My October 1 Talk at OLLI

A surprisingly receptive audience reaction to Social Security reform.

Yesterday I gave a talk to the Osher Lifelong Learning Institute (OLLI) at California State University, Monterey Bay (CSUMB). I typically give 2 such talks in the spring and 2 in the fall. This year is no exception. One of the people involved with OLLI suggested last spring that in the fall I give 2 talks on economic issues in the presidential campaign. (The second talk will be on October 8.) With some trepidation, I agreed. Why trepidation? Because I know how even very reasonable people (and the OLLI audience is typically very reasonable) can get spun up about particular candidates.

So what I did early in my presentation was show a slide that said:

Downplay candidates.

Play up issues.

When I showed that slide, I said, “One good reason for doing so is that I find the issues far more interesting than the candidates.” That got a number of heads nodding and a couple of laughs.

I talked at length about federal spending, federal taxes, and the federal budget deficit, showing them some scary figures from the Congressional Budget Office. Then I pointed out that according to the CBO, during the years 2030-34 Social Security spending net of Social Security revenue would add an average of 1.2% of GDP to the annual budget deficit and Medicare spending net of revenue would add 2.4% of GDP net of revenue. So these 2 programs alone would add 3.6% of GDP. That’s over half of the expected deficit as a percent of GDP. If it weren’t for those, we would be in much better shape.

Then I took a deep dive into Social Security to make a few points. The first was what one of FDR’s advisors motives was in setting up Social Security:

W. R. Williamson, an actuarial consultant to the first Social Security Board, stated that Social Security extends Federal income taxes “in a democratic fashion” to the lower-income brackets.

I filled in the background, pointing out that the income tax back then was a “class tax” and that it was only World War II that turned it into a “mass tax.” Surveying the room of about 30 to 35 people, I said that I suspected that none of their counterparts in their part of the income distribution in the mid-1930s would have paid any income tax.

Then I laid out that the fact that Social Security is a Ponzi scheme and was explicitly planned to be a Ponzi scheme.

I showed this quote from comedian Dave Barry:

I say we scrap the current [Social Security] system and replace it with a system wherein you add your name to the bottom of a list, and then you send some money to the person at the top of the list, and then you . . . Oh, wait, that IS our current system.

—Dave Barry, “Election could come down to who kisses most orifice,” Miami Herald, September 24, 2000.

 

Then I quoted Paul Samuelson blessing it as a Ponzi scheme. I quoted from the chapter on Social Security in my 2001 book, The Joy of Freedom: An Economist’s Odyssey:

MIT economist Paul Samuelson added some of the intellectual backing for these policies. “The beauty about social insurance is that it is actuarially [italics Samuelson’s] unsound.” Samuelson’s point was that if real incomes were growing quickly, each generation could get more out of Social Security than it paid in. While its critics attacked Social Security as a Ponzi scheme, Samuelson beat them to the punch in 1967 by blessing it as one. “A growing nation,” wrote Samuelson, “is the greatest Ponzi game ever contrived.”[1]

[1] Samuelson quotes are from Newsweek, February 13, 1967, and are quoted in Derthick, p. 254.

 

Then I quoted Franklin D. Roosevelt laying out how making it a Ponzi scheme would almost certainly guarantee that Social Security would never be abolished:

[T]hose taxes were never a problem of economics. They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions….With those taxes in there, no damn politician can ever scrap my Social Security program.[1]

[1] From Arthur M. Schlesinger, Jr., The Age of Roosevelt, vol. 2, The Coming of the New Deal (Houghton Mifflin, 1959), pp. 309–310, referenced in Martha Derthick, Policymaking for Social Security, Washington, D.C.: Brookings Institution, 1979, p. 230.

Then I showed a picture of my Hoover colleague Mike Boskin and noted that his commission, set up by the U.S. Senate, did a report in December 1996 that argued that the Consumer Price Index overstated annual inflation by 1.1 percentage points. Then I did some math. “If Congress and the President had started in 1998 to set the Cost of Living Adjustment (COLA) at CPI – 1.1 percentage points, in 2033, Social Security benefits would be 32% lower. (Here’s the math: 0.989^35 = 0.68.) The Social Security crisis would have been gone just like that. I then noted that the Bureau of Labor Statistics had made some adjustments in response to Boskin’s commission. Boskin, in an article in my Concise Encyclopedia of Economics, estimated that as a result the CPI overstated inflation by 0.8 to 0.9 percentage points.

So I redid the math: 0.992^35 = 0.75. So Social Security benefits would be 25% lower. Again, the crisis would be gone.

I could tell you other highlights of my talk–there were many. But what I particularly liked was that this audience, at least 85% of whom were receiving Social Security, seemed quite open to this.

It makes sense. Who goes to a class on education, for which there is no certificate? Answer: people who want to be educated.

 

 

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