What worry me are the problems that we will bequeath to our children. Long before I was born, Franklin D. Roosevelt established a compact among the generations. Families had long cared for their elderly members, but Roosevelt federalized that responsibility in the form of the Social Security system. Social Security is sometimes viewed as a pension plan, but it is mostly pay-as-you-go. The working-age population taxes itself to support its parents, in the hope and expectation that its children will do the same … unless we figure out a politically acceptable way to reduce the benefits now promised to future retirees, taxes are going up in the coming decades. The national debate will have to shift from which tax cuts do the most good to which tax increases do the least harm.
Where to begin with such a weak attack on the Social Security system?
I could go all Dean Baker on this criticizing Greg for mixing up three things: the projected increase in Federal health care spending, the massive general fund deficit (which Greg fails to even note), and the Social Security system which is not that far from being solvent over the long-run. Greg loves to note the rise in payroll taxes but he omits the reason for that 1983 increase, which he and I had to face just as we were getting out of graduate school. Greg claims Social Security is pay-as-you-go but we know better than this in the wake of the Reagan Social Security reform.
But what is most odd about this birthday wish is its claim about family relations. Maybe some kids are willing and able to take care of their parents, but during the 1930’s several of the elders were destitute. So this line about FDR Federalizing family responsibility sort of ignores the historical context behind the creation of the Social Security system.
But Greg’s main concern is one that I share – that we are leaving a huge Federal debt for our kids. Then again I am reminded of Robert Barro’s reconstruction of Ricardian Equivalence. Greg and I are both lucky enough to have both children and good jobs. With all those tax “cuts” (actually shifts) that we got from Greg’s former boss (President Bush) – shouldn’t he and I be saving to help our kids pay for those future taxes?
Happy 50th birthday Greg!
12 comments:
pgl,
What is it with Mankiw? Does he not know that the SS system has been doing better than the low cost projection under which the system never even runs a deficit if left alone, not even in 2030? Why do these people keep repeating this disproven drivel?
Barkley
Astonishingly I have nothing to contribute on Soc Sec. Mirabile dictu!
Which allows me to slip in this OT link. Over the course of tv single year of FY2007 the holdings of foreign held US treasuries shifted in astonishing ways. Japan, China saw their absolute holdings drop by low single digit figures, Taiwan effectively liquidated 17% of its total portfolio and Korea more than 33%. In a single year.
Of course those notorious kidders at Treasury may just be pulling my leg or maybe I just lost my ability to read a chart but someone has some explaining to do.
Www.treas.gov/tic/mfh.txt
On the other hand Britain increased their Treasury holdings by 4x in a single year and Brazil by 2.3x. The conventional wisdom that we are hostage to the Chinese Central banks fails when exposed to actual numbers (not unlike the SS narrative).
Am I missing something here?
If I was compelled to comment on Soc Sec I would have to point out that calender year receipts show a combined result north of IC but somewhere south of LC with a slight bias towards LC. Growth numbers since 2005 cumulatively were bound to leave a mark and so it proved. That receipts held up as well as they did is in context of the GDP/productivity' numbers is astonishing.
Bruce; On the other hand Britain increased their Treasury holdings by 4x in a single year and Brazil by 2.3x. The conventional wisdom that we are hostage to the Chinese Central banks fails when exposed to actual numbers (not unlike the SS narrative).
Very true. If I've properly understood Brad Setser over the last few years, funding the U.S. has increasingly been in the hands of oil exporting nations. A sizeable portion of the large British increase may be related to this since, according to Brad, 'the Gulf uses London custodians and private fund managers and offshore accounts so very little of its surplus tends to show up in the US data.'
It's not clear to me whether the SWFs have continued same or changed portfolio composition.
back to SS
the "least harmful" tax increase would be the 2% increase in the payroll tax.
once you explain to the people that that is just the money needed to pay for their longer life expectanices.
and explain to them they are no more paying for their elders retirement than they would be if they put the money in stocks or bonds
the problem disappears.
on the other hand, given the demagoging of the Trust Fund for the Baby Boomers, it may not be so easy to explain to the people after all.
Let me say a word against family responsibility. The old system put a tremendous burden on children and was tremendously risky for parents. Inevitably a certain number of parents would end up destitute, after having invested heavily in childraising, because their kids couldn't take care of them for whatever reason. In the old days a child responsible for a parent often might not be able to marry.
Even in the present situation, children whose financially solvent parents need home care often are overburdened. I know two people who are deeply depressed after five years or more dominated by their parents' needs.
People who call themselves conservatives object in principle to evening out risks, but their belief in "family responsibility" is effectively a harsh, cruel one, whether or not they're able to understand that.
John Emerson - thanks for the comment. In injects a reality that Greg Mankiw just ignored.
Did Greg Mankiw say whether or not he would join AARP since he is now eligible? Don't low taxes and huge deficits, especially with the War on Terror billings, burden our children and their children? Do college loans burden children as compared to parents paying for their educations? I assume Greg is raking it in so his kids will not have to worry.
Not to mention the fact that not everybody has children, or even any living relatives of any sort.
Barkley
Juan thanks. That UK 4x number makes more sense if they are basically acting as brokers for oil producing states. In any other context it seemed out of line, the North Sea not being that productive.
Politically it makes perfect sense for some of these countries to put a British face on their purchases of Treasuries.
Mankiw says the payroll tax is "nowhere near enough to maintain solvency in the future." In combination with his claim that SS "is mostly pay-as-you-go", he is blotting out the Trust Fund. Is he one of those who claim there is no such thing? I am also surprised that he refers to the falling number of workers/retiree w/o mentioning rising labor productivity.
june zaccone
re "nowhere near"
as of 2040 it would take an extra 20 dollars per week of payroll tax to pay for scheduled benefits
by that time workers wages will have increased by over 300 dollars per week, on average.
the extra money will be needed because those workers are expected to live six years longer than their grandparents... longer life translates to more living retirees per worker. but that is just another way of saying more retirement years per working year for each worker.
so what we are talking about here is a small increase in taxes, in a much larger paycheck, to pay for living longer.
tell Mankiw
have him call me, and i'll show him the arithmetic.
oh, for those believers in science fiction projections: by 2085 it may be necessary to increase taxes at the rate of 25 cnts per week each year while wages are increasing at 20 dollars per week per year. these are the Trustees Intermediate projections. though they don't spell it out that clearly.
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