A surprisingly receptive public response to social security reform.
Yesterday I gave a talk to the Osher Lifelong Learning Institute (OLLI) at California State University, Monterey Bay (CSUMB). I normally give two such lectures in the spring and two in the fall. This year is no exception. One of the people involved with OLLI suggested last spring that I give two talks in the fall on economic issues in the presidential campaign. (The second reading will take place on October 8.) It was with some trepidation that I agreed. Why fear? Because I know how even very reasonable people (and the OLLI crowd is usually very reasonable) can get excited about certain candidates.
So what I did at the beginning of my presentation was show a slide that said:
Downplaying candidates.
Play up problems.
When I showed that slide, I said, “One good reason is that I find the topics much more interesting than the candidates.” That got some nodding heads and a few laughs.
I talked at length about federal spending, federal taxes, and the federal budget deficit, and showed them some scary numbers from the US Congressional Budget Office. I then pointed out that, according to the CBO, during the years 2030-34, Social Security spending, minus Social Security revenues, would add an average of 1.2% of GDP to the annual budget deficit, and that Medicare spending , after deducting revenues, would add 2.4% of GDP. net of income. These two programs alone would therefore add 3.6% of GDP. That is more than half of the expected deficit as a percentage of GDP. If they weren’t there, we would be in a much better place.
Next, I dug deep into Social Security to make a few points. The first was what one of FDR’s advisors’ motives was in setting up Social Security:
W.R. Williamson, an actuarial consultant to the first Social Security Board, stated that Social Security “democratically” extends federal income taxes to lower income groups.
I filled in the background, pointing out that the income tax was a “class tax” at the time and it wasn’t until World War II that made it a “mass tax.” As I surveyed the room of about 30 to 35 people, I said that I suspected that none of their counterparts in their part of the income distribution would have paid any income taxes in the mid-1930s.
I then explained that Social Security is a Ponzi scheme and was explicitly planned to be a Ponzi scheme.
I showed this quote from comedian Dave Barry:
I say we cut the power [Social Security] system and replace it with one where you add your name to the bottom of a list, and then send some money to the person at the top of the list, and then to you. . . Oh, wait, that IS our current system.
—Dave Barry, “Elections Could Come Down to Who Kisses the Biggest Opening,” Miami HeraldSeptember 24, 2000.
Then I quoted Paul Samuelson who labeled it a Ponzi scheme. I quoted from the chapter on Social Security in my 2001 book: The Joy of Freedom: An Economist’s Odyssey:
MIT economist Paul Samuelson added some of the intellectual support for this policy. “The great thing about social insurance is that it is true actuarial [italics Samuelson’s] defective.” Samuelson’s point was that if real incomes grew rapidly, each generation could get more out of Social Security than it took in. While critics labeled Social Security a Ponzi scheme, Samuelson defeated them in 1967 blessing it as one. “A Growing Nation,” wrote Samuelson, “is the greatest Ponzi scheme ever devised.”[1]
[1] Samuelson’s quotes come true Newsweek, February 13, 1967, and are quoted in Derthick, p. 254.
I then quoted Franklin D. Roosevelt in explaining how creating a Ponzi scheme would almost certainly guarantee that Social Security would never be abolished:
[T]Hose taxes were never an economic problem. They are political on all sides. We put those payroll contributions there to give the contributors a legal, moral and political right to collect their pensions… With those taxes in there, no damn politician can ever cut my Social Security program.[1]
[1] From Arthur M. Schlesinger, Jr., The era of Roosevelt, full. 2, The advent of the New Deal (Houghton Mifflin, 1959), pp. 309-310, referenced in Martha Derthick, Policymaking for social security, Washington, DC: Brookings Institution, 1979, p. 230.
Then I showed a photo of my Hoover colleague Mike Boskin and noted that his committee, established by the US Senate, report in December 1996 it was argued that the consumer price index overestimated annual inflation by 1.1 percentage points. Then I did some math. “If Congress and the President had started setting the cost of living adjustment (COLA) at CPI – 1.1 percentage points – in 1998, Social Security benefits would be 32% lower in 2033. (Here’s the math: 0.989^35 = 0.68.) The Social Security crisis would just disappear. I then noted that the Bureau of Labor Statistics had made some adjustments in response to Boskin’s order. Boskin, in an article in my Concise encyclopedia of economicsestimated that the CPI overestimated inflation by 0.8 to 0.9 percentage points as a result.
So I did the math again: 0.992^35 = 0.75. Social security benefits would therefore be 25% lower. Once again the crisis would be over.
I could tell you other highlights of my talk; there were many. But what I especially liked was that this audience, at least 85% of whom received benefits, seemed very open to it.
It makes sense. Who goes to a class about education for which there is no certificate? Answer: people who want to get an education.