bill. For this, the Democrats are primarily responsible, although I have to say that Secretary Darman and others who served under Reagan and Bush tap danced around this issue as well.

Post a comment