Krugman on Social Security
Paul Krugman was a professor of economics at MIT, and he now works at Princeton. One of the themes of his writing is that because most government spending is efficient and popular, attempts to trim the size of the state are misguided. In the last few months, he’s taken a break from criticizing the war in Iraq to write almost exclusively about social security. It’s worth examining what he’s said, so that The Tech can help counterbalance whatever influence the New York Times has on national opinion.
Proponents and opponents of privatization agree on these basics: by instituting a pension plan program, the government has made promises to pay individuals during retirement, funded by taxes on labor. The program has promised to pay out $10 trillion (in present value) more than it will receive in the future. The only questions now on the table are the following. How should we pay that debt? This is a question of efficient public finance. This is the question Krugman discusses almost exclusively, berating the Bush administration for their plan to borrow the needed funds. The other question is, given that we need a national retirement plan, how should we structure it? Hopefully, everyone can agree that a plan that promises to pay $10 trillion more than its revenue is not a good plan. Krugman never discusses this topic and fails to note that the Bush plan solves this structural problem. Let’s look at Krugman’s thoughts, column by column, on this topic.
On Dec. 7, Krugman returned early from sabbatical to begin writing about social security. Here, he proposed a means of public finance for our debt, saying that new taxes of about a half percent of GDP would save social security for another century or so. But more taxes don’t address the structural problems with the program, they just prolong its life and invite problems later. Krugman helpfully reminded us here that this cost is a bit “less than we’re currently spending in Iraq,” as if this is to be of comfort.
On Dec. 10, Krugman complained that the Bush plan would have the government borrow money to pay for current retiree costs. If people were allowed to divert their payroll taxes into private accounts, there would be less money available to pay current retirees. Recalling our initial framework, his complaint is about that first question -- that such borrowing would be inefficient public finance. He forgot the second question. The Bush plan would make it impossible for the government to accumulate such debts in the future.
On Dec. 17, Krugman took a shotgun survey of other countries’ experience with privatization, and on Jan. 14, he wrote in more depth about the British experience. The major newspapers have made this comparative analysis repeatedly, and depending on who’s writing the article, one can think privatization is a recipe for disaster or an economic miracle cure. Here, Krugman paints a picture of economic disaster. Unfortunately, Krugman’s position here -- that it is theoretically impossible for individuals to save money now to spend later -- is just not tenable.
On Jan. 4, 2005, Krugman made the case that social security is stronger than we give it credit for, since it has a trust fund that will last until 2042, because social security taxes have generated revenue in excess of expenses. Krugman really leaves the realm of candid debate here. The government doesn’t save the money given it in payroll taxes for our retirement. It’s spent as if it was general income. Remember all of those massive surpluses that we had during the Clinton years? If the money from social security taxes had been set aside for retirement instead of counted as general revenue, those surpluses would have been deficits. Clinton only ran surpluses by robbing our retirement accounts. (He’s not alone. Everyone does it, G.W.B. included.) Krugman punts on this point, declaring that the government will pay back the money spent, somehow. Yet again, this is a question of efficient public finance, not program structure.
On Jan. 7, Krugman took a break to write about how much he doesn’t like Republicans in general, from Alberto Gonzales to Don Rumsfeld.
On Jan. 21, he resumed discussion of social security, repeating the complaint that borrowing money to pay transition costs is inefficient public finance. In this column, he noted that some privatizers propose to raise taxes to pay transition costs, and characterizes that idea as absurd, saying that it is wishing for “large sums [of money to be] shipped in from an undisclosed location.” The irony is that in most of his other columns, he himself proposes to raise taxes to pay for social security debts. Again, he ignores the fact that privatization fixes the structure of a retirement system, leaving citizens with assets instead of spending promises.
On Jan. 25, Krugman attacked Alan Greenspan, one of the best guardians of the Federal Reserve in history, as a “Bush yes-man” for his belief that lower taxes coupled with less government spending is a good idea. On Feb. 1, he contended that stock market growth will not be high enough to make a private scheme viable. If the economy and stock market aren’t growing enough to support a private retirement scheme, then there’s not enough growth to support a public one. Then, taxes need be continually raised to keep paying retirees; this is what Krugman and defenders of the current system essentially propose. Taking this path puts the nation on a downward spiral: higher taxes slow future economic growth, necessitating even higher taxes to pay retirees. It’s a recipe for the economic decline of the West and is currently underway here and in Europe.
On Jan. 28, Krugman takes time to discuss race and retirement. A system with personal accounts means that if you die, you can bequeath the account you have saved. Privatizers point out that since black people have a shorter average lifespan than whites, they get the short end of the stick, paying taxes all their lives but receiving fewer benefits. Krugman says that blacks generally get about two fewer years of life in retirement than whites. Two years isn’t that much, he says, so blacks are fine under the current system.
On Feb. 4, Krugman attacks the privatized system because it has no net effect on social security finances if returns on private accounts are only three percent, a lower estimate than anyone (including Krugman) makes. Because there might be a net neutral effect, he says, we shouldn’t privatize. Here, he calls social security “America’s most successful government program.” This is a program that has promised people $10 trillion more than it will receive in revenue. Standards for success must be different at Princeton.
After all of this, Krugman’s sole coherent complaint is that the financing measures proposed to pay social security debt are the wrong ones. But on Mar. 1, Krugman made a new complaint: even if we raise taxes, he says, we shouldn’t have private accounts, because that would do nothing to help with the costs of Medicaid and the budget deficit. These are both incorrect, since having private accounts would constrain future deficits, and an irrelevant conflation, like saying that putting out a fire won’t fix our broken leg. Both are things we should do.
Because he opposes borrowing, Krugman’s position is necessarily that debt should be paid not later, with efficient public finance, but now, with the highly regressive social security tax, which falls disproportionately on the working poor. Never does he discuss how we should design a national retirement system, making his analysis unacceptably incomplete, regardless of the reader’s political persuasion. Krugman once said that when trying to explain a policy or idea, a good method is to “find an influential person who is saying something quite silly because he does not grasp the idea.” On that final point, perhaps he’s right.