Saturday, December 11, 2004

It's a bird, it's a plane...

Mark Kleiman points to Brad Delong's pointer to unfogged's observation and suggests that we should stop talking about social security in isolation, and talk instead about the crisis in the general fund. I think that stops a bit short.

What we have is not really a funding crisis at all, but a demographic crisis. When people talk of the "aging baby boom," they're referring to a demographic phenomenon where from 2010 to 2030 the percentage of the population between 20 and 64 will drop from 60% to 55%, a drop of 8%. For a given level of workforce productivity, this equates to an 8% drop in per capita GDP. Alternatively, in 2010, the average person of productive age will be supporting 2/3 of a person of non-productive age. In 2030, they will be supporting 4/5, a 22% increase.

All the discussion about privatization vs SS vs general fund obscures this fundamental point. A real economic investment for 2030 is one that will improve productivity of the kind we will need in 2030, and that's very difficult to do today. We have to hope the market does a good job. Perhaps we can nudge it a little by funding research in the areas we're likely to need to do well, but we can't start building a stockpile of medical equipment or supplies we can use 25 years from now. We can hope the private sector increases overall productivity, but the shift (most of which occurs between 2020 and 2030) will still eat 8% of our productivity gains. If we cover the difference by increasing taxes, productive adults will see the cost in tax increases. If we cover the difference by increasing ownership among retirees, productive adults will see the cost in mandatory private investment in the "ownership society."

One way to illustrate the fallacy that privatization will solve the problem is to consider the private pension crisis, where funds run by professional money managers are going bankrupt and heading for government bailout in the face of demographic failures similar to those faced by the society at large.

The choice of solution is important. Privatization, for example, will mean that some peoples' investments will perform much better than others. They'll be able to retire quite comfortably. Others will see their savings wiped out--the overly aggressive by market downturns and the overly conservative by inflation. Equitable solutions are vital, but we can't have any real solutions without facing up to the real problem. Neither viewing the problem as an impending catastrophic failure of a government program nor as a minor accounting irregularity that can be solved by a minor tax increase today or a minor benefit cut tomorrow does that.

As it happens, we've already gone through a 30 year period where productivity rose by 10% without the gains being broadly realized. Maybe we can look at the period of 1970-2000 for hints on how to proceed.

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