Senator Joe Lieberman is at it again:
Paul Krugman ('The $600 Billion Man,' column, March 15) claims that when I say that every year we do nothing about Social Security's coming insolvency we add $600 billion in unfunded liabilities, I am 'helping to spread a lie.'
Nonsense. Experts we've consulted at the Social Security Administration have confirmed this estimate.
Everyone knows that Social Security is on a path to insolvency. Every year that we wait to make the program solvent will cost us more.
I know that Mr. Krugman opposes the president's carved-out private savings accounts. So do I. But if we stop there, the victims will be tens of millions of seniors who need Social Security to escape poverty.
As a columnist, Mr. Krugman has the right to just say no. As a lawmaker, I have a responsibility to work with other members of Congress in both parties and with the administration to protect this great program.
And as a Democrat, I feel a special responsibility to preserve one of my party's most effective initiatives ever.
U.S. Senator from Connecticut
Washington, March 16, 2005
I don't doubt that the SSA actuaries "confirmed this estimate" that "every year we do nothing about Social Security's coming insolvency we add $600 billion in unfunded liabilities" to Lieberman's staff. But if Lieberman's staff had continued the conversation a little bit, they might have learned some other things.
- Of the $600 billion, $250 billion is a simple inflation adjustment--the difference between valuing an obligation in 2004-value dollars and valuing the same obligation in 2005-value dollars.
- If we are going to close the Social Security funding gap by cutting benefits in the future, moving the valuation date forward in time raises not just the present value of the unfunded liability but also the present value of benefit cuts in, say, 2080. The same benefit cuts in 2080 and beyond are required to close the gap whether the gap is measured as $10.4 trillion 2004 dollars or as $11.0 trillion 2005 dollars.
- If we are going to close the Social Security funding gap by raising taxes, then what we should compare the present value of the funding gap to is the present value of the tax base. And the present value of the tax base also grows larger as we move the valuation date forward in time. The present value of GDP in 2004 was $867 trillion. The present value of GDP in 2005 will (I think) be higher by $58 trillion--$21 trillion because of the inflation effect on nominal values, $26 trillion because of moving the valuation date forward a year, and an additional $11 trillion because productivity growth in 2004 was faster than the SSA had anticipated and that has implications for the entire forecast path of GDP.
If Lieberman had said, "The SSA projects that each year we delay the present value of the infinite-horizon unfunded Social Security obligation goes up by $600 billion. It also projects that the present value of all of America's future wealth--all future GDP--goes up by $58 trillion," then Paul Krugman would not be complaining. If he had said, "In 2004 the infinite-horizon unfunded Social Security obligation was 1.20% of the present value of GDP. It looks as though in 2005 it will be 1.19% of the present value of GDP," then Paul Krugman would not be complaining.
But Lieberman strips the $600 billion number of the surrounding context needed for it to make sense. That is why he is guilty of spreading a lie. He pretends that $600 billion is the extra economic cost of delaying the Social Security fix for a year, and it is not. What it is is a combination of an inflation adjustment and a valuation-year effect.
The fact that he is so easily snookered into repeating deceptive Republican talking points makes me wish that he would curb his feeling of "responsibility to work with other members of Congress in both parties and with the administration": he's going to get taken to the cleaners.
UPDATE: Let's contrast the phony Republican $600 billion calculation with a different, real one: suppose we wait an extra year before we start fixing the Bush deficits. What are the implications? Well, if we fix the deficit--stabilize the debt-to-GDP ratio--just one year later than we otherwise would, we will have run one extra year of deficits and so boosted the long-run debt-to-GDP ratio by three percentage points. Elmendorf and Mankiw's rule-of-thumb is that $1 of debt reduces annual GDP by $0.07. That means an extra three percentage points of debt-to-GDP reduces GDP by $25 billion: puts us on a new, lower growth path where in each year GDP is $25 billion lower than it would otherwise have been. Capitalize this at a yield of 3.33%, and find that delaying action on the Bush deficit for a year is like imposing a one-time tax of $750 billion on America (offset by the fact that people benefit from the U.S. government's spending and not-taxing $360 billion it doesn't have this year: call it a net cost of $390 billion). This is a *real* economic cost: a reduction in people's wealth and standards of living. It's not the result of an inflation adjustment. It's not the result of choosing a different base-date for making your financial calculations.