Glenn Hubbard: why do we need Social Security?
May 4, 2013 10:00 PM   Subscribe

Boom, Bust, or What? Larry Summers and Glenn Hubbard Square Off on Our Economic Future. Planet Money's Adam Davidson profiles Glenn Hubbard (chair of the Council of Economic Advisors under George W. Bush, and advisor to Romney) and Lawrence Summers (Treasury Secretary under Clinton, and director of the National Economic Council under Obama). After talking to them one-on-one for several months, he gets them together in the same room.
Hubbard suggested turning Social Security and Medicare into smaller programs that help “the least well off among us.” With smaller social-insurance programs, the government can prevent tax increases and shrink the debt burden. That, he said, would lead to broad economic growth.
As he spoke, I began seeing the arc in my mind: a young boy grows up in Central Florida reading Hayek, charts Social Security’s distortions in graduate school and eventually argues to overturn the system. Hubbard would go on to become the architect of George W. Bush’s famous tax cuts, which slashed taxation on dividends and capital gains. His views all seemed to coalesce around a fairly simple idea: the U.S. economy is better off when the government gets out of the way. Cutting the entitle­ment programs was an extension of this. It could free up more capital to further enable virtually everyone to contribute to the economy.

Summers’s worldview seemed to take into account more moving pieces. “It would surely be better to address long-run fiscal issues sooner rather than later,” he said. “But this needs to be done in a balanced way. The highest priority is getting the economy growing.”

... [Summers] had told me that if tax rates were so dominant in determining economic health, “it wouldn’t be the case that the economy grew fastest when top tax rates were highest.” After all, the U.S. economy did grow quite quickly in the 1950s and 1960s when top tax rates were far higher (income tax was once as high as 91 percent). Lowering taxes on the rich and cutting benefits to the middle class, he said, could also have the opposite of Hubbard’s intended effect. Ambitious middle-class people might see no point in taking risks, fearing that the fix was in and that only the rich could get richer. At some point, Summers became emotional in his defense. He told me that Social Security and Medicare were among the best things about America. They took the group of people that were most vulnerable in our society — the elderly — and made them secure. “Why would you want to get rid of that?” Summers asked rhetorically.
Why not replace Social Security for the middle class with private savings, perhaps by expanding 401(k) accounts?

Matthew Yglesias: It's a 401(k) world, and it sucks.
Here's the essential shape of 401(k) as a backbone of the retirement system:

— Poor people get absolutely nothing.

— Wealthy people who would have had large savings anyway get a nice tax cut that offers no meaningful incentive effect.

— For people in the middle, the quantity of subsidy you receive is linked to the marginal tax rate you pay—in other words, it's inverse to need.

— A small minority of middle-class people manage to file the paperwork to save an adequate amount and then select a prudent low-fee, broadly diversified fund as their savings vehicle.

— Most middle-class savers end up either undersaving, overtrading, investing in excessively high-fee vehicles or some combination of the three.

— A small number of highly compensated folks now have lucrative careers offering bad investment products to a middle-class mass market based on their ability to swindle people.

Congratulations, America!
Brad Plumer: The case for expanding Social Security, not cutting it. ... a big new report (pdf) from the New America Foundation suggests that the conventional wisdom is exactly backward. Congress should be looking at ways to expand Social Security, not shrink it — particularly at a time when traditional corporate pensions are disappearing, and 401(k)s have proved fairly risky.

Meanwhile in Canada: the Canada Pension Plan is working well (it was put on an actuarially sound basis about 20 years ago), and there's also proposals to expand it (pdf).
posted by russilwvong (45 comments total) 30 users marked this as a favorite
Every public policy the Republicans advocate has as its goal increasing risk for ordinary people.

Taking away your Social Security is only part of it.
posted by AsYouKnow Bob at 10:39 PM on May 4, 2013 [19 favorites]

I suspect no version of this plan involves my ever seeing any of the money I've paid into it over the years.

This, by the way, is the basis of the only retort that ever makes a dent in any of the talk radio marching morons I know who parrot everything they hear about "cutting entitlements": "I've been paying into the social security system all my life. No way you fucknuts are going to take it away from me." Shuts them right down; they actually never thought of that. Hardly surprising since they never actually think of anything for themselves. Once in a blue moon one has the presence of mind to say "it's insolvent, it wont be there for you anyway". To which I reply "if it is we need to fix that. No way I'm going to sit still and be robbed of it."
posted by George_Spiggott at 10:55 PM on May 4, 2013 [18 favorites]

You've already been robbed of it George_Spiggott. All that money you paid in is gone. The question is really if we intend to perpetuate the same fraud on our children as our parents pulled on us.
posted by three blind mice at 11:18 PM on May 4, 2013 [1 favorite]

Shit, are you seriously telling me they sneaked onto the washington mall in the middle of the night, dug up the box that had all our Social Security cash in it and spent it? Well god damn it.
posted by George_Spiggott at 11:37 PM on May 4, 2013 [7 favorites]

Social Security would be solvent until the heat-death of the universe IF the ceiling on deductions is raised.

This simple solution is never, ever discussed or even mentioned in public as a possibility. It's never even acknowledged as a option.
posted by AsYouKnow Bob at 11:41 PM on May 4, 2013 [42 favorites]

It's gotten to the point where conservative economists should say "...and I want a pony" at the end of every pitch for one of their ideas.
posted by dry white toast at 11:41 PM on May 4, 2013 [4 favorites]


I will always be amazed at how people like these two can be so spectacularly wrong about almost everything yet be held in such high esteem by an organization like the New York Times because they have climbed to the top of their respective fields. Robert McNamara anyone?

And just in case Hubbard's name doesn't ring a bell, here he is at his finest.
posted by Phlegmco(tm) at 11:44 PM on May 4, 2013 [7 favorites]

By the 1940s, he said, the sport had become boring, dominated by extremely tall players who planted themselves next to the rim. Then a Columbia University graduate student who also coached basketball wrote a Ph.D. dissertation arguing that the game could be saved by innovations, like the 3-point shot, which created an incentive to move action away from the hoop. It took decades for the N.B.A. to adopt the 3-pointer, but since its implementation, it has helped make basketball one of the most popular and lucrative sports on earth.

The U.S. economy, in other words, desperately needs to find its own 3-point shot.

Moreso than that, the U.S. needs to stop letting short people climb a stepladder next to the rim and insist that they are extremely tall.
posted by The Notorious SRD at 11:46 PM on May 4, 2013 [16 favorites]

Basically the canard is "the money is all gone" because the government has to print the checks and there's no vault made of stolen Fort Knox gold full of $1,000 bills with a big SOCIAL SECURITY diamond-studded sign flashing above it. It's only guaranteed by the most powerful largest institution ever, the same standard-bearer for the AAA rating which admittedly has been abused by ratings agencies but not so far to my knowledge by the government.

Basically we increase the burden slightly more on the people who benefit most from the institution of government, who use its court systems and lobby its legislators and take all manner of incentives and subsidies and grants and profit handsomely on enormous R&D projects that are practically given away at the taxpayer's dime.

Social security was created precisely to skim money off the top in a world where the most powerful people get a cut of the action at every single turn, externalizing risks so often on the collective commons, imposing huge environmental devastation and cleanup costs; we complain about the notion of taxing money at every transaction and yet subsidize transaction fees to bazillionaire companies like Chase even when paying cash, and yearn to attain a high numeric rating that determines how much debt we can get into, and perversely, how much more we should be ravaged by interest due to our unfortunate financial situation.

People speak of these programs in such abstractions and worry about the impact on the deficit or inflation or what have you, and yet so often they are the ones who insist that even if global warming / disastrous climate change / whatever is a real problem (!!), we'll find a way out of it. So far we've kept this going and real people are eking it out instead of starving or suffering in their old age. Yes, they didn't pay enough into it, the boomers, and the solution is not to throw the baby out and drink the bathwater.
posted by lordaych at 11:47 PM on May 4, 2013 [21 favorites]

The question is really if we intend to perpetuate the same fraud on our children as our parents pulled on us.

You have no idea how a society works.
posted by benito.strauss at 11:48 PM on May 4, 2013 [16 favorites]

Also can we get a Glass, Steagal, and Nash reunion tour 2013 or 2014 is OK too, plz
posted by lordaych at 11:52 PM on May 4, 2013 [5 favorites]

Fraud? Taking all those payments into Social Security and then not paying off sounds more like fraud to me.
If you recall, George Bush was for 'privatizing' Everyone's SS by investing in the stack market. Then came the crash, the latest of many. The market is no place for small investors.
posted by Cranberry at 11:52 PM on May 4, 2013 [4 favorites]

Also, I think we could probably find 50 or so legal arguments for upping the ante on any sort of "Social Security CRISIS!" news cycle and frame it as a national security issue, pay a bunch of Nate Silver-like genius people to estimate how much we've been collectively drained as a society by offshore banking accounts and enormous loopholes that are too undeniably absurdly exploitable to be even overlooked in the slightest...and get the NSA and CIA to just magically make that money come back over here. But I'm no economics expert and suspect it would just destroy the value of the dollar unless we started manufacturing a butt-load of cool stuff and sold the shit out of it all over the world and then made the offshore money rain all over the world, and then the Vulcans will impatiently meet us instead of waiting out the WWIV thing.
posted by lordaych at 11:55 PM on May 4, 2013 [1 favorite]

We may have been better off if the other Glenn Hubbard was advising people on economics.
posted by MoonOrb at 12:09 AM on May 5, 2013

Guys like Hubbard don't provide advice. They provide the cover story.
posted by notyou at 12:18 AM on May 5, 2013 [10 favorites]

I suspect no version of this plan involves my ever seeing any of the money I've paid into it over the years.

How about you DO get back the money you put in, but only if you volunteer to die at the age you were expecting to die when you put the money in? That's the deal you signed up for, right?
posted by alasdair at 12:20 AM on May 5, 2013

Huh? Seriously, do I or anyone else need to say any of the following, let alone all of it? 1) The eligibility age can be raised with life expectancy. It has been raised before. This has the effect of increasing the working life contribution period as well as mitigating a statistical increase of the entitlement term. 2) A given amount -- assuming we're even talking about a fixed amount, which by the way nobody is -- can be disbursed in larger or smaller checks depending on the expected term. 3) The deal was in place when i started working. It was not negotiable. 4) What are you talking about, "volunteering to die?" Please name a social contract anywhere in the world that involves anything resembling this outside of speculative fiction, fables and straw man arguments.
posted by George_Spiggott at 12:43 AM on May 5, 2013 [5 favorites]

I can't say what the economy needs, but more stupid and reductive metaphors to mis-explain it surely don't help
posted by Joey Michaels at 12:53 AM on May 5, 2013 [1 favorite]

Alasdair, that sounds like a great deal as I'm not expecting to die at any age.
posted by biffa at 1:04 AM on May 5, 2013 [1 favorite]

SS is in great shape. The trust fund is fine. Just raise the cap on contributions and it'll be fine indefinitely.

There is no need to raise the retirement age. The bit about the average life expectancy having gone up since thr 30s is a non sequitur, as anyone who reads Krugman or DeLong even semi-regularly should know.
posted by professor plum with a rope at 1:06 AM on May 5, 2013 [14 favorites]

"the architect of George W. Bush’s famous tax cuts" is advising how to REDUCE the National Debt? No act in American History has done more to INCREASE the National Debt than the Bush Tax Cuts. Talk about financial fraud.
posted by oneswellfoop at 1:18 AM on May 5, 2013 [19 favorites]

How about you DO get back the money you put in, but only if you volunteer to die at the age you were expecting to die when you put the money in? That's the deal you signed up for, right?

I've always expected science will come up with a way to make me immortal.
posted by Drinky Die at 1:38 AM on May 5, 2013

he argued, our culprits are myopic politicians who are creating a middle-class entitlement state.
When clearly what's needed is strengthening the upper-class entitlement state.
posted by Mario Speedwagon at 1:44 AM on May 5, 2013 [4 favorites]

"The bit about the average life expectancy having gone up since thr 30s is a non sequitur, as anyone who reads Krugman or DeLong even semi-regularly should know."

No need to be cryptic about it. It's a very wrong argument because life expectancy is strongly affected by infant mortality rates. When you have babies dying, it brings down the average age of death quite a bit. And almost all of the increase in US life expectancy since the establishment of Social Security has come from lowered infant mortality.

A better measure is life expectancy at adulthood, or, better yet, life expectancy post-60. And both of those have increased only a few years. Furthermore, that increase has been quite uneven, with most of the gains among the more well-off population with almost no gain for the poor ... the group for whom Social Security Retirement is most important. Finally, that group, the working poor, also disproportionately includes people who have difficult, manual labor jobs for whom increasing the retirement age is far from a trivial matter.

In short, the argument for raising the SS benefit age on the basis of increased life expectancy is a marvel of malignant, privileged, right-wing disinformation. It's founded upon an intentional confusion that relies upon widespread ignorance, it takes as its standard model the educated, white-collar class for whom SS benefits are much less crucial, and the policy it advocates would disproportionately and badly affect poor people...

...and huge swaths of the media and those inside the beltway, on both sides of the aisle, swallow this bunk whole and believe that it's a hallmark policy of those who are or want to be credible and responsible on entitlements and debt.
posted by Ivan Fyodorovich at 2:32 AM on May 5, 2013 [50 favorites]

George_Spiggot: Huh? ... The eligibility age can be raised with life expectancy.

I completely agree. However, you may be unaware ("Huh?") that raising the eligibility age for age-related welfare payments is usually bitterly resisted by people who typically say things like "I've been paying into the social security system all my life". Check the AARP website, for example.

You didn't say such a thing, though, so my apologies.

I would point out that raising eligibility ages is harder on poor men, who typically exit the workforce much earlier - in their fifties, generally. So it's not a simple solution.

I think "dying" is an implicit part of the "pension" system, yes. The flip comments about living forever are a good example: if we had a drug that cured dying, do you think we'd still have pensions in their current form?
posted by alasdair at 2:34 AM on May 5, 2013 [1 favorite]

Both poor men and poor women are highly likely to be at least marginally disabled and to work despite that fact past the point when they can physically handle it.
I actually think the age needs to be lowered and the cap needs to be raised.
posted by Katjusa Roquette at 2:38 AM on May 5, 2013 [8 favorites]

Just because people are alive doesn't mean that they're able to be gainfully employed. Especially if you're in a blue collar career that needs hard physical labor every day. My dad had to essentially retire from being a mechanic at around 55 because his body just couldn't take it any more. My mom was better off since she had an office job but just barely made it to retirement at 65 before her memory issues (that turned out to be vascular dementia) made it impossible for her to keep working.
posted by octothorpe at 2:48 AM on May 5, 2013 [3 favorites]

And just in case Hubbard's name doesn't ring a bell, here he is at his finest.

Yes, the Hubbard described in the FA as "a mild and genial man".
posted by daveje at 3:00 AM on May 5, 2013

There are 2 options for improving the economy (on paper):
1. Help everyone be better off by a little
2. Help a very few receive obscene amounts of money.

Either way the numbers show an "improvement".

The republicans seem to favour #2, and the democrats seem to favor supporting the republicans in whatever they want.
posted by blue_beetle at 5:12 AM on May 5, 2013 [2 favorites]

stooge vs stooge in an article written by a shill. we all lose:
He told me that my fantasy — one big, bipartisan solution — is common these days. Given the current circumstances, though, any reform to our economic system will have to be incremental and ultimately unsatisfying to all of those clamoring on the left and the right for significant change.
The only possibility is to make cuts to social security in exchange for rearranging the loopholes in the tax code. Yup.
posted by at 5:12 AM on May 5, 2013 [4 favorites]

I think we should lower the social security eliglibity age to 18 and call it a basic income. But also eliminate the implicit means-testing that takes away a part of your benefit if you continue to work.

Since you asked.
posted by anotherpanacea at 5:31 AM on May 5, 2013 [4 favorites]

Even with present day ss benefits there are many, many elderly not making it.
I sometimes wonder if a certain economic class in this country doesn't do a bit of a jig every time they learn of a destitute senior taking his/her own life.
posted by notreally at 5:43 AM on May 5, 2013 [1 favorite]

Social Security draws so much interest and ire because it represents the last great pool of cash in government the private sector hasn't been able to lower their siphons into. All contributions are either paid directly to recipients or are invested in special securities that can only be traded between Treasury and the SSA. Even worse, the entire plan runs with around a 1% administrative overhead meaning that 99% of the funds are tantalizingly just out of reach...
posted by jim in austin at 5:46 AM on May 5, 2013 [24 favorites]

if we had a drug that cured dying, do you think we'd still have pensions in their current form?

Assuming such a thing actually cured aging and didn't just allow people to gradually turn into conscious mummies (in which case I'm fairly sure almost no one would take it), the changes to our society would be so profound that the question of retirement age would be the least of our concerns, so it's not even a thought experiment worth entertaining, especially since it's very unlikely to happen.
posted by Steely-eyed Missile Man at 7:26 AM on May 5, 2013 [1 favorite]

The 401(k) system is badly flawed. It is a government subsidy that primarily benefits high income people. Even at that, it funnels a high percentage of savings into the pockets of Wall Street, robbing savers of their retirement.

It would be better to eliminate the 401(k) entirely, save the $120 billion annual government subsidy, and spend it on an expanded Social Security.
posted by JackFlash at 8:49 AM on May 5, 2013 [4 favorites]

First, Glen Hubbard have you no shame? He should have his quotes about credit derivatives enhancing financial stability (writing whatever crap in lofty journals that would provide a fat consulting contract) tattooed across his big stupid forehead. Shitheels like that make me yearn for a stand at the barricades and heads on pikes.

Second, I can see the need for the age adjustment for receiving social security, but as mentioned up thread what to do with folks that do physical labor? My ex-husband is heading in to his late fifties working in the trades and he says it's brutal. His breakfast always includes ibuprofen and he's had one hip replaced already. He just came off a period of a six day a week push on a mostly outdoor construction site, dawn to dusk. Yes, you can make some money, but there's weeks you're off or times the job is called due to weather. And he's fairly well paid, around $70K a year, what then for the folks that make half that at non-union gigs? There are only so many openings for Walmart greeters.

Also, in the eighties his union decided to drop the pension plan in favor of a 401K plan. There are very few pension plans left in the private sector, just stupid 401K's that invested in those lovely derivatives.
posted by readery at 8:50 AM on May 5, 2013 [2 favorites]

Hubbard suggested turning Social Security and Medicare into smaller programs that help “the least well off among us.” With smaller social-insurance programs, the government can prevent tax increases and shrink the debt burden. That, he said, would lead to broad economic growth.

Refresh my memory, what happened to welfare in the '90s, under a Democratic president no less?

Turning Social Security -- which has hardly any funding problem, thank you very much -- into a welfare program would just make it that much easier to kill entirely.

Republicans have been against the New Deal since, well, the New Deal era. Why should we presume at all that they're interested in "preserving" it, or that their proposals ostensibly to do so are made in good faith?
posted by Gelatin at 9:03 AM on May 5, 2013 [3 favorites]

A New York Times profile of Hubbard, from October 2012: Glenn Hubbard is Mitt Romney's Go-To Economist.
To the job of in-house economist, Mr. Hubbard brings a rare ability to translate complex policy into plain English, as well as a conservative’s love for small government and a faith that cutting taxes will spur growth. During a stint as chairman of the Council of Economic Advisers for President George W. Bush, from 2001 to 2003, Mr. Hubbard was known as the principal architect of the Bush tax cuts.
From the viewpoint of a technocrat like Summers, the problem with this "faith" is that there's no hard evidence that cutting tax rates will boost growth. It sounds similar to the popular crank doctrine known as supply-side economics. I don't think Hubbard would be considered a supply-sider himself, but it sounds like he's at least sympathetic to their arguments.

Jonathan Chait, December 2001: Let Them Eat Rates.
[Lawrence] Lindsey believes in supply-side economics—--which is a hard faith to sustain without a deep, almost religious, resolve. Supply-siders hew to a distinct view of the world, according to which people are extraordinarily responsive to tax rates. Since high tax rates serve to massively discourage work and innovation, they say, it naturally follows that tax cuts can have enormously positive economic results. Supply-side economics gets its name from the fact that its adherents more or less disregard any consideration of demand in the economy—--whether consumers are able and willing to buy goods—--and focus entirely on the willingness of producers to supply them. This leads to tax cuts—--which make it cheaper for producers to supply--—as the all-purpose solution.
Chait: "Supply-siders think tax cuts are the proper response to any circumstance--—fast growth, slow growth, depression, high humidity, or alien invasion."

A 1996 article by Krugman: Supply-Side Virus Strikes Again.

From the current article:
At moments, Summers seemed close to exasperated. “I don’t think Bill Gates, in his garage, was calculating his marginal tax rate,” Summers told me, before referring back to sustained growth during the 1950s and 1960s. “There is no serious statistical evidence in support of the view that tax rates at current levels have a major disincentive effect on economic growth,” he said. He suggested, pointedly, comparing the rapid economic growth during the Clinton years with the comparatively worse performance of the post-tax-cut Bush period.
posted by russilwvong at 10:46 AM on May 5, 2013 [4 favorites]

Matt Taibibi (via Brad DeLong): Glenn Hubbard, Leading Academic and Mitt Romney Advisor, Took $1200 an Hour to Be Countrywide's Expert Witness.
Anyone who's seen the movie Inside Job will recall the stupendously angering scene in which Hubbard pissily snaps at his interviewer for asking about his outside relationships with the financial services industry....

"This isn't a deposition, sir," he hissed. "I was polite enough to give you time, foolishly I now see. Give it your best shot."

Again, there's just nothing like karma. If your answer to a perfectly sensible question is going to be, "Screw you, this isn't a deposition," exactly how long do you think it'll be before you end up actually getting deposed? And forced to answer, under oath, just how much your opinions cost?

A couple of years, as it turns out.

Hidden among the reams of material recently filed in connection with the lawsuit of monoline insurer MBIA against Bank of America and Countrywide is a deposition of none other than Columbia University's Glenn Hubbard [from July 2012]. And boy, is it a wild deposition. It's like Inside Job, only Hubbard has to answer the questions he doesn't want to answer. Reading it is like watching a man try to avoid breathing in a gas chamber.
Taibibi provides some highlights, but the whole 307-page transcript is available. The deposition was six and a half hours.
posted by russilwvong at 10:53 AM on May 5, 2013 [8 favorites]

three blind mice: The question is really if we intend to perpetuate the same fraud on our children as our parents pulled on us.

This is the "pay-as-you-go is a Ponzi scheme" argument. The answer isn't to get rid of defined pensions, it's to make the program actuarially stable instead of using pay-as-you-go. Again, see the Canada Pension Plan.

Why should the government be in the business of providing a defined-benefit pension in the first place? There's a simple reason: The government is far more efficient at providing social insurance than the private sector.

Back in the mid-1990s, the Canadian Department of Finance looked at whether the Canadian Pension Plan (the equivalent of Social Security) should be changed to a privatized system, a 401(k)-style system of individual accounts. After surveying the experience of different countries, they concluded that the answer was no. See Steven James, A Public versus a Private Canada Pension Plan: A Survey of the Economics, Working Paper 97-04, June 1997.

The key advantage of a universal public system is that it overcomes the problem of adverse selection. In a private system, you can provide a guaranteed income for as long as you live by purchasing an annuity; this protects you from the risk of outliving your savings. But only people who expect to live a long time are likely to buy them. This means that the pool of annuity-holders will be high-risk, and it makes annuities very expensive. According to an economist friend, buying an annuity from a Canadian insurance policy costs three times what it costs the Canadian government to provide the same benefit.

The reason is that the government can spread the risk of people outliving their savings across the entire population, by requiring universal coverage.
posted by russilwvong at 11:11 AM on May 5, 2013 [4 favorites]

The answer isn't to get rid of defined pensions, it's to make the program actuarially stable instead of using pay-as-you-go.

On a long timescale, macroeconomically, there is very little difference between pay as you go and saving the money. Money goes into the system, money comes out. Whether the money sits in a vault for 40 years doesn't really make a difference.

Pay as you go has the added advantage of more or less dealing with inflation. If my grandfather had the option of saving all his SS contributions in an account over his working life, he would have run out of money a long time ago. But because the people paying for his benefits are contributing based on today's CPI, his benefits are sufficient to keep him fed and housed. If he were required to try and live on 13% of what he was making in 1984, it would never work.
posted by gjc at 11:44 AM on May 5, 2013 [1 favorite]

gjc: Pay as you go has the added advantage of more or less dealing with inflation.

Actually, I think that's a separate issue. The CPP provides a defined-benefit pension, indexed to inflation, even though it's not pay-as-you-go.

The main reason to go with "pre-funding" (basically, setting aside a reserve fund for paying out future contributions) is to prevent problems if the workforce shrinks or economic growth slows down in the future. From the 2007 CPP actuarial report (pdf):
Social security schemes in different countries are funded in various ways, which are continually reviewed for their level of appropriateness given the respective benefits and risks involved and changing demographic and economic conditions. There are three basic ways of funding such schemes, namely pay-as-you-go, full, and partial funding. PayGo financing is more appropriate in an environment of high real total wage growth and low real investment returns, while full funding is more appropriate in an environment of low wage growth and high investment returns. Partial funding lies between these two approaches and applies well in an environment of declining total wage growth and rising investment returns. To be beneficial, any level of prefunding must lead to an increase in national saving and ultimately in economic output to supply the goods and services consumed by future retirees.

In Canada, the economic and demographic conditions are such that a fuller funding model is more appropriate. Because the working age population is declining, the total wage growth is also declining. This means that CPP contributions from the working population are declining and thus will not be sufficient to maintain the cost of providing benefits to an increasing population of retired workers. On the other hand, investment returns are expected to remain higher than the total wage growth over the projected period. Thus, it makes sense to have a CPP fund that is pre-funded and has sufficient assets that can be invested so that the investment earnings can contribute to covering the costs of benefits.
One difference between the Social Security trust fund and the CPP reserve fund is that the CPP reserve fund isn't just invested in government bonds--it uses a variety of different investment assets, with pretty good returns, at least so far.
posted by russilwvong at 1:12 PM on May 5, 2013 [1 favorite]

anotherpanacea: "I think we should lower the social security eliglibity age to 18 and call it a basic income. But also eliminate the implicit means-testing that takes away a part of your benefit if you continue to work.

Since you asked.

People's Republic of Haven?
posted by fireoyster at 6:05 PM on May 5, 2013

posted by anotherpanacea at 8:50 PM on May 5, 2013

« Older In my experience, everyone lies the first time   |   Why? Why? Why? Why? Hand! Hand! Hand-hand! Newer »

This thread has been archived and is closed to new comments