Wednesday, June 22, 2005

Vox Baby Lectures Congress

Dartmouth economist Andrew Samwick holds class in Washington DC:

The default outcome if we do nothing today is to wait until the fiscal consequences of running the current system with a retired population of Baby Boomers become unmanageable. ....When that day of reckoning occurs, it will likely involve a combination of benefit cuts, tax increases, and delays in the retirement age, as in the 1983 amendments. However, unlike 1983, these changes will have to happen in greater measure and with more immediacy. We will have squandered the opportunity to envision a more modern system that relies less heavily on pay-as-you-go financing. We will have done nothing to prepare new retirees for their lower retirement incomes. And, worst of all, we will impose a tax burden on our children’s generation that, with full knowledge of its likely appearance, we will have refused to address ourselves today. I wouldn’t blame them if they refused to pay, or, if in the face of these higher taxes, they simply decided to work less.

.... the driving force behind the projected deterioration in Social Security’s finances is an increase in the number of beneficiaries relative to the number of workers. Between 2005 and 2080, the number of beneficiaries per hundred workers is projected to rise from 30 to 54, an increase of 80 percent. Over that same period, Social Security’s cost rate—the amount of benefits relative to the payroll tax base—is projected to increase from 11.1 percent to 19.1 percent, an increase of about 72 percent.

.... Consider what happens if we wait to act. In 2005, the Trustees Report tells us that we have unfunded obligations (over the infinite horizon, not just the next 75 years) that are equal to about 90 percent of GDP. Those unfunded obligations could be eliminated by raising the payroll tax by 3.5 percentage points, immediately and forever (and ignoring the likely declines in economic activity associated with this tax increase). If we were to wait until the Trust Fund is projected to be exhausted in 2041, then we would find ourselves (according to my own rough calculations) with unfunded obligations that are about 140 percent of (a much larger) GDP. Tax increases and benefit cuts would have to be commensurately higher, and all of those who retire in the next 35 years would evade any responsibility for sharing in the burden of those tax increases.

Which is to say, virtually everyone who wants to do nothing but wait to see if something turns up.

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