Evan Soltas wrote a column about Social Security in Bloomberg. I responded to that column with a blog post, and explained where I thought he went wrong. Now he is out with a blog post responding to me.
In my argument, I basically pan the notion that retirement savings really do anything meaningful. You see, Social Security is not a retirement savings program. It is a transfer program that transfers money from those who are working to those who are retired. But more than that: it would not matter if it was a retirement savings program. The brute fact is that retired people live off the work of younger generations, and that remains true no matter how well it is disguised by cash savings or whatever else. In that way, all retirement — even retirement funded by “savings” — is really funded by transfers.
Given that, I dispute the notion that there is anything meaningful to the idea of underfunding Social Security. I don’t see any difference between a world where the payroll tax is bumped up to account for changing demographics and a world where the Social Security Trust Fund collected more revenue over the last decade and bought up Treasury bonds with it (which is what it would have done). At the end of the day, both will inevitably require transfers, either by collecting taxes from the working to pay off the bonds the Trust Fund would have collected or by collecting payroll taxes. You simply will not ever escape generational transfers because retired people live off of working people always.
Soltas’ response took the form of a hypothetical squirrel economy. It’s a bit complicated, but basically he creates two squirrel economies. In one, there is (if I can modify it to reality here) a 20% payroll tax used exclusively to fund retirement. So while working, squirrels get 80% of their income and then while retired, they get an amount equivalent to 20% of their lifetime earnings. As far as I can tell, this economy serves no purpose for the rest of his argument except to establish the background for his second squirrel economy.
In the second economy, they have a 10% payroll tax, and also get 20% of their lifetime earnings when they are retired. The second economy is supposed to reveal an obvious structural failure that will eventually require either 1) that the elderly cut back to 10% of their lifetime earnings during retirement or 2) that the younger generation adopt a 20% payroll tax so that the elderly can avoid a benefits cut.
Don’t get me wrong, I love analogies. But this one is so ill-fitting that I am not even sure it advances the discussion at all. What follows is just two of the problems. There are more, but these are major enough to sink the whole thing, I think. I don’t take these problems as supporting my position so much as explaining why Soltas post didn’t make his point.
First, Soltas argues that if you were to do option (2) and bump up the payroll tax for the younger generation, that this would decrease the total lifetime income of the younger generation. After all, they now have to pay higher payroll taxes in order to fund the retired. This is just wrong. The younger generation would pay 20% of their income in payroll taxes (instead of the 10% the older generation paid), and then they would get 20% of their lifetime earnings when they retired (funded by that same tax, but now being levied on the third generation). What did the younger generation lose? They got exactly what they “paid in.” So what’s the problem? How has their lifetime income been decreased?
Second, it is totally possible to have a world where every generation only pays 10% of their lifetime income in payroll taxes, but get 20% of their lifetime income in retirement without ever running out of money. How? Imagine the economy grows, as it does. If the economy grew by 100% every generation in this squirrel economy, then every retired generation could pay a 10% payroll tax and get benefits that are twice as much as they “paid in.” That Soltas has (I guess) made his economy one that doesn’t grow allows him to avoid talking about this, but it also makes the analogy ill-fitting and unable to model Social Security as it exists.
After this squirrel analogy (which I think fails on more levels than the two mentioned above), Soltas starts actually saying what I wanted him to say in his first column. He starts talking about how an older generation might deplete the capital stock of a society or not build out the capital projects that were needed. This causes a problem for the younger generation because they then have to replace the capital that the older generation failed to build plus build out their own capital. So, in effect, the younger generation has to pay for its capital and the capital of the generation before it who neglected to do so. And that forces the younger generation to consume less (they have to build more machines and take less vacations).
But if this is the argument Soltas wants to make, then he is way out in left field talking about Social Security. The notion that a rather small Social Security deficit is a reliable indicator of whether the older generation has depleted the capital stock is a ridiculous one. For one, Social Security has nothing to do with capital: it’s surpluses aren’t even necessarily invested in any capital projects. But for two, it is totally possible for a generation to simultaneously have built out major amounts of capital and have neglected to pre-fund Social Security. Hell, they could have neglected to pre-fund Social Security in order to build out that capital. (Also, as an aside, using Medicare deficits as he did is an even more terrible indicator of the old neglecting to build out capital because those deficits are being driven by spiraling health care costs).
If Soltas wants to argue that the older generation did not build out enough capital, then he should actually look at how much capital was built. He hasn’t done that yet. Once he has, then he is more than welcome to start arguing that we should reduce the elderly’s pensions to replace the capital they depleted. But looking at the Social Security Trustees’ Report will tell you nothing about whether capital has been depleted, and that is all he has done so far.