Speaking in the Science Center last night, John Lott, a resident scholar at the the American Enterprise Institute, and Dean Baker ’80, co-director of the Center for Economic and Policy Research, presented opposing views on Social Security’s role and the need for change in the system. Lott argued that under President Bush’s presumed plan of choice total government debt will be reduced and people will enjoy superior results. Baker responded that the system is fundamentally sound and effective in achieving its goals. Professors Mark Kuperberg and Ellen Magenheim from the Department of Economics and Professor Barry Schwartz from Psychology provided additional commentary. Political Science Professor Ken Sharpe moderated the discussion.
In his opening remarks, Lott compared Social Security to defined contribution 401(k) plans, a common vehicle for retirement savings, and argued that if given a choice between the two people would choose 401(k)s. He noted that workers have little choice or control with regard to their Social Security money and that most would receive a higher return from a diversified portfolio of investments.
Lott also challenged the basis for Social Security which he described as a program originally envisioned to reduce saving. He also contended that the description of Social Security as a riskless investment is inaccurate and that private accounts are not excessively risky over the long term since “all you are betting is that the economy is growing.” Lott also addressed the issue of the future shortfall of Social Security funds by noting that if the government properly includes future debt, privatization as proposed would reduce the total debt of the government. He also argued that it would be dangerous to allow the government to centrally invest Social Security funds since that would lead to a situation with the “government owning huge portions of the private economy.”
Baker painted a different picture presenting projections from the Social Security Trustees and the Congressional Budget Office which show the system able to pay full benefits through to the middle of the century and roughly three-quarters of all benefits after that point even if nothing is done. The Social Security Trustees and Congressional Budget Office use slightly different projections for future growth and thus obtain different estimates of the program’s future finances. Baker contended that “we are talking about [Social Security] because President Bush wants us to talk about it” but not because it is facing a new or insurmountable challenge. In Baker’s mind we have been at this point before and dealt with it.
Baker also challenged private accounts on the grounds of their higher expense ratios. In his view one of the major benefits of the Social Security system is its low expenses. In addition, Baker outlined his “No Economist Left Behind” challenge in which he asks economists to outline a set of projections for the future which are internally consistent and result in the high stock returns and low economic growth rates assumed by President Bush’s Commission on Social Security.
Finally, Baker touched on the idea of the Social Security Trust Fund. Since the mid 1980s Social Security has been accumulating more money than it spends in preparation for the retirement of the Baby Boom generation. Since the remainder of the government has been running a deficit, Social Security has lent its excess revenue to the government by purchasing government bonds. Since the money has already been spent by the government, the government would have to either raise taxes further or borrow more to pay it off. However, Baker asserted that it is “very important that the trust fund exists and be repaid” for otherwise the government will have engaged in significant wealth redistribution from lower earners to higher earners.
In commentary, Professor Kuperberg outlined three options for change to restore long term balance: “mak[ing] more future workers,” cutting benefits, of increasing productivity growth. In his view, the single most important action we could take in pursuing these objectives would be to eliminate the federal deficit. Kuperberg also recommended that interested audience members read “Saving Social Security” by Peter Diamond and Peter Orszag. (A summary of the book can be found online at http://econ-www.mit.edu/faculty/download_pdf.php?id=961.)
In her commentary, Professor Magenheim went in a different direction posing the question “should [higher returns] even be an objective?” In her view while it is clear that one would want higher returns when a baseline level of retirement income from Social Security is assured, without that baseline the trade off is much less clear. Finally, Professor Schwartz came at the issue from a more political lens arguing that the debate about returns is a discussion of whether Social Security is achieving a goal it wasn’t defined to achieve. The move towards private accounts represents a “fundamental ideological shift” and the debate about that shift is the discussion we should be having but are not according to Schwartz.
Baker and Lott explicitly disagreed on only one issue: the implicit rate of return for workers in the current Social Security system. Lott’s numbers placed this return significantly lower than Baker’s. Instead, the two scholars in large part talked past each other with Lott implicitly abandoning some insurance aspects of the current Social Security system in pursuit of higher returns and Baker in the reverse position.
While the evening was confrontational at times, it was not without moments of economics humor. Professor Kuperberg at one point assured Lott that Swarthmore professors try not to teach Ricardian Equivalence.