Doing the Social Security math
There are at least three things wrong with us economists: We are lousy short-term forecasters (but brilliant at dissecting the past); we are fatally practical, always willing to dump on others’ hope-filled ideas; and we can’t understand why an economist will never become president.
Although we fall short on many fronts, we do excel at understanding the big picture, and few economists have dedicated as much of their lives to championing the extremely unpopular view that U.S. fiscal policy is fundamentally unsound and unsustainable as has Boston University economist Laurence J. Kotlikoff.
Kotlikoff’s new book, “The Coming Generational Storm,” written with financial journalist Scott Burns, lays out in easy-to-understand prose why Social Security and Medicare need a comprehensive overhaul. The authors clearly document that government spending far exceeds the willingness of the citizenry to pay for it, and they painstakingly parse the demographics of how the eventual boomer bust will inflict a doomsday equation on the nation: too many retirees and too few younger working Americans to fund those retirees’ benefits.
To make this argument, the authors introduce a civilian version of the fancy math economists use to project how today’s decisions affect tomorrow’s options. They contend that it is impossible to understand government finances by studying only current spending and revenue. Even ignoring the fiscal mischief of “off-budget” expenditures or the lockbox in which Social Security funds are supposedly kept, the authors write that the government neglects to factor in future promised benefits when it assesses its financial health.
The key tool that Kotlikoff and Burns use to paint our government’s true financial position is “generational accounting,” which tracks the benefits promised each age group as well as the expected amounts the members of each age group will be taxed over their lifetimes. In other words, rather than thinking about the government redistributing from poor to rich, think of it as redistributing from younger to older. It should thus come as no surprise that those of us born during the late baby boom, 1961 to 1964, will pay more and receive less than older boomers, those born from 1946 to 1960.
But there are two main downsides to applying generational accounting to public policy questions. First, the time frames grow to include many future generations. Proponents talk about forecasting 160 years from now. That’s 40 presidential terms. It’s difficult to get policymakers, pundits or voters to think past the next election, much less act on such predictions.
Second, generational accounting concentrates on the accounting aspects of the problem rather than on economics and politics. Although Kotlikoff and Burns are correct in their calculation of how our fiscal trajectory is far off target if households continue to save too little and politicians continue to spend too much, their analysis ignores how political parties and institutions may change over time, or how family structure may change to provide more for its older members.
The book goes awry in a few other ways. It is too dismissive of the idea that the demographic change in America may, in fact, not lead to economic malaise, because of technological growth and the wealth an expanding economy can produce. Also, they resort to a bit of scaremongering by developing a scenario in which investors anticipating a default on U.S. Treasury bonds create havoc in the country’s financial system.
But, on balance, the book does an excellent job of preaching two economic basics. First, our promise of Social Security and Medicare benefits in their current form to all retired Americans, regardless of means, is unsustainable. Do working Americans really want to pay more than 60% of their income in taxes, as Kotlikoff and Burns write, to support their parents? Second, individuals and families need to save more for their futures. Sober news, but that’s why we economists are never the hit at the cocktail party. *
