In a recent editorial the editors of the Washington Post, sounding more like the WSJ every day, call for reforming Social Security and Medicare by means~testing them. While I think the idea has some merit, I wanted to point out some short~comings in their analysis.
First, they illustrate the large amount of wealth that Americans hold in the form of retirement accounts, IRAs and the like, with an eye~catching graphic. It shows Americans holding more than 30% of their wealth in the form of them. Unfortunately, that finding isn’t durable across all income or wealth levels. The Congressional Budget Office (CBO) found that the majority of Americans hold rather little of such—6% or less. Contrary to what the editors imply what their graph actually illustrates is how much wealth is held by the wealthiest Americans. In short the majority of Americans don’t have much if anything in their IRAs.
Second, if most Americans start saving considerably more of their incomes, it will be cataclysmic for the economy. Target’s and WalMart’s sales will fall sharply; financial companies’ holdings will rise.
Third, editors don’t seem to realize that Social Security is already highly progressive: the benefit formula replaces a much larger share of lifetime earnings for low-wage workers than for high-wage workers. The editors are therefore proposing not merely greater progressivity but an additional test based on retirees’ current means.
Fourth, the editors seems to assume that equities always appreciate in value; they don’t. Between 1966 and 1982 the DJIA essentially moved sideways. It went largely unchanged. If the editors want the Fed to ensure that assets increase in value (the “Greenspan put”), they should say so.
Finally, without the cash surpluses that Social Security has realized over the last 90 years, income taxes would have needed to realize about 3% more revenue per year than we did. That’s quite a notable tax increase.
My proposal for Social Security is somewhat different. I think that whatever we do, we will need some federal plan to ensure that people who are too old to work aren’t desperately poor in their old age. We won’t just cut off their only sources of income and wish them the best. The editors should have explained how they would solve that problem. As noted above IRAs won’t cut it. I think that FICA max should be indexed to the same percentage of wage income remains subject to the tax. Had that been done in 1983, reform would not be necessary. Since it wasn’t a slightly higher percentage of wage income might need to be subject to the tax.
Short term I dont see much is possible other than increasing the tax amount. I suspect we will see the rate increased rather than the amount of income exposed. The wealthy have more influence. Longer term maybe we have more people to convert their savings into equities but we need to resolve the issue of whether or not we are willing to let some old people starve.
My wife spent her career as faculty at a small, elite private college. She was well-compensated, and her earnings were taxed in the Social Security. She gets full SS benefits, but her SS income would be insufficient to maintain her pre-retirement lifestyle. I suspect retirees who had modest or low income cannot survive on SS payments.
So, I do not think there is any valid argument that social security benefits are too high. If anything, they are too low.
Moreover, the Great Dying is about to begin; the first Boomers are now 78. Their main asset is their house, and there is going to be a surfeit of available housing in the next couple of decades. The surfeit will be made bigger by declining total populations, so house prices should begin falling in real terms, reducing retiree wealth substantially. Think Detroit, and its abandoned, empty neighborhoods.
Once again, our leaders and economic planners are going to be surprised by the obvious. They will do something stupid, and poor retirees will suffer.
“Second, if most Americans start saving considerably more of their incomes, it will be cataclysmic for the economy.”
One of the weird quirks since the end of the Great Recession is that Government Debt has increased significantly rising from 82% to 122% of GDP. Meanwhile, the private sector has been deleveraging and total debt in the US (Government, household, business) as a percentage of GDP is essentially flat in the past 20 years (around 360%). That deleveraging has not been cataclysmic for the economy.
https://x.com/morganhousel/status/2090241670281675094
This chart actually surprised me as I had no idea it was happening.
If you just look at household debt it has been decreasing.
https://fred.stlouisfed.org/series/HDTGPDUSQ163N
However, personal savings, at least as a percentage of income remains at low historical levels.
https://fred.stlouisfed.org/series/A072RC1Q156SBEA
As an aside, as trade surplus/defict largely reflects domestic saving and investment if you think that issue is important you need to increase savings which does likely hurt the economy.
Steve
The Economist had an interesting article where they say the personal savings rate is effected by demographics. Adjusted for baby boomers retiring and spending their savings as intended; the personal savings rate is not far from historical norms.
On trade, there are multiple ways to resolve a trade deficit. The ideal way is for surplus countries to reinvest their surplus in increasing production in deficit countries and then buy more from deficit countries — leading to increased production and increased consumption for both sides, a win-win.
The tricky part is the real world where surpluses are often reinvested in surplus countries to further increase production and worsening trade deficits, or reinvested in purely financial assets, or used as geo-political leverage…. then the eventual resolution is a reduction in consumption by the deficit country.