Virginia Postrel writes in Wednesday's New York Times on “Tax Policy as a Tool and a Weapon”; go forth and read it.

She mainly discusses the relative merits of changing the tax treatment of dividends, corporate tax reform, and a payroll tax cut. On the latter, she writes:

Reducing the payroll tax would give every worker an immediate tax break and encourage companies to hire (or retain) employees. It's a winning idea whether you're looking for a Keynesian jolt to consumer spending or a supply-side boost to hiring. And it would particularly benefit low-income workers, who pay little or nothing in federal income taxes but still owe payroll taxes.

However, she notes a low-end payroll tax cut — exempting the first $10,000 of income, for example — could have perverse policy implications, by making it more cost effective for employers to hire two workers on a part-time basis than one full-time worker. A cut in the payroll tax rate, as opposed to an exemption, might therefore be economically preferable.

Of course, cutting the payroll tax has other problems associated with it — either future benefits will have to be cut accordingly, or general taxes will have to be diverted to subsidize social security and Medicare; neither option would be very palatable. A solution some have suggested — taxing high-income workers on their full incomes without a corresponding benefit increase — has some appeal to income redistributors but may not be popular with the electorate (and a tax increase is a tax increase, at least in a 15-second sound bite).

One plausible option (speaking as a “policy wonk” rather than a libertarian) is to have a rate cut in the payroll tax, coupled with a new tax in two years (bringing the total rate back to the old rate) tied to privatized accounts. The holiday would serve a useful short-term goal, while the new financing arrangement would kickstart a move toward privatization of social security.

Tyler Cowen has been beating the drum against social security privatization for a good while, and it has finally sunken in with me. After thinking about it enough, it appears that he is right: we will end up with two programs if we transition to private accounts and it won’t reduce the unfunded liability, which is the central problem. Presumably, when the actuaries refer to an unfunded liability they are referring to an excess in the present value of all cash outflows versus the present value of all inflows. If the first number exceeds the second, you have a liability. We’ve promised to pay too much and benefits will have to be reduced, or taxes raised, to bring the system into balance.

Private accounts alone won’t change the unfunded liability. However, Tyler offers an intriguing solution to part of that problem: auction off the right to leave the system. An auction provides a great mechanism to separate those that are risk averse from those that are not; those with financial savvy from those with none. It also creates a logical break point to show where they have left the system and have acknowledged that the system owes them nothing, though they have paid into it. They should similarly understand that they will need to save enough for their own retirement and will have to keep working without enough savings.

There would be an initial inflow of money that could be used to retire debt—thereby enabling future borrowing for the government to cover shortfalls—and presumably an increase in savings from those that leave the system; no more payroll taxes, higher disposable income. The system could then transform into a poverty program for the elderly, which should be far [Ed.: got a little carried away.] smaller than in its current setup.

I’m sure the details would need to be hammered out by actuaries—how many people would pay to leave the system, how much would they pay (meaning how much current debt could we retire) and how much would the unfunded liability would be reduced. Even with these questions, it seems like a sounder suggestion than getting people into a forced savings program where the government still implicitly takes responsibility for everyone’s retirement and the unfunded liability is unchanged.

Cass has more here.

Apparently the blogosphere has gotten the better of Michael Kinsley, in this round anyway. He plans a more detailed response for next week’s WaPo, but this week is simply a concession that some bloggers got the better of him, i.e. made him think twice about dissing Social Security privatization. Here’s a quote:

That conference was the last straw. Last week, to vent my frustration, I sent an e-mail to some economists and privatizing buffs saying, look, either show me my mistake or drop this issue. Refute me or salute me. Disprove it or move it. Or words to that effect.

As an afterthought, I sent copies to a couple of blogs (kausfiles.com and andrewsulllivan.com). What happened next was unnerving.

A few days later, most of the big shots hadn’t replied. But overnight I had dozens of responses from the blogosphere. They’re still pouring in. And that’s just direct e-mail to me. Within hours, there were discussions going on in a dozen blogs, all hyperlinking to one another like rabbits.

Just so I don’t sound too naive: I am familiar with the blog phenomenon, and I worked at a Web site for eight years. Some of my best friends are bloggers. Still, it’s different when you purposely drop an idea into this bubbling cauldron and watch the reaction. What floored me was not just the volume and speed of the feedback but its seriousness and sophistication. Sure, there were some simpletons and some name-calling nasties echoing rote-learned propaganda. But we get those in letters to the editor. What we don’t get, nearly as much, is smart and sincere intellectual engagement—mostly from people who are not intellectuals by profession—with obscure and tedious, but important, issues.

I always thought Kinsley was fundamentally decent, and regardless of what he has to say about SS privatization, I’ll probably continue to think so. Welcome to instant fact checking, Mr. Kinsley.

On a somewhat related note, I thought I remembered a quote by JFK, about the WaPo no less, regarding getting in a fight with people that buy ink by the barrel. Turns out it was Clinton:

Never pick a fight with people who buy ink by the barrel.

Kinsley has a similar statement in his column:

You can send your views electronically to a blog in less time than it takes to find a stamp, let alone type a letter.

It’s a good column. RTWT, and I’ll be looking forward to next week’s installment.

Once again I find myself in agreement with Joe Lieberman:

A rejoinder to this rejoinder is now being beta-tested by Sen. Byron Dorgan: Republicans exaggerate the “crisis” of Social Security, which can be fixed with a few modest tax hikes. Uh huh, in the sense that a bankrupt man might still be able to manage his car payments . . . if you ignore the fact that he owes house payments too.

House payments, in this case, are the unfunded liabilities of Medicare, which vastly outstrip even the unfunded liabilities of Social Security, by a margin of $62 trillion to $10 trillion. For several years, the nonpartisan board of Social Security and Medicare Trustees has flagged these figures, which everyone ignored. Joe Lieberman last year introduced a Senate bill to recognize these obligations in the federal budget. He was ignored.

Yet since Mr. Bush introduced the subject of Social Security reform at his party’s September jamboree, public debate has surged ahead of the White House and its Democratic sparring partners. USA Today, to give the underrated McPaper its due, produced a report in October forcing Medicare into the picture, noting it would take $53 trillion invested today to cover the $200 trillion in shortfalls the program is expected to generate just over the lifetimes of today’s youngest workers. By Monday night, even Peter Jennings of ABC News had decided there’s a story here.

Adding the unfunded liabilities of entitlements to the federal budget would be a great idea and would go a long way towards getting rid of the notion that there’s a trust fund, or that these benefits are “free”. It’s a good idea, so it naturally get’s dumped.

Of course, SS reform has been a big topic lately. Alex Tabarrok has a great post on the argument about the fairness of the current SS system. I likewise agree with his endosement of Tyler’s solution—make it, explicitly, a poverty program for the elderly.

The gist of Alex’s post is that, as long as we are pretending SS is a pension system, rather than a welfare program, the argument against a regressive payroll tax falls flat. However, if we admit that it’s a welfare program, we should treat it as such. This, of course, would open it to things such as means testing, eliminating the automatic increases and the like.

In the mean time, as long as we are calling it a pension (or retirement) system, arguments about the fairness of regressive taxes should be ignored.*

Alex Tabarrok suggests that critiques of the social security tax as “regressive” miss the point:

The payroll tax is regressive but benefits are progressive and on net the social security system is progressive—a 45 year old male with an income twice the national average, for example, will in present value pay into the system $243,700 more than he will receive in benefits. (Part of this net loss comes from progressivity and a larger part from the fact that all currently young workers will pay more in present value taxes than they will receive in benefits). [citation omitted]

I’d say that the system is generally progressive, but there are subpopulations for whom I’d question that conclusion—according to the CDC, the average African-American male born in 1975 or earlier can expect to collect virtually no social security benefits, because he will have died before becoming eligible to collect benefits at age 62.

Though the author’s sympathies lean heavily towards doing nothing about SS, there’s an excellent history of the program at the NYT.

The article also makes clear that each generation receives more benefits than the previous generation, due to the link to inflation-adjusted wage growth. Seeing the program lift the elderly out of poverty is well enough, but at some point it would make sense to simply link it to inflation to minimize the burden to younger generations. The elderly would keep their current purchasing power and taxes could be reduced (or would be less than they otherwise might). In fact, this whole controversey could probably be done away with—and private accounts ignored—with this one simple change. Here’s the relevant graf:

Since wages generally rise faster than inflation, retirees in each generation get more in real dollars than those in previous ones. Contemporary critics, like Kasich and the Bush council, would slow the rate of future increases by linking benefits only to inflation. Though this would save a lot of money, its effect on retirees should be understood.

Seniors now get an initial benefit that is tied to a fixed portion of their pre-retirement wages. If the index was changed, their pensions would be pegged to a fixed portion of a previous generation’s income. If this standard had been in force since the beginning, retirees today would be living like those in the 1940’s—like Ida Fuller, which would mean $300 a month in today’s dollars, as opposed to roughly $1,200 a month.

As a means of lifting the elderly out of poverty, SS has succeeded quite nicely. Not increasing the burden on future generations of workers would be a big improvement over the current situation.

This issue is now all the rage. It’s quite amazing how your understanding of an issue this big has to be pieced together. Take a look at the following:

The 1970s were a time of social turmoil, rampant inflation, and falling real wages. Gerald Ford was president in 1976 and Alan Greenspan was his chairman of economic advisors. To this day Mr. Greenspan no doubt has painful memories of those wacky “Whip Inflation Now” (WIN) buttons that came to symbolize economic policy disarray. Inflation in 1974 and 1975 had been running at about 10% per annum. Many voters were extremely distressed about the impact that inflation might have on the value of their Social Security and other pension benefits.

There was strong bipartisan support at that time for indexing initial benefits to inflation, but a great deal of confusion about how to do it. Should the government use indexes of wages or of consumer prices to adjust future initial benefits? If so, what specific index should be used? It was a given among economists then—and still is—that wages are likely to rise faster than consumer prices over the long run based on the long-term trend toward higher labor productivity.

Be sure to read that again and then consider: if Congress and President Ford had chosen to index Social Security to inflation in 1976, there would be no problem today. They chose wage indexing because real wages were falling at the time, so they saved some money in the short term and screwed us in the longer term, with little or no discussion at the time:

Whatever one’s opinion on that monumental policy shift may be, the remarkable thing is that it occurred with virtually no public discussion. A search on Lexis-Nexis of major U.S. newspapers during the 1975 to 1977 period turns up few editorials or news analysis of any substance dealing with the massive shift in policy. The mainstream media clearly seemed to be missing in action on the entire story. If there was a substantive debate on wage indexation in 1976 it seems to have been entirely an inside-the-beltway affair.

Read the whole thing, and weep.

People really need to get their terminology straight. Apparently these LaRouchies think that privatizing part of Social Security is both fascist and anti-capitalist:

No organization is more responsible for the forced-march drive to privatize Social Security—stealing trillions of dollars of its funds for Wall Street accounts—than the Cato Institute, a multi-million dollar Washington, D.C. think tank. During the past 20 years, Cato has had more than a quarter of a billion dollars lavished on it in contributions by the most powerful Wall Street banks, and largest right-wing think tanks—led by the ultra-right-wing Koch group of foundations. Cato has spent this money on a host of projects intended to destroy the sovereign nation-state and implement fascist economic austerity. But the lion’s share has gone into the privatization of Social Security.

The title of the post: Cato Institute: Anti-Capitalist Clique Leads the Attack on Social Security.

With all of the partial information and misinformation out there, it’s tough to get a handle on the scope of the problem, and what should be done. Lately I’ve been opposed to the idea of private accounts, and remain so. They will have to be funded and will not reduce the unfunded liability.

Still, the case for reform is a good one and consider this from an earlier post about a NYT story (excerpt from original story):

Seniors now get an initial benefit that is tied to a fixed portion of their pre-retirement wages. If the index was changed, their pensions would be pegged to a fixed portion of a previous generation’s income. If this standard had been in force since the beginning, retirees today would be living like those in the 1940’s—like Ida Fuller, which would mean $300 a month in today’s dollars, as opposed to roughly $1,200 a month.

This raises a good normative question: how fair is it to expect workers to fund standard-of-living increases—and pay increasingly higher taxes—for each succeeding generation, especially with the baby boomers set to retire, when seniors are already a very wealthy demographic? One solution would be to just begin increasing benefits to keep up with the cost of living; another solution would be to give them half of the increase in real wages, instead of the whole as they get now. The second idea would reduce the amount of the unfunded liability while still raising the standard of living for retirees; just not at the pace of wage increases. It would lighten the burden on the economy as a whole.

Of course, any attempt at reform—including reductions in the automatic increases will be fiercely opposed by the AARP. Yet another reason I won’t be joining that organization when I hit fifty.

Today’s WaPo carries an interesting op-ed on social security from one of the paper’s junior writers, Laura Thomas. Here’s the meat of her discussion:

It seemed as though my family (a mixture of partisan extremes, from Rush Limbaugh fans to passionate antiwar protesters) saw Social Security’s troubles as a small matter—contrary to the president’s description last week. Whether the impending collapse of Social Security is a myth or not, I shouldn’t be relying on Social Security to take care of me when I retire anyway, they said. I was taken aback by their mistaken impression that I had a sense of entitlement to Social Security, just as I was amused during the State of the Union speech to hear that Bush thought I was expecting to receive it.

I didn’t want to stir up a Christmas Eve brawl, but I nonetheless felt compelled to explain that never in my life had I assumed that Social Security was coming to me. Every time I see that somewhat shocking Social Security dollar figure subtracted on my pay stub, I choose to look at it as giving back to my older family members who’ve been known to drop random checks in the mail to their poor, desperate niece or granddaughter.

By the time we finished the antipasto, we decided that we were all more or less on the same side: Start saving now, because Social Security, if it still exists when you’re older, will only be for people on welfare or those who didn’t have the foresight or willpower to save (which will not be you, Laura).

Todd Zywicki at the Volokh Conspiracy (who gets the hat-tip for the link) says none of his students “are counting on a dime from Social Security when they retire.” I haven’t polled my students on this question, but I suspect he’s right.

Meanwhile, all Kevin Drum can do is mock her stupidity for buying into Republican propaganda, although the truth—the fundamental truth—is that social security is—even today, while still “fully solvent” according to the government’s bogus accounting principles (which would land a company’s CFO and CEO in prison)—at best a safety net; anyone not on welfare who thinks they’re going to retire at the standard of living they’re accustomed to on social security alone is the “insane” one. Every penny that Drum has in his IRA, 401(k), and/or other retirement accounts puts the lie to his politically-expedient defense of the current system.

The beauty of social security is that the public was conned into having a welfare system for seniors the only way a pluralistic society can—by turning it into a handout for everyone. That social security, and its related pal Medicare (which is universal healthcare for poor seniors, packaged as a handout for everyone), are both in serious fiscal trouble is no unforseeable accident; it’s the unavoidable consequence of a system established by Democrats to ensure these two welfare schemes wouldn’t be taken away at the ballot box, like “welfare as we know it” was and Medicaid is almost certain to be.

Like many, I’ve had my doubts about the potential success of the war in Iraq. In fact, I had them last Fall in Cass’s comments section back when she was at Jet Noise. I never thought I would see Michele go wobbly, though.

Michele is apparently experiencing buyer’s remorse over having voted for President Bush back in the Fall. She’s even starting to question us going to war in Iraq. Coming from one of the founders of The Command Post, a post I manned in the runup to the Iraq War, it’s more than a little astonishing.

Here’s Michele on her reasons for experiencing buyer’s remorse:

Social Security. Bankruptcy. The insistence of the far right that they have some kind of religious mandate now and we need to revert back to our Christian roots and morals. And yes, Iraq.

One at a time:

• Social Security: it’s not clear to me why there should be any remorse here. Bush’s support for private accounts is one of the worst kept secrets in the world. He’s favored them since the 2000 race. Lately, I’ve started to question the need for the accounts myself, but I can’t claim that Bush’s support for them is a surprise.

  According to Zogby, this is part of a political realignment that Bush is attempting to engineer. Maybe so, but it seems like a far more difficult solution to the problem than is needed (for more see here, here and here) and that the effort to reform Social Security would be better spent working on Medicare, which is a far bigger problem.

• Bankruptcy: this is a little more bothersome, but not as much as Michele seems to think. From what I’ve read, the credit card companies are refusing to accept any responsibility for the people they give cards to. This seems a bit unfair, and I would like for it to be different, but it’s not something to get worked up over. The best solution is to limit your use of credit cards and you won’t have to deal with the bankruptcy bill. If there’s more to it than that, please let me know.
• The religious right: Michele and I apparently read different publications. Even if the religious right thinks it has a mandate, what are they gonna do? Throw people in jail for going to the wrong church, or for not going at all? I’ll be in there with all of the other sinners.

  On gay marriage it seems that they mostly want it to be handled at a state level. Some want it outlawed nationwide, but it’ll never happen. They couldn’t even get the FMA out of the Senate last Fall and it doesn’t outlaw gay marriage; it simply guarantees that it’s left to the states. The optimal answer here is to let the states decide and that appears to be what is happening.

  Abortion is another item, but again, the religious right doesn’t seem to be intent on outlawing it nationwide; they simply want it returned to the states, which is all that would happen if Roe v. Wade were overturned. The real problem is that the courts intervened in this process thirty years ago and tried to fashion a consensus where none existed. And it’s still a huge issue today precisely because the Court intervened, rather than leaving it to the states. If someone tries to do the opposite and outlaw it nationwide before a consensus exists, I’ll be screaming about it as well. Until then, I won’t worry about it.

• The Iraq War: this is the most inexplicable of Michele’s gripes. Finally, after months and months of nothing but bad news, the idea of freedom in the Middle East seems to be getting a bit of traction, and part of it can be traced to the reelection of President Bush. By reelecting President Bush we told the rest of the world that we can’t be rolled and that we’ll remain committed to what we started. The people in other countries in the Middle East have taken this to heart and are acting on this and other events to work for freedom. How is this sneaking past Michele?

  Like Cass said, it’s gut check time. All we have to do is be resolute in our jobs as computer jockies and let the troops know that what they are doing is not in vain. I can do that.

It’s weird. Right now I support Bush more strongly than I ever have and seeing others get buyer’s remorse is a bit confusing.

Me, three months ago:

The beauty of social security is that the public was conned into having a welfare system for seniors the only way a pluralistic society can—by turning it into a handout for everyone. That social security, and its related pal Medicare (which is universal healthcare for poor seniors, packaged as a handout for everyone), are both in serious fiscal trouble is no unforseeable accident; it’s the unavoidable consequence of a system established by Democrats to ensure these two welfare schemes wouldn’t be taken away at the ballot box, like “welfare as we know it” was and Medicaid is almost certain to be [in the future].

The New York Times, tomorrow:

In choosing to preserve benefits for the less well off and not raise taxes on more affluent people, Mr. Bush sought to cast himself in the Democrats’ traditional role as a defender of the poor. In his radio address on Saturday, he said: “By providing more generous benefits for low-income retirees, we’ll make good on this commitment: If you work hard and pay into Social Security your entire life, you will not retire into poverty.”

But critics, including most Democratic lawmakers, say that such an approach would undermine a central bargain conceived during the New Deal: that Social Security is not just a welfare program for the poor but a form of social insurance that people at all income levels pay into and reap rewards from.

“Social Security is not a poverty program, it is a retirement system people have worked hard for, paid into and have earned,” said Representative Sander M. Levin, Democrat of Michigan.

If it becomes increasingly irrelevant for middle-income people, the critics warn, Social Security will eventually become little more than an empty shell.

Most intriguing. (þ: Eric Lindholm)