Please May I Retake the Test
When Brad DeLong says "Mark is wrong" about anything remotely related to economics -- even home economics -- my instinctive reaction is to just concede the point and beg him to let me retake the test.
In this particular case, I was wrong
to say that add-on private accounts might be more appropriate today as part of a retirement-security package than they would have been in the past. Brad is right that they would have been at least as appropriate in the past, perhaps even more than today, since "asset prices are currently very, very high.. and you get expected returns that are lower looking forward than they have been in the past."
But Brad misquotes me when he says that I argued that such private accounts, or the broader economic security platform I sketched out, would reduce income inequality. He points out that it wouldn't make a dent in income inequality, and I'm sure he's right about that. I didn't claim otherwise.
In fact, I see a focus on economic security as an alternative to an aggressive focus on inequality, which I think is politically more difficult. Security, or social insurance as described by Jacob Hacker, is a solution that explicitly does not challenge the basic inequalities inherent in capitalism; it merely tries to socialize and redistribute some of the risks.
I suggested that private accounts might be appropriate today because the benefits of productivity increases are overwhelmingly going to capital rather than labor, more so than in the past. One way to build security for working families in those circumstances, without disturbing the existing order, is to help families obtain a little more of a stake in the capital market, whether through add-on retirement accounts or tax-preferred accounts for college, career changes, starting a business, etc.
But what I wanted to point out in my late-night post was that there's a choice. Economic security would mean accepting the inequtable returns to capital. The other approach -- including living wage, pay-or-play or single-payer health care, and robust income supports for the working poor -- would directly redress the imbalance, and probably reduce income inequality as well, especially if adjusted for health care costs.
But I didn't mean to argue that economic security and redistribution are equally effective as ways to reduce income inequality. They're not, and I'm sorry if I wasn't clear about that.
Incidentally, I notice that it seems that Brad has joined the group here. That's really great news. I used to have a header on my own very short blogroll that said, "Krugman rules," which many people took to mean something like, "Krugman Rulez!," but I was actually referring to a statement by Paul Krugman a few years ago: "I've limited my blog reading to Josh Marshall and Brad DeLong." For a short while, I tried to follow that rule, but there's too much other interesting stuff. Having Marshall and DeLong in the same space is a dream team.
The "add-on private account" would be like an IRA that is independant of the employer, a third leg to complement basic social security and company pensions. In theory, you could choose whether it's managed by the government (mediocre returns, but low risk) or a private institution (higher possible returns, but higher risk).
It sounds plausible. It leaves normal social security the way it is, as the safety net at the bottom, and cleans up a lot of the rules governing private retirement insurance plans.
Economic security versus equality could be described by a metaphor. Leveling the playing field is undesirable, as it makes the "game" no longer worth playing. But we can put up guard rails and sand off the sharpest edges. We can make it safer without making it boring.
July 6, 2005 12:13 AM | Reply | Permalink
"I see a focus on economic security as an alternative to an aggressive focus on inequality"
. . . and I fear you are giving the game away before we even take the field.
This sounds like the tired old distinction between "equality of opportunity" and "equality of result" that Matt Y was talking about in one of his posts. Just as you can't really get more "equality of opportunity" without more "equality of result," you're not going to get more economic security without a direct attack on economic inequalities.
You speak as if the economic inequalities of American capitalism are inherent in the system rather than at least partly the result of a three-decade campaign by wealthy business elites to stack the system in their favor. There is nothing automatic about American levels of inequality, which becomes clear when you compare the U.S. economy to its' European (and Canadian) counterparts, with their stronger labor movements and social partnership, along with more expansive welfare states. The result is less inequality and poverty, greater economic mobility, better health, along with productivity levels close to or even greater than our own. Yes, unemployment is a problem in some European countries and regions, but others have managed to address the issue. Why can't we have an Americanized version of the European social model?
I guess the argument is political infeasibility, and perhaps you are right about that. But I'm afraid that by the time we trim down our economic security proposals to meet the demands of business, we won;t have made much of a dent either in economic inequality or insecurity.
I don't mean to argue that a focus on economic security, or the specific proposals you have made along those lines, should not be a part of our geberal program. I just think the distinction between reducing economic security and reducing economic inequality is not as great as suggested here.
July 6, 2005 1:03 AM | Reply | Permalink
IRAs are independent of employers, and when you leave an employer you can roll your 401(k) into an IRA you control (consult a licensed tax advisor for details). So what leg of the tripod are we missing?
sPh
July 6, 2005 4:58 AM | Reply | Permalink
I think private accounts can be a very useful tool both to promote saving and to reduce income inadequacy.* The problem with the Republican viewpoint, however, is that private accounts (as a part of Social Security and in the form of health savings accounts) are used to replace programs that would be better left as insurance programs--i.e., programs that spread risk and cost across a group of people.
Rather than use private accounts as a replacement for social security and health insurance, I'd allow people to use them for a variety of reasons, such as:
Downpayment on a first home
Education expenses
Dependent care expenses
Severe financial emergencies
Health care expenses not covered by insurance
Retirement income (beyond what's provided by Social Security)
The accounts could therefore be a flexible resource, allowing people to manage any of the major expenses they face during their lifetimes that can threaten economic well-being.
I would fund these accounts through a combination of government, employer, and individual contributions. Government contributions would be funded by a progressive tax that essentially was designed to transfer income from the wealthiest to the poorest, with middle income people breaking even (i.e., for middle income people, the government's contribution to their account would roughly equal their tax cost). This is similar, in a way, to Milton Friedman's "negative income tax" idea--a tax system designed to modestly redistribute wealth by providing a subsidy to people who earn too little to meet basic needs.
Employer contributions to their employees' accounts would be mandatory. I have argued previously that if the government were to provide a government-funded comprehensive health and retirement program, companies could drop the benefits they currently provide. Right now, benefits typically cost companies about 30% of wages. I think many companies would gladly trade a mandatory contribution to their employees' private accounts for the loss of the need to provide expensive benefits.
Individual contributions would be voluntary, similar to 401(k) contributions. I assume the accounts would be tax-preferred, so some limit on individual contributions would be necessary to prevent the accounts from becoming a massive tax shelter for the very rich.
Private accounts constructed in this way would become a core element in an economic security program that also included two government insurance programs: a health care insurance program and a retirement/disability/unemployment insurance program designed to provide income when people aren't working. (I have argued that these two insurance programs could be funded through the private account, as well, simply by providing enough money to the account to allow people to purchase health and income insurance from their accounts--those purchases would need to be mandatory, however, to ensure that such insurance is actually provided.)
With the private accounts and the two insurance programs, I think we'd have a comprehensive economic security program that could replace the current system and meet the needs of most Americans.
* I have no problem with income inequity, but I do think we need to have modest income redistribution to transfer some wealth from people who have lots of it to people who have amounts inadequate to meet their basic needs.
July 6, 2005 5:38 AM | Reply | Permalink
"In theory, you could choose whether it's managed by the government (mediocre returns, but low risk) or a private institution (higher possible returns, but higher risk)."
The costs of administering individual accounts would be sharply higher than the current system whch cost less than 1% of annual pay-out to administer. One estimate was that Social Secrity administration would have to hire an additional 100,000 employees to deal with the individual accounts and the decisions people would make. That would come off the top every year before investment returns came in. The more decisions that individuals are allowed to make, the more it would cost to administer them.
Those administration costs are based on the nature of individual accounts, not on whether they are administered by the government or private institutions. After that, the risk/return calculus determines the rest of the cost. Greater risk will involve greater cost as the losers are factored in. The investments themselves would have to be contracted to private institutions. Stock broker is not a job that will ever fit into the General Schedule pay scales. If the government tried, they would do little more than train brokers for private industry, sort of like special operations soldiers going to work for private security firms at 5 to 10 times the government pay. So the accounts will not be managed by the government. All of them would be administered by the government, but the investments themselves would not be managed by the government.
July 6, 2005 6:11 AM | Reply | Permalink
New forms of "add-on accounts" are an attempt to make minor adjustments in the behavior of individuals, and won't significantly reduce the tendency to engage in "high risk" economic behavior that leads to insecurity. If anything, it may exacerbate the problem, because the more "secure" people feel, the more debt they are willing to incur....
July 6, 2005 6:15 AM | Reply | Permalink
I see your point, but, I object on the basis of how hard people work. When you're working between 40-60 hours a week, the rewards should be greater than "what do I need?" and should approach "What do I want?"
July 6, 2005 6:42 AM | Reply | Permalink
Of course that is exactly what the Republican fear will happen some day. This whole idea that we need to reform the system now is really just a preemptive strike against such changes down the road a ways. Given that the Republicans will control all the details of any "reform" plan that is introduced now I think we should stay away from private accounts altogether as part of the current debate on the future of Social Security.
July 6, 2005 7:47 AM | Reply | Permalink
If I were King, I would scrap the SSA and replace it with a relatively simple "Disability Income Administration" that would provide worthy, means-tested recipients with income support, funded out of general tax revenues. The means of revenue collection? A steeply-progressive income tax, of course.
The idea of this federal agency would be to provide economic security to those who have suffered injuries or disabilities for any reason, including old age. It would provide that basic floor of minimum support that individuals can always rely upon. If you think about it, our current SSA was originally sold as a way to save those unfortunate souls who suffered the combined horrors of "old age disabilities" and poverty. The agency I propose would achieve the same end.
Instead of being the Grand Achievement Of The Democratic Party, however, it would simply be one of the institutional means by which the federal government would honor its commitment to the economic security of The People. The complete package of economic security initiatives would include a commitment to a Labor Shortage Economy and Universal Health Care.
It's all quite doable.
July 6, 2005 8:11 AM | Reply | Permalink
I fail to see the connection between the number of hours worked, and a theoretical entitlement to have what one wants.
There are people working 60 hrs a week at two jobs barely earning minimum wage, machinists working 60 hours a week at $20/hr (plus overtime after 40 hrs, of course) and lawyers billing 60 hours a week making $250K/year. All of them want more, and spend as much as they think they can afford to spend (if not more.)
July 6, 2005 10:03 AM | Reply | Permalink
Mark Schmitt corrects my misreading of him:
I accept the correction, and apologize for my misreading...In one aspect, there's no difference between "economic security"--understood as providing social insurance and a floor--and reducing inequality. The floor does move upward over time: It starts with enough food not to be hungry, enough clothes not to be cold, and enough shelter not to be wet. It moves upward. The definition of "enough" changes. And basic needs grow to include first literacy, then internet access, and then (someday) real equality of opportunity for your children.
In another aspect, there is a difference. "Economic security" is about economic policies that greatly soften the differences in living standards between the middle class and the poor--it says nothing about the differences in economic power between the middle class and the rich. "Economic security" has no purchase on issues like the Estate Tax, or CEO compensation, or what the existence of very big prizes to the corporate and lobbying games do to our politics...
July 6, 2005 11:05 AM | Reply | Permalink
Just as important, I think, is constricting the amount of money and power those at the top of the food chain can accumulate. The structure of our political system is evolving to specifically service those on top. This aspect of income inequality I would consider particularly corrosive.
It would also include, I think, policies and programs that reduce the volatility of income: swings in income level from year to year. These swings are becoming increasingly deep, and can be especially hard on the lower income, as a medical or legal catastrophe can end up causing years of pain and dislocation.
July 6, 2005 11:42 AM | Reply | Permalink
I think you misunderstood me. I wasn't planning on altering the social security system. I think it's fine as a base, even if benefits are going to go down in the long term. The social security system is currently one of the healthiest government programs.
My thought was more like mandatory IRA investment, with a government-run alternative that people can choose. SS remains a seperate entity. I mean, if people are worried about their retirement in 30 years down the road, then maybe they should be reminded that SS was never intended to be the sole source of income for retirees, but as a supplement to private pension plans.
The whole SS debate smacks of red herring. With far more pressing problems in medical coverage and military unreadiness, discussing SS lets the other problems fester.
July 7, 2005 1:25 AM | Reply | Permalink
I'll agree that the current Social Security debate is really a distraction from the real problems we face as a nation. My point was much more narrow than that.
You made the unwarranted assumption that a government administered set of private acdounts would not provide as good return as would a privately administere set of private acocunts.
That ignores the distinction between administration of the accounts and managing the investments. Private accounts of ANY kind will be a lot more expensive to administer than are the current Social Security accounts. The cost of that administration will come out of any return.
Then there is the management of the investments. Like any mutual funds, the best return will come from the funds with the lowest management costs. The government would have to contract that management out to private contractors because it simply is not a civil servant appropriate function. The process of contracting out the investment will be a source of potential graft (see the Ohio scandals) as will the process of investing the funds themselves.
You are correct that the current SS must remain a separate entity. I simply don't see a reason for the government to get involved in such an IRA program. The only benefit government can add to the IRA type programs is forcing them to invest and limit the investment choices for security and lower administation costs.
Let people take their own investment risks and remind them occassionally that there is still a viable Social Security program to protect those who screw the process up, get screwed over by the investment process or have something totally unanticipated and negative occur.
July 12, 2005 1:43 PM | Reply | Permalink
Ah, now we're nearing agreement!
The assumption about the risk/return tradeoff was one based on how there's a rule of thumb in investment that there's a tradeoff between profit and security. The more risks you take, the higher the potential return. My opinion is that a government investment program should err on the side of security. Most likely it would just be another way to buy treasury bonds that would exist even if the treasury didn't need any more (hey, I can hope!).
July 13, 2005 3:13 AM | Reply | Permalink
The Social Security Administration would never be involved.
Anything the Republicans propose that is even loosely connected to the Social Security system has a single purpose - the destruction of Social Security. Their extremists will not let anything out of their decision processes that protects or prolongs Social Security.
For anyone to compromise with them in any way is to work with those extremists for the destruction of the system. Nothing the Republicans propose that is in any manner connected to Social Security should be considered, because it all has a single inalterable purpose - destroy Social Security.
July 14, 2005 3:39 PM | Reply | Permalink
Thank you for the enlightening discussion.
Since I'm living and working in Germany, my worries are with a totally different retirement fund thingy. I freely admit to not knowing the nuts and bolts of Americas three retirement legs (SS, company pension and individual funds). Like I wrote in my previous post, we probably both want the same thing, it's just that you know the inner workings better than I do.
July 15, 2005 3:22 AM | Reply | Permalink
Just to list my qualifications for understanding Social Security and investments, I worked eight years as a Claims Representative for the Social Security Administration, and my father was a District Manager beginning in 1937 until he retired in 1974. I have an undergraduate degree in Economics and an MBA, as well as extensive graduate education in management, Finance and Economics. I am not a professional "expert" in Social Security, but I know enough to tell what is realistic and what is not and I can read and undersrtand the technical literature.
Because of my interest in the subject, I have the blog http://socialsecuritynotes.blogspot.com/ (Social Security Notes) in which I have attempted to draw together both technical and political references to the Social Security phase out issue. A lot of it is referring to things already written by Josh Marshall, of course. But there are also links to some of the more important Social Security sources.
I also list some good books on the subject. The most recent and most accessable is "The Plot against Social Security."
I very much enjoyed my three years in the Army in Hanau and Frankfurt in the late 60's. I envy you being there. I once went to the lighting of the schloss in Heidelberg. Got off the autobhan, headed east and didn't know where I was going, so I just sort of kept bearing right on roads in the forest driving up the valley. Finally I saw a castle with a party going on and stopped for directions. Walked in, they handed me and my wife glasses of champagne, invited me out to the balcony, and my wife and I accidently enjoyed the lighting of the schloss from the balcony of the schloss itself. Amazing how much fun you can have when lost in Germany. Or Switzerland, Italy, Holland or Barcelona.
I'm sure you are similarly enjoying that fascinating nation.
July 15, 2005 10:44 AM | Reply | Permalink