This is the other, perhaps more pressing, Social Security crisis: It’s not generous enough to counteract the sorry state of retirement savings nationwide. In a report for the New American Foundation, Michael Lind, Steven Hill, Robert Hiltonsmith and Joshua Freedman survey this data and conclude that the ongoing debate over how to cut Social Security is all wrong: We need to make Social Security much more generous.
They would keep today’s income-based Social Security program, but add a “Part B,” which would be a flat payout to all retirees. When parts A and B are combined, all retirees would be guaranteed 60 percent of their average working wage in retirement, with low earners seeing closer to 100 percent replacement. Part B would be pricey, adding almost a trillion dollars to Social Security’s costs in 2037, and the authors don’t have a clear proposal, much less a politically realistic plan, for how to pay for it. But not paying for it doesn’t mean those costs disappear: It either means living standards for seniors will tumble, or families will strain as they try to support older relatives.
When I read this, it came across to me as a poor use of economic language. Instead, I would have pointed out that if Baby Boomers are not saving enough for retirement, and someone suggests using transfer payments to give them more resources, then in order to know whether or not this is a good idea one needs to know where the resources will come from. Take any year, say, 2018. If you increase Baby Boomers’ consumption in that year, then either you have to decrease the consumption of other people who are alive that year or you have to diminish the rate of capital accumulation. Those are the costs that do not disappear in using transfers to solve the problem of Baby Boomers’ consumption needs in retirement. Perhaps this sounds picky. But as an economist I think that, particularly when one is writing for a lay audience, it is appropriate to employ the principles of scarcity and trade-offs.
Payroll savings plans are vital because they are essentially the only way that middle-class Americans reliably save for retirement. Your grandmother probably knew that the best way to save is to put money aside before you have a chance to spend it. That approach has always worked — and is a core idea embedded in these plans.
…The Obama administration has proposed a simple solution to this problem: the automatic I.R.A. This plan, originally proposed by scholars at the Brookings Institution, would require any employer that doesn’t offer its own plan to enroll workers automatically into individual retirement accounts, with the option to opt out. The burden on employers would be tiny, and the benefit to workers could be life-changing.
Pointer from Mark Thoma.
I liked Thaler’s piece better. He sees the problem as one of encouraging people to provide for their own future consumption by deferring current consumption. If his suggestions were adopted and they work as intended, then there will be more capital in 2018 than otherwise, which would result in more output. Therefore, Thaler’s solution is consistent with economic principles.
As an aside, Klein covers another topic in his column, which is the cost of health care. He writes,
A key fact — perhaps the key fact — about American health care is that the prices we pay for the health care we consume are far, far higher than in any other country.
He recommends putting people age 55-65 on Medicare and negotiating down the compensation of health care providers.
Maybe I was in an uncharitable mood, but I was disturbed by the tone of the quoted sentence. In Crisis of Abundance, I spent a chapter talking about various narratives that have been used to explain health care spending in the United States. On page 25 I wrote,
The most awkward fact for the narrative that attributes high health care spending solely to prices is the finding by John Wennberg and his colleagues…by looking directly at utilization figures, it is clear that when it comes to explaining spending differences across regions it is not prices. Patients in high-spending regions see more physicians and undergo more procedures than patients in low-spending regions.
After surveying a lot of literature, I concluded that the most important narrative for explaining American health care spending is that we use a lot of what I dubbed “premium medicine.” I offered evidence that health care in the United States uses more physical and human capital, meaning medical equipment and specialists, than health care in other countries.
Klein is entitled to disagree with me, of course. But I cringed when he pronounced the over-pricing narrative as if it were a “fact.” In fact, there are many economists who doubt that we can have a free lunch by paying providers less for their services.
3. Turning back to Baby Boomers’ retirement, Reihan Salam writes,
In recent months, opponents of reducing the growth of Social Security benefits have been making the case that Social Security benefits should actually increase, to reflect the inadequacy of private retirement savings. A month, I wrote about Josh Barro’s call for an expanded Social Security program and how it might be reconciled with Andrew Biggs’ center-right vision for Social Security reform. Basically, Barro is open to expanding the public commitment to retirement security through a number of strategies, including mandatory savings accounts….
while policy intellectuals are thinking hard about Social Security’s future — another good example is the work of Charles Blahous and Jason Fichtner on how to make the Social Security payroll tax more work-friendly and fertility-neutral — there has has yet to emerge a consensus among Republican lawmakers on Social Security reform, hence the fact that the House Republican budget proposal didn’t tackle the issue head on. My sense is that there is a way to draw on the work of Biggs (the larger architecture), Barro (his idea of a new class of government securities linked to wage growth or GDP growth merits consideration), and Blahous and Fichtner (thinking through how we can connect their work on fertility-neutrality to the Stein tax reform agenda) to craft an attractive retirement security agenda that would actually prove more generous, when all elements including the mandatory savings element are taken together, than the current system while also proving more fiscally sustainable. Fundamentally, this would be a “conservative” reform, as it would improve work incentives and emphasize pre-funding.
Read the whole thing. Salam is my favorite policy wonk.
There is still the problem of why this activity should be a function of government.
Why should there be this collective responsibility, creating collective obligations through the coercive functions of taxation?
We can now proceed to pace this label on Medicare and Medicaid.
If those three functions were not active, what would be our fiscal problems today?
I still see no reason high earners should get more from SS in retirement. SS may be too stingy for some but it surely too generous to others.
Also people might respond to Ezra’ plan by saving even less.
On health care over-pricing: My experience from living in both Canada and the USA is that American health care is higher-tech and more luxurious in the little things: buildings, rooms, chairs, space, and medical equipment. That’s not over-paying. It’s paying more to get more (but does it improve health outcomes?).
On retirement savings: The flipside of saving for retirement is accumulating less debt and paying less in interest over the years. Live frugally. Because I do not see how one can save meaningfully when interest rates are at zero and stock market returns involve a lot of risk for a little return.
A transfer payment scheme does not develop or maintain capital.
But “savings” that are not “fruitfully” invested don’t either.
Which means baby boomers are likely in for a rough ride regardless.
Surely it is too late to do much for the Boomers: reforms should be aimed at improving the pension structure for the next generations.
I would be happy to see a Singaporean style savings program implemented; but it would have to be made safe from the grabbing hands of politicians – a daunting task.
Free lunches abound in health care, I would just prefer them in the hands of patients rather than providers. If patients want more, they can spend more, better that than having providers spend more on their behalf with no idea whether anyone considers it worthwhile.