Krugman and Some "Other" Social Security Reform

Sun, 30 Mar 2008 14:56:55 +0000

Paul Krugman correctly points out the flaws with an argument of the form, "there is no trust fund, so the system will be in crisis in 2017." But his response is not a good argument against reforming the system now.

I acknowledge that we should be careful about demonizing the word "crisis." The use of the word "crisis" should be construed as an attempt to focus people's attention on how economic and fiscal relationships will change as we transition to a society with so many more retirees relative to workers. For example, in 1994, the World Bank published a very influential research report, "Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth" that has been cited extensively. The report's conclusions for how countries should manage the transition resemble a lot of what people like me pushing for reform now: an unfunded public system to keep retirees out of poverty; a mandatory and funded system on top of that public system to promote savings and growth; and voluntary savings opportunities if individuals want to save beyond what has been mandated.

Ten to fifteen years ago, this was not viewed as particularly controversial. In the interim, we missed our chance to make progress during the Clinton administration, as the momentum that was building (e.g., "Save Social Security First") for phasing in reform gave way to impeachment proceedings. I supported this approach and was looking for ways to make it happen. As the Clinton Administration gave way to the Bush Administration, we got a Social Security Commission that had a very tough task before it. It was supposed to "strengthen" Social Security but was not supposed to collect more revenue to do it. I would take the Commission's recommendation (Model 2) over the status quo, but that's mainly because I have a small-government view of the world. Others who don't share that view are going to push back, and they did, with sufficient force to block the whole thing.

But none of this means that reform is not a pressing issue today. For example, Krugman states, "As Kevin Drum, Brad DeLong, and others have pointed out, the SSA estimates are very conservative, and quite moderate projections of economic growth push the exhaustion date into the indefinite future." As I pointed out at the time, this gives a very odd definition to "quite moderate projections of economic growth."

You can look at the sensitivity analysis for the growth in real wages in Table VI.D4 and see that increasing the projected rate of growth in real wages by 0.5 percentage points (around the baseline growth rate of 1.1% per year) shrinks the 75-year actuarial deficit from 1.70% to 1.12% of taxable payroll. That gets us about a third of the way toward a zero balance over 75 years and is a necessary but not sufficient condition to support Krugman's claim. If continued linear extrapolation is valid, then we would need to add about 1.5 percentage points to the real wage growth rate--over 75 years--to get the balance to zero. That's sustained real wage growth of 2.6% per year for 75 years. Krugman should come out and say that such a number is "quite moderate" if that's what he means. Seems pretty optimistic to me.

So I return for now to the same place we started: The population is aging. The aging population will place larger fiscal demands on workers in future generations. We can see this demographic challenge now. We should work to face up to it now.