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Northwest Plan for Social Security: Policy Proposal? or Benchmark?

by Bruce Webb

Yes. Both. But first a recap. The semi-final version of the basic NW Plan was introduced in this post: NW Plan for a Real Social Security Fix. The spreadsheets linked to that post show that under current projections you can fix Social Security by implementing a 0.20% FICA increase in 2010, another of 0.10% in 2011, followed by a series of 0.20% increases in 2026-2036. The NW Plan doesn’t set those future increases in stone, instead they are tied to a specific trigger, the date that either fund that comprise Social Security falls out of the Trustees primary official test, that of Short Term Actuarial Balance. As it happens DI already failed that test last year which explains the immediate increases for 2010 and 2011. But OAS retains a significant degree of uncertainty. For example even though CBO starts from the same set of demographic assumptions as SSA, their different treatments of the economic numbers result in wide variations between their median outcomes. The CBO projections from Aug 2008 can be seen at the following post Probability and Social Security. The most current SSA projections can be seen in the following figure:

(Update: the above figure is from the 2009 Report, the original post included the version from the 2008 (below). Sorry about that.)

The differences between CBO and SSA are explained in large part by different assumptions and methodology but are also effected by being different snapshots in time, SSA building in data for Q3 and Q4 of calender 2008 and Q1 2009 not available to CBO last summer.

So the Northwest Plan is being worked up as a Policy Plan to be presented to policy analysts and policy makers. But like all batttle plans it is unlikely to escape all effects of contact with the enemy, which in this case is the uncertainty of the projections. What the Northwest Plan does is to close both the Short Term and Long Term actuarial gap under the Trustees most current set of assumptions and definitions and provides a mechanism for adjusting the tax schedule each year in anticipation of events as yet fifteen to twenty years down the road. Rather than revisiting the issue every decade or two it provides for a permanent yet flexible fix that in turn allows us to focus if we wish on other measures that might move that future trigger point farther out in time.

For example if we examine the above graph we see that DI (light gray) has vastly more variation than OAS. Under the NW Plan the light gray line that current intersects with zero in 2025 instead would exit the 75 year window right at 180. But if we examine outcome I we see that line exiting the window at above 2000. Oddly it is politically hazardess for Social Security if its Trust Fund balances remain permanently north of a ratio of 300 or so. If over the next few years it looks like DI is on a course approaching outcome I we would want to divert a portion of the 2010 and 2011 increases, which are under the NW Plan devoted to DI, over to OAS. This in turn would serve to move the trigger point for OAS, perhaps imperceptably, perhaps noticeably. But we don’t have to rely on chance events, lowering future costs for DI is a matter of lowering the incidence of disability or of tightening eligibility. I’ll let Nancy Ortiz speak to the latter, from what I hear if anything the rules are too tight and the administration too disfunctional already. On the other hand it would be useful to focus on the differences between Intermediate Cost (II) assumptions on incidence and Low Cost (I) and then work on ways to achieve improved outcomes. For example it is possible that better enforcement of existing workplace safety law might directly serve to drive down disability generally and hence need for DI and in turn reducing DIs impact on OAS.

In this way the OAS trigger set by the NW Plan for 2026 can be an explicit target for economic policy. Once you change your model from the deterministic one typical of today, “Social Security will go to depletion in year X”, instead we should be thinking “What can we do in 2010 to push that trigger point back, or use it to increase benefits”. In that way the NW Plan frees us to approach Social Security pro-actively rather than passively.

The NW Plan provides a Social Security fix that is at the same time permanent, flexible in the face of events, and modifiable by direct action by policy. It is certainly worth a try.

But the title of the post also says it is a benchmark. How so? Answer below the fold.

On the merits ‘Nothing’ has been shown to be a perfectly sound plan. That is instead of rasing taxes by $1/week as the NW Plan does we could reallocate current FICA between DI and OAS in a way that made their future shortfall and depletion dates congruent and then start trying to move the joint trigger point outwards via economic policy. This would mirror past practice. But ‘Nothing’ is a tough sell, it implies that the people pushing it are in some sort of denial rather than what is the case, that examination of the data shows ‘Nothing’ to be on net a historical proven plan since 1997. But rather than continually rebattling that war we propose the implementation of the NW Plan to at least serve as a benchmark.

Because the NW Plan is scorable, it has numbers that can be checked and against which conclusions can be drawn such as “Yes under Intermediate Cost assumptions the NW Plan would put Social Security into Short and Long Term Actuarial balance at a cost of X dollars in 2010, Y dollars in 2011 and Zetc dollars in years 2026 and following.” Which then allows us to challenge any other plan to match up dollar for dollar. What does their plan cost in the form of foregone benefits or increased taxes in any future year? If it doesn’t actually provide better retirement benefits at a lower cost what are its offsetting advantages that would induce workers to take the deal? Put your numbers on the table and lets compare.

It is one of the striking features of the overall Social Security debate that future impacts for any given year are rarely if ever spelled out. Yes under Intermediate Cost assumptions cash income from taxation falls behind cost in 2017. What does that mean for 2017? or 2023? Yes if we do nothing on Social Security the system will only have projected resources to pay out 75% of benefits in 2037? What does that mean in real terms? Well you never know because the argument always moves form ‘Crisis’ to ‘Benefit cuts’ without anyone pausing to quantify the effects or reflect on alternatives.

Well the Northwest Plan is such an alternative. It provides 100% of the scheduled benefit while maintaining the Trust Funds in actuarial balance through the current 75 year window. Plus it offers a mechanism that allows Social Security to maintain that state over the Infinite Future if you like. Want to wipe $15.3 trillion dollars in unfunded liability off the U.S.’s books tomorrow? Enact the NW Plan.

Of course it will cost you a $1.50 a week by year two. Maybe that is a deal breaker, but at least people need to explain why that shoud be. Over to you all.

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What to do now with $50,000 cash??


A thought for a Sunday’s musing:

If you have USD $50,000 in cash, what do you actually do with the money now? It is probably different by age group, but does one buy Ford at $2/share, swiss francs, some gold?

As writers in newspapers and blogs analyze the state of the economy, what do they really think concerning their own welfare?

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Health care proposals coming


The Washington Post reports that:

Sen. Edward M. Kennedy (D-Mass.) is circulating the outlines of sweeping health-care legislation that would require every American to have insurance and would mandate that employers contribute to workers’ coverage.

The plan in the summary document, provided by two Democrats who do not work for Kennedy, closely resembles extensive changes enacted in the senator’s home state three years ago.

In many respects it adopts the most liberal approaches to health reform being discussed in Washington. Kennedy, for example, embraces a proposal to create a government-sponsored insurance program to compete directly with existing private insurance plans, according to one senior adviser who was not authorized to talk to reporters.

The draft summary also calls for opening Medicaid to those whose incomes are 500 percent of the federal poverty level, or $110,250 a year for a family of four.

President Obama, meanwhile, is urging his most loyal supporters to reactivate the grass-roots machine that helped elect him and direct it toward health-care reform.

“If we don’t get it done this year, we’re not going to get it done,” he said yesterday in a call to members of Organizing for America, the political group formed to advance his agenda. “And to do that we’re going to need all of you to mobilize.”

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Bullet Dodged ?

Robert Waldmann

It may turn out that the value of the Geithner put given to banks in the PPIP will not be huge. Many people including me worried that the legacy loan program was a huge scam, because loans were to be bought with up to 85% of the money a no recourse loan from the FDIC.

When I finally read the Geithner plan fact sheet, I discovered that there are 3 parts of the Geithner plan and that the FDIC was given the tools to protect itself.

The program which involves the FDIC, provides a large no recourse loan to buy pools of loans. The FDIC must approve the pool. The the pool is auctioned, then the FDIC decides how big a loan to make (if any).

The FDIC can (try to) protect its trust fund by not allowing pools with (predictably) huge variance. FDIC bosses do not want to have to go to congress to beg for a top up of the fund (I think that’s putting it mildly).

Now I read that the FDIC is, indeed protecting itself and has no intention of giving its trust fund to banks. Masaccio writes “it turns out the FDIC’s Sheila Bair has a spine and isn’t going to let that happen. “We’ll show you,” say the banks, “we won’t participate.”” OK so Masaccio is a great painter but I don’t know if he is right about the final outcome of the legacy loan portion of the Geithner plan. If he is I will write a post entitled “I Told You So.”

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Paying for Healthcare…a primer of options

by Tom aka Rusty Rustbelt

Paying for Health Care Reform

President Obama’s ambitious health care reform plans may have run into an immovable object – money.

In order to move forward on his plan the President has to find and/or reallocate something on the order of a trillion dollars.

One means of expanding health care coverage while containing health care costs is “efficiency” a fuzzy and hard to predict concept at best, especially while expanding insurance coverage.

Other potential means are been discussed by various constituencies, including:

1)Taxing the rich (also discussed to solve the deficit and other problems)

2)Tax some or all employer-paid health care benefits

3)Tax soda

4)Tax all sorts of “sin” products

5)Broaden the Medicare tax base

6)Cut payer reimbursements, possibly offset by insuring most Americans

7)Create new reimbursement systems for providers, perhaps “outcomes based”

8)Reduce or eliminate the tax sheltering benefits of Flex Savings Arrangements (FSAs)

9)Alter Health Savings Accounts (HSAs)

10)A national value added tax (VAT) or sales tax

Accomplishing this in the midst of a nasty and deep national recession may prove to be difficult if not impossible, but it appears Congress is going to move ahead and give it a try (sources – a couple fo dozen varied news reports).

And then there is another approach – increase the deficit, probably difficult.

Tom aka Rusty Rustbelt

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Drum Debates Drum

Robert Waldmann

Kevin Drum argues that it is a very bad thing that financial firms can pick their regulator

For what it’s worth, I’d say that having a single bank regulator is long overdue. The current structure not only doesn’t make sense, but allows banks to shop around for the most lenient regulator they can find, prompting a race to the regulatory bottom.

In the post immediately below, Drum agrees with Bill Clinton that the Gramm Leach Bliley act was no big deal.

In an interview with Peter Baker, Bill Clinton says that although he regrets not regulating derivatives more strictly, he doesn’t think that repealing the Glass-Steagall Act and allowing commercial banks to merge with investment banks was a big cause of our financial meltdown:

[snip Bill]

I think this is roughly right

huh ? I amplify after the jump.

There is a certain tension, almost cognitive dissonance, between this post and the post below. In the post below, you agree with Bill Clinton that the repeal of Glass-Steagal was no biggie. Here you argue that it is terrible to have competing regulators who are financed by fees paid by regulated firms inevitably causing a race to the bottom.

How did we ever get such an absurd regulatory system which seems to have been conciously designed to prevent actual regulation ? That would be by the repeal of Glass Steagal. The problem isn’t that the barriers between say financial services companies and insurance companies were removed. The problem is that the barriers between the regulators weren’t removed.

Firms could switch from sector to sector and their regulator couldn’t follow them. Back under Glass Steagal a firm couldn’t choose its regulator because it wasn’t allowed into the business of the desired regulator.

To put it another way, the problem with the bill was not that it allowed AIG to set up AIG-Financial products, but that it allowed AIG-FP to find a way to be regulated by the office of thrift supervision.

Oh and I don’t doubt that the regulatory system left by the repeal of Glass Steagal wasn’t deliberately designed to allow a race to the bottom and prevent regulation insofar as that was possible. The chief architect was Phil Gramm who has made it very very clear that he thinks the main problem with regulation is that it exists.

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Brad DeLong Raises the Jolly Roger

Robert Waldmann

This post is an act of solidarity with DeLong’s heroic civil disobedience of absurd intellectual property restrictions. Brad writes (in full Brad. All’s fair with those who ignore “fair use” restrictions).

Jacob Viner (1933), “Balanced Deflation, Inflation, or More Depression”

Perhaps the most important single document with respect to how much the Chicago School of Economics has forgotten over the past seventy-five years–how much less they know now than Irving Fisher or Knut Wicksell did.

As I understand things, Jacob Viner’s estate has rights to this document until 2040, and there is at present no way for me to get permission to legally distribute it. So I think it is time to hoist the jolly roger…

I hoist it too.

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Yield Curve

By Spencer:

The yield curve is strongly positive, and this is getting all kinds of blog comments.

They range from Arnold Kling saying “in my view, this is perfectly rational, and it shows that the short-run effect of the fiscal stimulus is negative”

To Greg Mankiw saying “that it signals future economic growth. In many ways, however, this is an unusual downturn, so it is not entirely clear to what extent historical relationships are a useful guide going forward’

It looks to me like a very normal cyclical development. For example according to this traditional indicator of what drives the yield curve the surprise ought to be that the yield curve is so flat.

I’m inclined to go along with Mankiw on this one and can not understand how this support Kling’s conclusion that this demonstrates that the impact of fiscal stimulous is negative.

After responding in the comments section I thought I would add this chart to demonstrate my point. At the bottom in December the bond market was discounting a deflationary, depression.
Now it is discounting an economic recovery. It is a normal cyclical development.

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Greg Mankiw gets in touch with his Old Keynesian Roots

He decides to consider current income the only determinant of savings.

He writes of Sonia Sottomayer “My grandmother would have been shocked and appalled to see someone who makes so much save so little.”

True and one can understand his grandmother’s total lack of appreciation for the work of Milton Friedman. Professor Mankiw, however, knows better, as is explained in the blog post with the best title ever and by Brad deLong.

Mankiw mentions his theory and I discuss after the jump.

Prof Mankiw

I once wrote a short paper called The Savers-Spenders Theory of Fiscal Policy based on the premise that there are two types of people: Some save and intertemporally optimize their consumption plans, while others live paycheck to paycheck, spending their entire income as soon as it’s received.[…]

Apparently, the new Supreme Court nominee Sonia Sotomayor is an example of the latter. The Washington Post reports that the 54-year-old Sotomayer has a $179,500 yearly salary but

On her financial disclosure report for 2007, she said her only financial holdings were a Citibank checking and savings account, worth $50,000 to $115,000 combined. During the previous four years, the money in the accounts at some points was listed as low as $30,000.

So evidently 50,000= 0. I mean most people not as expert on economics as prof. Mankiw would not consider someone with 50,000 in the bank to beliving from paycheck to paycheck. The fact that her wealth was much lower at some point in the last 4 years means that her consumption does not track her income. The evidence for significan consumption by “spenders” is mostly that income and consumption are more highly correlated than they would be if all people were intertemporal maximizers without budget constraints (excess sensitivity). This is observed in aggregate data in spite of the case of judge Sottomayer whose wealth is not only positive (wouldn’t show up) but variable (uh oh for the we’re all spenders hypothesis of Prof Mankiw’s colleague prof strawman).

In contrast, as explained by Brad DeLong and Nate Silver in the linked posts, it is relatively easy to reconcile the Sottomayer data with the intertemporal utility maximizing hypothesis.

The idea that one can expect a simple relationship between financial wealth and income would not be shockingly inconsistent with modern economic theory if stated by Prof Mankiw’s grandmother, but it is authentically shocking coming from prof. Mankiw.

Now I actually think quite highly of Prof. Mankiw’s work on consumption. I can remember the day I first saw it presented — October 19, 1987. OK click the link and see that I can look up the date not because the brilliance of the talk seered the date into my memory but because the stock market was crashing.

The first I heard of the crash was that Mankiw was describing instruments used to forecast future aggregate income and mentioned the advantage that stock market indices are available every day (then in an aside sometimes every minute) but that they are not good predictors of future income (then in an aside “I guess we should be glad about that today”). Only when the seminar was over did I find out what he was talking about, so I was reassured in advance that the expected income decline conditional on the crash was, according to him, modest. And so it turned out to be, supporting Mankiw’s work on excess volatility of stock markets (both papers with co-author John Campbell).

The Sottomayer episode shows something almost serious I think. Economists don’t take economic theory seriously. We switch from optimizing models to our grandmother’s model to get a blog post out. We certainly switch back and forth from the model in which everyone is rational, markets are complete and competition is perfect depending on the arugment we want to make. Mankiw takes economics very seriously (compared to say Waldmann) yet even he is willing to embrace pre Friedman thinking at the slightest provocation.

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