Tuesday, January 4, 2011

James K. Galbraith On How Social Security Screws Everyone but the Wealthy

I guess it's lefty week at EPJ, Galbraith writes:
The most dangerous conventional wisdom in the world today is the idea that with an older population, people must work longer and retire with less.

This idea is being used to rationalize cuts in old-age benefits in numerous advanced countries -- most recently in France, and soon in the United States. The cuts are disguised as increases in the minimum retirement age or as increases in the age at which full pensions will be paid.

Such cuts have a perversely powerful logic: "We" are living longer. There are fewer workers to support each elderly person. Therefore "we" should work longer.

But in the first place, "we" are not living longer. Wealthier elderly are; the non-wealthy not so much. Raising the retirement age cuts benefits for those who can't wait to retire and who often won't live long. Meanwhile, richer people with soft jobs work on: For them, it's an easy call.
I have no idea if his comment is accurate. It might very well be, but he doesn't cite a reference. Assuming he is correct, it is just one more reason the near bankrupt SS system needs to be ended.

However, the Galbraith doesn't call for the end to the scheme but instead offers a Keynesian solution:

The answer is obvious. Older people who would like to retire and would do so if they could afford it should get some help. The right step is to reduce, not increase, the full-benefits retirement age. As a rough cut, why not enact a three-year window during which the age for receiving full Social Security benefits would drop to 62 -- providing a voluntary, one-time, grab-it-now bonus for leaving work? Let them go home! With a secure pension and medical care, they will be happier. Young people who need work will be happier. And there will also be more jobs. With pension security, older people will consume services until the end of their lives. They will become, each and every one, an employer.

A proposal like this could transform a miserable jobs picture into a tolerable one, at a single stroke.
The problem with this is that markets clear (including labor markets).

If you remove the obstructions to employment, such as minimum wage laws and unemployment benefits, the unemployment problem disappears pretty fast.  No additional spending is needed. The only thing Galbraith's plan would do is bankrupt the SS system quicker.

The idea that there will be a boost in spending from the retired ignores two other important facts. If money is given to the elderly, it is coming from somewhere and where ever that money comes from represents a drain from the economy. Secondly, it is production not consumption that boosts an economy.

The SS system should be abolished. People should be able to choose their own investment programs, retirement programs, and when they want to retire, given their specific situation.

The Galbraith plan is simply another nutty attempt to micro-managet  the macro economy. It ignores the nature of unemployment and basic cash flow analysis. I mean real basic cash flow analysis, more outflow means declining funds to pay others. At best what is going to happen under Galbraith's plan is that the SS payments lost by the newly retired will find their way into wage payments of others and will be paid into SS by them. Its balance the scheme out from that perspective. But this still means more outflow from the SS from the newly retired, which means a speedier bankruptcy of the system

Bottom line:  The solution isn't to expand or micro-manage the Ponzi scheme, but to end it.


  1. Jamie sure is a man of the 1930s. That was one of the original purposes of Social Security at the time: to get older workers to leave the labor force so that younger workers could get jobs. It was promoted to draw attention away from the failures of New Deal policies that were hindering economic growth and hindering the ability of the labor market to clear.

    The fallacy justifying this is called Lump of Labor. It is based on the assumption that the labor market (and the size of the labor force) is static, so that when one person gets a job, another person must lose one. The idea that a labor force might grow is lost on these people.

  2. James K. Galbraith is a real turd in the intellectual punch bowl. That guy never saw a free market he didn't want to instantly dominate with a rusty government baton.

    He's your standard elitist-- total disdain for and lack of confidence in the abilities of the "poor commoners" he claims to want to help with his interventionist schemes.

    Stupid, evil or both.

  3. How do people this economically ignorant earn the right to be taken seriously as an economist?

  4. Whether old age pensions are financed by social security taxes or general revenue, liberal inclined thinkers - who claim to be especially attuned to inequality and inequity - always seem to look the other way when the income redistribution effects of state financed old age pensions are discussed.

    In most countries, poorer people, at least 'the working poor', start working earlier in their lives and paying taxes earlier than middle and upper class people. They also have shorter lives and thus draw down less from the welfare state in pensions and medicare than their middle and upper class peers.

    It is not clear that these type of programs reduce 'inequality'. They may even increase it. It is probably no coincidence that in most western nations, not just the US, income inequality increased in the forty years from 1970 to 2010. This was also a period when the number of people on old age pensions increased and the relative value of those pensions compared to the average income also increased. The effect is even greater when you calculate in the range of cash and non-cash discounts and benefits pensioners are able to qualify for.

    The distributional impacts of programs of this type are quite significant and there is no reason to simply assume the impact is egalitarian. Liberal inclined thinkers prefer to just think about equality in terms of what tax loopholes billionaires should or should not qualify for and it leave it at that.