Friday, September 26, 2014

Fixing Social Security

Our Social Security system is insolvent: the present value of expected future contributions is not large enough to cover the present value of expected future benefits.

This needs to be fixed, or resources from other parts of the budget will have to be permanently diverted to make social security payments.

Macroeconomically, this is a problem that is readily fixable. This interactive webpage from The Committee for Responsible Federal Budget shows the possible policy combinations, and allows you to choose a plan to fix the problem.

Unfortunately, politically these solutions do not seem possible at this juncture. Note that because of the way the comparative dynamics work, the efficacy of each of these solutions diminishes as we move into the future.

This is ridiculous. Consider the two largest items.

The biggest is indexing payments to the CPI minus 1%. Macroeconomists know that the CPI overstates price inflation, by something in the range of 1%. So, we’ve already been giving seniors a gift every month by indexing to just the CPI.

To draw an analogy, this is like having your parents pay for your gas, and every time the price per gallon goes up by a nickel, they give you a dime to cover it. Last I checked, keeping the change as a habit, and then bitching about it if your parents threaten to ask for it back is something most of outgrew a long time ago.

The second biggest is raising the retirement age immediately (to compensate for it not being raised earlier), and then indexing it to increasing life expectancy in the future. Without doing this, with every passing month we’re offering new retirees funding for a longer expected retirement with each passing month … without them having contributed extra to the system with a longer career.

An analogy for this might be giving a football team 5 downs, or a baseball hitter 4 strikes … after the game has started. Again, excepting things like the Colorado Buffaloes 1990 co-championship, this is something that most people would find unacceptable in others.

I hope I don’t offend anyone, but many people say things like the government is broke, when in fact it’s more like grandma just stole all our sh*t.

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