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TEXAS ECONOMICS ASSOCIATION April 28, 2010
UPCOMING EVENTS <ul><li>May 1st – Longhorn Run </li></ul><ul><li>May 1st – Ultimate Frisbee </li></ul><ul><li>May 1 st  – ...
Longhorn Run <ul><li>Register by tomorrow night at 11:59 </li></ul><ul><li>Cost = $25 </li></ul><ul><li>Finish line is 50 ...
TODAY’S SPEAKERS <ul><li>Dr. Valerie Bencivenga </li></ul><ul><li>Dr. Bryan Jones </li></ul><ul><li>Dr. Beatrix Paal </li>...
Social Security Dr. Valerie R. Bencivenga Spring 2010 TEA meeting April 28, 2010
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SOCIAL SECURITY SCARE TACTICS <ul><li>Sept. 23, 2009.  Social Security choice: Benefit cuts or tax hikes.  SAN FRANCISCO (...
US FINANCIAL OBLIGATIONS (IN TRILLIONS) 2000 2006 Increase Debt $6.9 $10.4 52% Contingencies $0.5 $1.3 140% Future Obligat...
TRUST FUND ASSETS AS A PERCENTAGE OF ANNUAL EXPENDITURES
AS A PERCENTAGE OF GDP
SOCIAL SECURITY AND MEDICARE TRUSTEES REPORT, 2009: <ul><li>Concern about the long-range financial outlook for Medicare an...
SOCIAL SECURITY IS (RELATIVELY) EASY TO REFORM <ul><li>Since the Greenspan Report of 2004, Social Security is fiscally sou...
THE REAL VILLAIN: MODERN REPUBLICAN PARTY POLICIES   (SEE: BRYAN JONES AND WALTER WILLIAMS,  THE POLITICS OF BAD IDEAS ) <...
THE HIGH POINT OF SUPPLY SIDE ECONOMICS YIELDED THE WORSE DECADE FOR THE US SINCE THE 1930S.
THE BEAST WAS NOT STARVED: THESE SHIFT POINTS (REAGAN, CLINTON, GW BUSH) ARE NOT QUIRKS
AN ORGY OF IRRESPONSIBILITY LOOSELY BASED ON THESE THEORIES <ul><li>Actions taken in the GW Bush Administration: </li></ul...
WHY THEN IS THE SOCIAL SECURITY PROBLEM SO HARD TO SOLVE? <ul><li>The fiscal balance sheet of the US government is a big m...
PLAN <ul><li>So much said before me... </li></ul><ul><li>Two topics to center my comments around </li></ul><ul><ul><li>the...
THE GOVERNMENT BUDGET CONSTRAINT <ul><li>Does separating the social security budget from the general budget make a differe...
PERIOD-BY-PERIOD BUDGET CONSTRAINT OF THE GOVERNMENT <ul><li>Social security budget </li></ul><ul><li>General budget </li>...
PRESENT VALUE BUDGET CONSTRAINT <ul><li>Social security system </li></ul><ul><li>General budget </li></ul><ul><li>Sum </li...
THE VALUE OF GOVERNMENT DEBT <ul><li>interpretation </li></ul><ul><li>real debt </li></ul><ul><ul><li>government plan for ...
IMMIGRATION <ul><li>Idea </li></ul><ul><ul><li>Root cause of the social security imbalance:  demographic imbalance </li></...
 
DETAILS OF THE PROPOSAL BY AMITY SHLAES <ul><li>Background </li></ul><ul><ul><li>The promised tax/benefit system is redist...
DETAILS OF THE PROPOSAL BY AMITY SHLAES <ul><ul><li>Altering the formula for base pensions to be indexed to the CPI would ...
DETAILS OF THE PROPOSAL BY AMITY SHLAES <ul><li>Proposal:  two-part reform </li></ul><ul><ul><li>Adopt  progressive indexi...
COMMENTS: SIDE EFFECT OF THE PROPOSAL <ul><li>Effects of importing human capital </li></ul><ul><ul><li>“ Brain drain/gain”...
COMMENTS: SIDE EFFECT OF THE PROPOSAL <ul><li>Health care </li></ul><ul><ul><li>One type of highly skilled workers whose s...
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Bencivenga Jones Paal Social Security Forum April 28

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TEA Professor Forum on Social Security April 28, 2010. Moderated by Jonathan Pevey, Academic Officer

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Transcript of "Bencivenga Jones Paal Social Security Forum April 28"

  1. 1. TEXAS ECONOMICS ASSOCIATION April 28, 2010
  2. 2. UPCOMING EVENTS <ul><li>May 1st – Longhorn Run </li></ul><ul><li>May 1st – Ultimate Frisbee </li></ul><ul><li>May 1 st – Pluckers Day </li></ul><ul><li>May 5 th – Elections </li></ul>
  3. 3. Longhorn Run <ul><li>Register by tomorrow night at 11:59 </li></ul><ul><li>Cost = $25 </li></ul><ul><li>Finish line is 50 yard line of DKR </li></ul>
  4. 4. TODAY’S SPEAKERS <ul><li>Dr. Valerie Bencivenga </li></ul><ul><li>Dr. Bryan Jones </li></ul><ul><li>Dr. Beatrix Paal </li></ul>
  5. 5. Social Security Dr. Valerie R. Bencivenga Spring 2010 TEA meeting April 28, 2010
  6. 40. SOCIAL SECURITY SCARE TACTICS <ul><li>Sept. 23, 2009. Social Security choice: Benefit cuts or tax hikes. SAN FRANCISCO (MarketWatch) -- Social Security provides a majority of the retirement income for about two-thirds of Americans over age 65, but if you're in your mid-50s or younger, it's time to make alternate arrangements. </li></ul><ul><li>Bryan Jones </li></ul><ul><li>Department of Government </li></ul>
  7. 41. US FINANCIAL OBLIGATIONS (IN TRILLIONS) 2000 2006 Increase Debt $6.9 $10.4 52% Contingencies $0.5 $1.3 140% Future Obligations $13.0 $38.8 197% Social Security benefits $3.8 $6.4 Medicare Part A $2.7 $11.3 Medicare Part B $6.5 $13.1 Medicare Part D … $7.9 TOTAL $20.4 $50.5 147%
  8. 42. TRUST FUND ASSETS AS A PERCENTAGE OF ANNUAL EXPENDITURES
  9. 43. AS A PERCENTAGE OF GDP
  10. 44. SOCIAL SECURITY AND MEDICARE TRUSTEES REPORT, 2009: <ul><li>Concern about the long-range financial outlook for Medicare and Social Security often focuses on the exhaustion dates for the HI and OASDI Trust Funds—the time when projected finances under current law would be insufficient to pay the full amount of scheduled benefits. A more immediate issue is the growing burden that the programs will place on the Federal budget well before the trust funds are exhausted. </li></ul>
  11. 45. SOCIAL SECURITY IS (RELATIVELY) EASY TO REFORM <ul><li>Since the Greenspan Report of 2004, Social Security is fiscally sound. </li></ul><ul><li>The Trust Fund, which holds US Treasury Securities, is NOT a ‘shell game’. Its securities are backed by the “Full Faith and Credit” of the US Government. </li></ul><ul><li>Reform could be accomplished by any one of the following: </li></ul><ul><li>Lift the cap on income subject to the SS tax </li></ul><ul><li>Change the indexing of benefits from wages to prices </li></ul><ul><li>Raise the retirement age a couple of years. </li></ul>
  12. 46. THE REAL VILLAIN: MODERN REPUBLICAN PARTY POLICIES (SEE: BRYAN JONES AND WALTER WILLIAMS, THE POLITICS OF BAD IDEAS ) <ul><li>Since Reagan, a series of ‘economic’ theories and ideological precepts have shifted the Republican Party toward a position of fiscal irresponsibility </li></ul><ul><li>Supply Side Economics </li></ul><ul><ul><li>Standard version </li></ul></ul><ul><ul><li>“ Miracle Version” </li></ul></ul><ul><li>“ Starve the Beast”: A silly theory by a distinguished economist. </li></ul><ul><li>Lead to a Republican stance of ‘all tax increases are bad’ because they detract from potential growth. </li></ul><ul><li>The empirical record supports neither. </li></ul>
  13. 47. THE HIGH POINT OF SUPPLY SIDE ECONOMICS YIELDED THE WORSE DECADE FOR THE US SINCE THE 1930S.
  14. 48. THE BEAST WAS NOT STARVED: THESE SHIFT POINTS (REAGAN, CLINTON, GW BUSH) ARE NOT QUIRKS
  15. 49. AN ORGY OF IRRESPONSIBILITY LOOSELY BASED ON THESE THEORIES <ul><li>Actions taken in the GW Bush Administration: </li></ul><ul><li>End of “Pay Go” Budgeting Rules </li></ul><ul><li>Two tax cuts that added to the deficit </li></ul><ul><li>Two wars fought “off budget” </li></ul><ul><li>A grand new entitlement program initially projected to cost as much as the whole ‘Obamacare’ program </li></ul><ul><li>A Social Security reform initiative that would have ADDED to the deficit and NOT solved the problem. </li></ul>
  16. 50. WHY THEN IS THE SOCIAL SECURITY PROBLEM SO HARD TO SOLVE? <ul><li>The fiscal balance sheet of the US government is a big mess. Social Security will fairly soon begin drawing down on its savings, adding to the mess. </li></ul><ul><li>The solutions involve some sacrifice, and the costs will be concentrated. </li></ul><ul><li>Bipartisanship is quite difficult in the modern polarized political system. </li></ul><ul><li>“ Privatization” may again be the red herring it was in the Bush administration. </li></ul>
  17. 51. PLAN <ul><li>So much said before me... </li></ul><ul><li>Two topics to center my comments around </li></ul><ul><ul><li>the government budget constraint </li></ul></ul><ul><ul><li>immigration as a potential fix </li></ul></ul><ul><li>Professor Beatrix Paal </li></ul>
  18. 52. THE GOVERNMENT BUDGET CONSTRAINT <ul><li>Does separating the social security budget from the general budget make a difference? </li></ul><ul><ul><li>my answer: NO </li></ul></ul>
  19. 53. PERIOD-BY-PERIOD BUDGET CONSTRAINT OF THE GOVERNMENT <ul><li>Social security budget </li></ul><ul><li>General budget </li></ul><ul><li>Sum </li></ul><ul><ul><li>the government debt is composed of social security holdings and private holdings: </li></ul></ul>
  20. 54. PRESENT VALUE BUDGET CONSTRAINT <ul><li>Social security system </li></ul><ul><li>General budget </li></ul><ul><li>Sum </li></ul>
  21. 55. THE VALUE OF GOVERNMENT DEBT <ul><li>interpretation </li></ul><ul><li>real debt </li></ul><ul><ul><li>government plan for future tax collections, transfers and expenditures must satisfy the PV budget constraint </li></ul></ul><ul><li>2. nominal debt </li></ul><ul><ul><li>price level is determined by the budget constraint: “fiscal theory of the price level” </li></ul></ul>
  22. 56. IMMIGRATION <ul><li>Idea </li></ul><ul><ul><li>Root cause of the social security imbalance: demographic imbalance </li></ul></ul><ul><ul><li>Logical to think of fix in terms of demographics </li></ul></ul><ul><ul><li>What the system needs: more workers </li></ul></ul><ul><ul><li>How to get them? Let them immigrate </li></ul></ul><ul><li>Advocated by </li></ul><ul><ul><li>Amity Shlaes, Senior Fellow for Economic History at the Council on Foreign Relations </li></ul></ul><ul><ul><ul><li>http://www.cfr.org/bios/7536/amity_shlaes.html </li></ul></ul></ul><ul><ul><ul><li>http://www.bloomberg.com/apps/news?pid=20601039&sid=asNACpWCNPqA </li></ul></ul></ul>
  23. 58. DETAILS OF THE PROPOSAL BY AMITY SHLAES <ul><li>Background </li></ul><ul><ul><li>The promised tax/benefit system is redistributive from high earners to low-earners: Low earners get more in benefits than they pay in the system (in expected PV sense) </li></ul></ul><ul><ul><li>General immigrants are typically lower-skill, lower-earning segment of the workforce. Therefore, simply allowing more immigration will not solve the problem in the long-run, even though it might help in the short-run. </li></ul></ul>
  24. 59. DETAILS OF THE PROPOSAL BY AMITY SHLAES <ul><ul><li>Altering the formula for base pensions to be indexed to the CPI would basically solve the problem, but is politically not feasible </li></ul></ul><ul><ul><li>A compromise idea that has been around: “progressive indexing”: </li></ul></ul><ul><ul><ul><li>index benefits of higher earners to CPI </li></ul></ul></ul><ul><ul><ul><li>index benefits of lower earners to a nominal wage index </li></ul></ul></ul><ul><ul><ul><ul><li>(note that this would increase the progressivity of the system) </li></ul></ul></ul></ul>
  25. 60. DETAILS OF THE PROPOSAL BY AMITY SHLAES <ul><li>Proposal: two-part reform </li></ul><ul><ul><li>Adopt progressive indexing to close part of the gap </li></ul></ul><ul><ul><li>Increase immigration of highly skilled workers </li></ul></ul><ul><li>Politically feasible? </li></ul><ul><ul><ul><li>“ The idea sketched out above has something in it to offend just about everyone. [...] The critics won’t necessarily gain traction, precisely because the country is desperate now. As an alternative to enormous tax increases, welcoming a new crop of engineers starts to look acceptable” </li></ul></ul></ul>
  26. 61. COMMENTS: SIDE EFFECT OF THE PROPOSAL <ul><li>Effects of importing human capital </li></ul><ul><ul><li>“ Brain drain/gain”, once again (one time effect) The immigrating high-skill workers would bring human capital with them which often was created using subsidized education in other countries </li></ul></ul><ul><ul><li>Higher supply of skilled workers would tend to reduce the skilled wage, increase the unskilled wage and reduce the skill premium. (Permanent effect) </li></ul></ul><ul><ul><li>Spillover effects Increasing average human capital in the US, would increase the productivity of existing workers, including both high-skill and low-skill workers. (Permanent effect) </li></ul></ul>
  27. 62. COMMENTS: SIDE EFFECT OF THE PROPOSAL <ul><li>Health care </li></ul><ul><ul><li>One type of highly skilled workers whose services will also be in high demand: doctors and other health professionals </li></ul></ul><ul><ul><li>Without immigration in these fields, real wages in health care can be expected to rise faster than the average real wage. </li></ul></ul><ul><li>Housing market </li></ul><ul><ul><li>Increase in the population, especially high-earner population would increase demand for housing and prop up housing prices </li></ul></ul><ul><ul><li>Higher housing values would help retirees who own their house and could reverse-mortgage it. </li></ul></ul>

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