Two Comments on Matthew Weinzerl’s “Seesaws and Social Security Benefits Indexing”

First:

Let me try to widen the scope of this discussion…

When I think about vehicles to provide retirement-income security…

1. I think that encouraging people to invest in 401(k)s leads them, because of poor financial education, to pay a 2%/year tax on their asset accumulations to Wall Street–a transfer that is 100% a dissipative minus for any utilitarian societal welfare calculation given how rich the princes of Wall Street already are.

2. I think that having firms provide defined-benefit pensions hasn’t worked out that well in the long run: firms do not survive long enough, and if they do along comes Bain Capital to exploit the legal gap between the cash-flow and the control rights of future pension beneficiaries and put the scraps of the mostly-expropriated pension assets to the PBGC.

3. I think that Social Security indexed to prevailing wages provides an extraordinarily efficient way of providing a form of retirement savings that–given the enormous risk premia we see in financial markets–value extremely high. If we were to ask, say, Citicorp here how much it would charge to write a contract matching the return on your Social Security benefits, it would be astronomical. The only major drawback of relying more on Social Security that gives me pause is Marty Feldstein’s long-time worries about the effect of Social Security on national capital accumulation and thus on the level of economy-wide real wages.

Given that the first rule of market economics is that you should do less of what dissipates wealth and more of what creates wealth, I am–as I have long been–somewhat puzzled by the focus here…

And:

When back in 1994 Joe Stiglitz came up with the bright or perhaps not-so-bright idea of proposing changes in the Social Security benefits indexation formula, the key piece was tying changes in Social Security benefits indexation to changes in tax bracket breakpoints. This was both because it made sense to view the social-insurance system as a whole–both taxes and benefits–and as a way to assemble a proposal that would make it past the multiple veto points of our eighteenth-century mechanistic orrery of a governmental system and also increase utilitarian societal welfare. So if I may channel Joe Stiglitz, I think he would say that there ought, somewhere, to be a wealth tax component to this proposal somewhere. If there were, what would it be?

Matthew Weinzerl: Seesaws and Social Security Benefits Indexing: “The indexation of Social Security benefit payments…

…may seem like an issue about which only an economist could get excited, but it has emerged in recent years as a áashpoint of debate in the United States. In his 2014 budget, President Obama proposed changing the price index with which retiree benefits are adjusted for inflation. In brief, the change was expected to lower the growth rate of benefits for all retirees, though at advanced ages that change would have been offset by progressive “benefit enhancements.” Because it was not tied to an increase in the starting level of those benefits, the Presidentís proposal was expected to reduce the total present value of benefits. The President’s proposal was explicitly intended to appeal to Congressional Republicans eager to reduce future spending on Social Security, but it was deeply unpopular with many of his fellow Democrats. When negotiations on more general fiscal policy challenges yielded little progress over the subsequent year, the President removed the proposal from his 2015 budget. His spokesperson made clear, however, that changes to indexation were still on the table if included in broader budget deals…