Relentless Pursuit of Wisdom and Liberty

The weblog companion of, dedicated to pondering, "If Patrick Henry could see us now..."

Friday, February 11, 2005

Two quick thoughts on Social Security commentary

I read a couple of columns this week that, overall, expressed doubts about whether or not the personal accounts proposals are the right thing to do and whether or not they'll "save" Social Security. Obviously I think the answers to those two questions are "of course they are" and "probably, though that's not why they're the right thing". But beyond those two overarching concerns, the following excerpts suggested to me wholly different points than those intended by the authors.

Former Senator Bob Kerrey had this to say about the "contract" between generations:
Across all generations and within both major parties, Social Security and Medicare are seen as a vital part of American life. They represent a powerful intergenerational contract between younger Americans in the work force who agree to be taxed on behalf of older, eligible Americans. What makes the contract work is that the expectation of those in the work force is that when they pass the age of eligibility, successive generations of workers will not object to the taxes that must be imposed on them to cover the costs of their income and health benefits.
The point that the Senator is missing isn't just the voluntary nature of contracts - but that's enough to call into question his conclusions of the success of the program. If the contract works because each generation submits to the payroll tax in expectation of the next generation financing their benefits, it would seem to me to make the system stronger, per person, to allow those who wish to opt out completely to do so. It might even be argued that allowing opt-outs could even help to mitigate the demographic challenge facing the program (the ubiquitous worker-retiree ratio initially 16-1 and declining into the future). Every 40-year-old who opted out would deprive the system of a portion of the taxes funding the Social Security benefits of their 67-year-old parent, but those benefits would still be funded by other workers who choose not to opt out. But that same 40-year-old would remove himself from an obligation of several 15-year-olds to fund his benefits later - so the taxes of those several workers could be spread among the other 40-year-olds who didn't opt out. There are certainly costs associated with avoiding the reduction of benefits to current retirees and those close to retirement, but IMO they would be definitely worth a stronger system going forward and the increased freedom of choice obtained by allowing opt-outs.

This OC Register article detailing some of the concerns of bond industry giant PIMCO's CEO Bill Gross is the source of the other contrarian observation:
It's no secret that the massive baby boomer generation is slowly moving from workplace to retirement status. This will leave far too few young workers to runthe nation's businesses - no less pay the Social Security tab.

Gross says this American business climate - weakened by a worker shortage - will not produce the stellar investment returns the president's plan is banking upon.
The upcoming shortage of workers will in one way or another force many Americans to stay employed far longer in life.

Heavy demand for their services may keep folks working. Or an economy stifled by worker shortages won't create the wealth required for a satisfying retirement.
While his concerns seem valid about downward price pressure on investment vehicles as large numbers of baby boomers sell them off in retirement to smaller numbers of current workers trying to build a portfolio, I'm more interested in the unstated effects of the worker shortage he's predicting. I'm far from an economics expert, but I do know what tends to happen when the supply of something drops - the price goes up. It works with gasoline, and it works with labor: labor shortage = higher wages. Higher wages means more principal to save for retirement, which would help offset any decreased returns if historical market averages don't match expectations in the decades to come. More than just upward pressure on wages, I find it very encouraging for educated hard-working 30-year-olds with lofty career aspirations, especially when the baby boomers start retiring in earnest and opening up those upper management positions coveted by their younger proteges. Bill Gross fears that a worker shortage will stifle the economy; I tend to have faith that the ingenuity of the American people (and the technological adeptness and fresh ideas of the new set of managers & executives, whose average age will be dropping as the boomers retire) will be able to stave off economic stagnation as productivity gains continue to increase. Time will tell.


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